HOW MANY PARTS TO MAKE AT ONCE

FORD W. HARRIS
Production Engineer
Reprinted from Factory, The Magazine of Management, Volume 10, Number 2, February 1913, pp. 135-136, 152

Interest on capital tied up in wages, material and overhead sets a maximum limit to the quantity of parts which can be
profitably manufactured at one time; "set-up" costs on the job fix the minimum. Experience has shown one manager a
way to determine the economical size of lots.

E very manufacturer is confronted with the prob-

lem of finding the most economical quantity to
manufacture in putting through an order. This is a
Most managers, indeed, have a rather hazy idea as to
just what this cost amounts to. If such is the case an
investigation will show that the cost of handling,
general problem and admits of a general solution, and, checking, indexing and superintending an order in the
however much it may be advisable to exercise judg- offices and shops is a considerable item and may, in a
ment in a particular case, such exercise of judgment large factory, exceed one dollar per order.
will be assisted by a knowledge of the general solution. The set-up cost proper is generally understood.
The writer has seen the practical workings of a first- Indeed, shop foremen in general appreciate only too
class stock system and does not wish to be understood well what the cost of set-up means on small orders,
as claiming that any mere mathematical formula and so, if left to themselves, will almost invariably put
should be depended upon entirely for determining the their work through in large quantities to keep down
amount of stock that should be carried or put through this item. So doing, however, affects unfavorably the
on an order. This is a matter that calls, in each case, next factor.
for a trained judgment, for which there is no substi-
tute. There are many other factors of even more Interest and Depreciation on Stock (/). Large orders
importance than those given in this discussion. in the shop mean large deliveries to the storeroom,
But in deciding on the best size of order, the man and large deliveries mean carrying a large stock. Car-
responsible should consider all the factors that are rying a large stock means a lot of money tied up and
mentioned. While it is perfectly possible to estimate a heavy depreciation. It will here be assumed that a
closely enough what effect these factors will have, the charge of ten per cent on stock is a fair one to cover
chances are many mistakes costing money will be both interest and depreciation. It is probable that
made. Hence, using the formula as a check, is at least double this would be fairer in many instances.
warranted. Given the theoretically correct result, it is
easy to apply such correction factors as may be Movement (M). It is evident that the greater the
deemed necessary. movement of the stock the larger can be the quantities
In determining the economical size of lot the follow- manufactured on an order. This, then, is a \ital factor.
ing factors are involved:
Manufacturing Interval (7"). This is the time required
Unit Cost (C). This is the cost in dollars per unit of to make up and deliver to the storeroom an order,
output under continuous production, without consid- and, while it seldom is a vital factor, it is of value in
ering the set-up or getting-ready expense, or the cost the discussion.
of carrying the stock after it is made. There is another factor, X, the unknown size of
order which will be most economical. Thus summa-
rizing, there are the following factors in the problem:
Set-up Cost (5"). This involves more than the cost of
getting the materials and tools ready to start work on M equals the number of units used per month
an order. It involves also, the cost of handling the (movement).
order in the office and throughout the factory. This C equals the quantity cost of a unit in dollars or the
cost is often neglected in considering the question. unit cost.
Operations Research 0030-364X/90/3806-0947 $01.25
Vol. 38, No. 6, November-December 947 © 1990 Operations Research Society of America
948 / HARRIS

S equals the set-up cost of an order in dollars. solution of this problem involves higher mathematics,
r equals he manufacturing interval in months. suffice it to say that the value for X that will give the
/ equals the unit charge for interest and depreciation minimum value to Y, reduces to the square root of
on stock. (240MS divided by C).
X equals the unknown size of order, or lot size, which Now 240S/C may be calculated at once and the
is most economical. square root taken. Call this result K, because it will be
a constant for any case. Then X equals K times the
The manufacturing interval is useful only in that it
square [root] of M
enables us to fmd the safe stock minimum, or smallest
Now let an actual example be taken and see what
quantity the storekeeper may allow his stock to fall to
the results will be. Suppose that an article has a
before he must enter an order for more.
movement, M, of 1,000 units per month with a set-
At first sight this minimum quantity would seem to
up cost of two dollars and a unit cost of ten cents.
influence the amount of stock and therefore the inter-
Applying the formula, it is found that the theoretical
est charges. It does nothing of the kind, however, and
economical size of lot is 2,190 units. This shows the
it will be found that the stock consists of additions in
lots of X and a gradual exhaustion of the stock to set-up cost to be about 0.1 cent and the interest charges
nothing. The stock minimum simply serves to notify about the same amount.
the storekeeper when to enter an order for new stock, Referring to the Figure I a curve will be seen repre-
so that he will use up his stock clean before deliveries senting the cost per piece of set-up for various manu-
on the new order are made and, at the same time, facturing quantities and an interest and depreciation
never be without stock for any considerable interval. charge under the same conditions. The sum of these
two is marked the total cost, although it does not
The average stock, if the movement is regular, it
include the unit cost of ten cents, which is not added
will be evident, is one-half of X. If the movement is
because assumed constant.
irregular, and it generally is, there is introduced an
additional complication. This, however, can generally
be neglected or applied as a correction factor to the Manufacturing Curves
final result. The average stock being X/2, the value of
this stock will evidently be C times this, or CX/2
(value of average stock on hand). 1
This is the quantity cost only. To it must be added
the set-up cost for the average stock. Since the set-up V
cost per order is S, and the average stock is half the
size of an order, the set-up cost of the average stock
u
U \\ fotal Cost (Not
Includinc Unit

will be S/2. The total value of the average stock will

03
\\ Coil ol Article)

then be V2{CX + S). The annual interest and depre- J2 0.2 \ \ y

ciation cost at ten per cent will be one-tenth this or
VioiCX+S). u
\ T-
EcoDomical

