Real Reasons for Earning Money by Small-batch Production

Last week, we shared with you that mass production does not necessarily generate profits. There are many people in the background who call for small-scale production. Today, we are going to talk with you about the basic reasons why small-scale production is highly popular with many companies.

Real Reasons for Earning Money by Small-batch Production

It is generally believed that "the larger the batch of production, the lower the cost"

One product can produce 100 at a time and 1000 at a time. Which is cheaper?

When we ask this question to the manufacturer, I'm afraid most of the answers are, "Of course, the cost of producing 1,000 is lower." Because the cost of mass production is lower than that of small batch production, it has become the common knowledge of production site. And batch refers to the smallest unit of production and sales, which means, the unit of quantity produced at a time. This "batch size" is very important.

Today, we will examine the impact of different batch sizes on the company's "profitability".

Case

Now suppose there is a production site where "100 products should be shipped per day". When the quantity of production is 100 in a day, which is cheaper to produce 100 in 10 days, or 1000 in one day? Now let's have a good test.

Comparisons between small batch and large batch

Mode A: 100 production per day for 10 days (small batch production, multi batch production)

Mode B: Concentrate on 1000 units in one day (mass production and small batch production)

In order to produce the on-site cost of this product, it can be mainly divided into "one production cost" and "switching cost" which needs to be set up in the production process. Among them, the change of wiring is to set up the machine, which requires a certain cost, but after the machine is set up, continuous production of the same goods will not have other additional costs.

Because of this cost, it is easy to come up with the idea of "mass production is more cost-effective". When the batch of one production is large, the cost of switching is enough only once, so this part of the cost can be saved.

Indeed, the cost of switching lines allocated to each product is 10 times higher when compared with that of 1,000 in a single production. Therefore, in mass production, the "cost of switching lines per unit product" will be lower.

Because the "cost of producing one product" in mode A and mode B is the same, the greater the ratio of "change line cost" is, the higher the superiority of mode B is. In order to facilitate verification, the following specific numerical values are used to calculate.

"Cost" of Mass Production and Small Batch Production

"Conditions Common to Mode A and Mode B"

The cost of producing a product is 30 yuan.

The cost of one change is 500 yuan.

The selling price of a product is 50 yuan.

In mode A and mode B, "the cost of producing a product" is 30 yuan, which has nothing to do with the size of the batch. Next, calculate the "cost of switching one product".

Line change cost per product

Mode A: 500 yuan/100 = 5 yuan

Mode B: 500 yuan/1000 = 0.5 yuan

It costs 500 yuan to change a line. If you divide the quantity of production, you can get the cost of changing a line for each product. The cost of producing one product is 30 yuan. Then we can get the "production cost of one product".

"Cost of production and profit per product"

Mode A: Production cost = 30 yuan + 5 yuan = 35 yuan

Profit = 50 yuan-35 yuan = 15 yuan

If we neglect the time factor and only consider the cost of line change, it must be that the larger the volume of production, the lower the cost. Therefore, if we compare the cost of one change with that of 10, the answer is obvious: the person in charge of the production department will choose to reduce the cost by mass production.

If it is the fact, 10,000 or 1 million will be possible let alone 100. The more, the better. As long as production can continue, the cost will become lower and lower. For this reason, it may be necessary to import large-scale machinery as much as possible and enlarge the scale of batches as possible when funds permit.

However, there is always a gap between theory and reality. Where does the capital for producing a million dollars come from? How long will it take to sell out all the 1 million units? It is meaningless to ignore these facts and pursue computational results blindly.

So, under the premise of a certain scale, the larger the batch of production, the lower the cost? Is the "profit" calculated in this way a real "earning power" for a company?

Consideration by adding "time" factor

In the above cost calculation formula, there is no concept of "time" at all. Holding inventory is equivalent to leaving funds idle. It must be recognized that this is a "waste of capacity". We call the cost after adding time factor "J cost".

