Optimal and Minimum Viable Factory Size in Manufacturing

Choosing the right factory size is crucial for optimizing production, managing inventory, and ensuring profitability. This article explores the concepts of optimal and minimum viable factory size, providing insights into lot sizing procedures and their impact on excess inventory management.

Optimal Lot Size for Excess Inventory

The optimal lot size can be determined by considering the cumulative parts period (CPP) and the economic production quantity (EPQ). The CPP is the time period after which the excess inventory is worth more to keep on hand than to throw away. The EPQ is the quantity at which the cost of ordering and holding inventory is minimized.

For instance, if the CPP exceeds the EPQ, it indicates that keeping the inventory longer becomes economically viable. In such cases, the lot size is considered optimal. As an example, an order of 815 units is placed during the first week, which will arrive in the third week. This period and quantity are crucial in determining the optimal lot size.

Case Study: A One-Man Machine

Consider a specialized manufacturer who produces spacer rings for bicycle headset spacers using aluminum and carbon fiber. This individual works alone in a 40' x 60' factory, frequently producing millions of spacers per week. They achieve a net profit of less than one cent per spacer but are content with their work and earnings.

Why is this small-scale operation successful despite such low margins? It's because the sheer volume of production keeps overhead and per-unit costs low. In a single week, they make 20,000 net profit working alone in a space roughly the size of a 4-car garage. This is an excellent example of how minimizing the fixed costs can be highly beneficial, especially in industries with low-margin, high-volume products.

Factors Influencing Factory Size

Choosing the right factory size is not a one-size-fits-all decision. It depends on multiple factors including the nature of the products, the manufacturing strategy, and the country-specific regulations. A small business might not need to produce 100,000 units per month to be successful, but rather, a maximum of 5,000 units.

For optimal lot sizing, consider the following steps:

Evaluate the CPP: Determine the period during which excess inventory becomes more valuable than disposal. Calculate the EPQ: Find the production quantity at which the cost of ordering and holding inventory is minimized. Consider the Lot Size: If the CPP exceeds the EPQ, the lot size is considered optimal.

Conclusion

In conclusion, the optimal and minimum viable factory size depend on careful analysis of the production needs, inventory management strategies, and cost-effectiveness. Whether focusing on a one-man machine or a larger-scale operation, understanding the principles of lot sizing can help achieve profitability and sustainability in manufacturing.

The key is to strike a balance between production volume and fixed costs to maximize efficiency and profitability.