Now since M units per month are used, this will be

<u
Q \ Lot Size, Giving
Mtnlmum
-1-otal Colt

12M units per year, and this interest charge must a \ Interest and
be divided by the number of pieces used in a year to 0.1 Dfprcciailon on
Siork
get the interest charge in dollars per unit, which gives u ?<
(\/240M)(CX + S) equals /.
The total set-up cost for X units being S dollars, the Set-up Cost — _

set-up cost per unit must be S/X. This now gives, as

the whole cost of a unit, the interest charge per piece
plus the set-up cost per piece plus the unit cost per
piece, or
Size of Order
Figure I. An increase in the size of the order results
in an increased interest charge and a
Let this summation equal Y. decreased set-up cost. The curves show this
The problem then is the old one of finding the value graphically and indicate a minimum total
for X that will give the minimum value to Y. As the cost in this case at 2,200 units.
 OR Forum / 949
It should be noted that this so-called total cost can diagram. It will be noted that the loss is much greater
vary between wide limits only when the manufactur- if too small a quantity is put through, than it is for
ing quantity is selected with very poor judgment. For too large a one. For example, if this article were made
example, in the case given, the least total cost possible in 2,200 lots, $0,001 would have to be added to the
will be about 0.188 cents at 2,190 units on an order. original cost of $0.0135, which would involve a loss
This quantity can vary from 1,000 to 5,000, and the of $0.00028. On the other hand, if they were put
additional cost will be only about 0.05 cent. This on through in lots of 10,000, which is about as far the
an article costing ten cents, is a very small percentage. other way, there would be a loss of only about one-
While this is true for the values given it is not univer- eighth of this amount. Or, in percentages, in the first
sally true, and thus it is seen that the general law can case there would be incurred an unnecessary expense
be applied with some profit to the specific problems of about two per cent on the original cost, while in
of manufacture. the latter case the loss would have been only about
Some actual examples of costs may be illuminating. one quarter of one per cent. It should be noted that
Take, for example, the copper connector shown in in this case this article would be put through in lots
Figure II. Here is an article that is being used at the that would last for nearly six months.
rate of 1,230 pieces a month, with a unit cost of Take, as a further example, the stud shown on
$0.0135 per piece, and a set-up cost of $2.15. This Figure III. Here is a piece that is used in lots of thirty.
latter cost includes the clerical work, superintendence, It is an expensive piece and costs in quantity $5.65.
and so on, as well as the actual cost of getting ready The set-up cost is $1.85. The correct quantity is 48.5
in the shop. or, say, 49. Here the least overhead for set-up and
It is found by applying the formula that the correct interest charges would be $0,076 per piece. Making
manufacturing quantity is 6,850 pieces. The different the article in lots of twenty, there would be about the
values of the cost are shown in the curves on the same unnecessary loss as when they were made in lots

Article = A Stud
o
Material = Copper
Monthly Quantity - M -1230 Quantity per Month '^ M = 30
Cost per Piece - C i.O135 Cost per Piece. — C - 5.65 Dollars
Article — A Small Connector Set-up Cost ° S = 2.15 Set-up Cost, = S = 1.85 Dollars
Material •=-Copper Mfg. Quantity =X=6850 Manufacturing Quantity: .X = 48.5 = 240 X 30 X .85
5.65

w\
.OOiO .10 1
\ Total Cost(Not
.0009 .09

\\
iticlud'mi: Unit
Cost of Arliclf)
.0008 Total Cost(Noi .08 \
Includins Unit ——'

\
Coil o( Article)
20007 .07 \
Interest and
a Depreciation
^.0006 ., —'
'"-—
Inicrcsl and
o .06 on Siork
Q Q
C.0005 Depreciation \ a \
un Sinrk \ .05
^0004 Set-up Cost
.04 V /
O
U.0003 U .03
/ \ ^

.0002 —
.02 —
Set-up Cost
.0001 .01

3 4 5 6 7 8 9 10 U 12 13 10 20 30 40 50 60 70 80 90 iOO
Thousands of Pieces Pieces on Order
Figures II and III. In each of these diagrams is shown the effect of the size of the lot on the set-up and interest
charges per unit. The set-up cost curves slope downward with increased size of the order
while the interest curves slant upward. The sum of the two elements gives total costs the
curve of which is the upper one and shows a minimum opposite where the two lower curves
cross.
950 / HARRIS

of 100, or about three cents each. This is not a large the manufacturing quantities. It is further gratifying
amount, but at the rate of consumption given, it will to know that the effect on profits from an error is so
involve a loss of $10.80 a year, which is avoidable small as shown by the curves.
and, therefore, worth considering. So it is seen, the In conclusion, it may be well to say that the method
more valuable the article, the more "worth while" it given is not rigorously accurate, for many minor
is to apply the formula. factors have purposely been left out of the considera-
There are not many men who understand the theory tion. It may be objected that interest and depreciation
underlying the economic size of lots, and so a knowl- should be figured, not only on original cost, but also
edge of it should be of considerable value. For exam- on the set-up cost, since that has to be incurred before
ple, having once determined that it is wise to put in the parts can be stocked. Such refinements, however,
orders for lots of one hundred, based on a certain while interesting, are too fine spun to be practical.
consumption, it is of value to know that this con- The general theory as developed here is reasonably
sumption must increase four fold to warrant doubling correct and will be found to give good results.