Compared with mode A produced every day, mode B, which completes 10 days'work in one day, takes longer to keep inventory. It is this part that generates J costs. Next, imagine a product with only one process and calculate "J cost" in two ways.

First, consider the process time in this case. Since the shipment volume is 100 one day, the average inventory of the products is half a day if 100 are produced per day according to mode A. The B mode is to produce 1000 products one day and then deliver them in 10 days. At this time, the average stock of the products is 5 days.

"Process Time of Mode A and Mode B"

Mode A: 0.5 days of process time

Mode B: 5 days of process time

In addition, safety stocks should be added. No matter what the product is, it's certainly too late to start production after all the stock has been used up. If there is no room, there will be problems such as stagnation of the previous process, or failure to deliver goods on time. Therefore, in order to prevent this from happening, it is necessary to hold a certain amount of inventory, called safe inventory.

Generally speaking, the safe stock of mode A produced every day is 0.5 days, while mode B produced centrally should ensure one day's stock. This chapter calculates on this premise. Therefore, the average process time considering safe inventory is as follows.

"The average process time considering safe inventory"

Mode A: 0.5 days + 0.5 days (safe stock) = 1 day

Mode B: 5 days + 1 day (safe stock) = 6 days

Therefore,

J cost of A is 35 x 1 = 35 (yuan per day)

J cost of B is 30.5 x 6 = 183 (yuan per day)

The key is "yield"= "profitability"

As we all know, when P yuan is lent, interest on T days plus R yuan is paid back. At this time, the formula of interest rate is R yuan(P yuan x T days). From this, we can get the degree of "making money", namely "profitability".

This formula takes profit as a molecule and "J cost" as a division of denominator.

Consider profitability on the basis of safe inventory

"Profitability of Mode A and Mode B"

The "profitability" of mode A = 15 yuan (35 yuan * 1 day) = 0.429 per day

The "profitability" of mode B = 19.5 yuan (30.5 yuan * 6 days) = 0.107/day

Obviously, from the "profit" point of view, unit product should have a larger mode B. When it comes to the "profitability" (interest rate) perspective, it is only 1/4 of the mode A.

It can be seen that the same thing, according to different evaluation methods, from the "profit margin" point of view, or from the "profitability" point of view, can draw completely opposite conclusions.

Verify the Maximum Inventory Amount

I believe readers have understood why Toyota's "small batch and multi batch production" initially advocated is better than the "profitability" of mass production advocated by society.

However, it is still difficult to convince those who have long believed that the "profitability" of "mass production" should be higher.

It doesn't matter. We still have cases to prove it.

Those who can not accept this view should consider themselves as the owner of the company listed in the examples. For the two production methods of mode A and mode B, they should calculate their respective liquidity requirements. In this way, it will be found that there are astonishing differences in liquidity. However, because it is more complicated to calculate liquidity accurately, only the "maximum inventory amount" is compared here.

"Maximum Inventory Amount of Mode A and Mode B"

Mode A: Maximum Inventory Amount (Substitution Value of Liquidity)

=Maximum inventory (1.5 days)x cost (35 yuan)

= 150 (units)*35 (yuan/unit)= 5250 (yuan)

Mode B: Maximum Inventory Amount (Substitution Value of Liquidity)

=11 (days)*30.5 (yuan/unit)

= 1100 (units) * 30.5 (yuan / unit) = 33550 (yuan)

"Profit Amount of Mode A and Mode B"

Mode A: Profit amount = 15 (yuan/unit)x 100 (person/day)x 30 (day/month)

= 45 000 (yuan/month)

Mode B: Profit amount = 19.5 (yuan/unit)x 100 (person/day)x 30 (day/month)

= 58500 (yuan/month)

It can be seen that since mode A is produced every day, only the maximum stock of 5,250 yuan is needed, while the profit is 45,000 yuan per month.

As mode B is to centralize production for 10 days, it needs to maintain a maximum inventory of 33,550 yuan, with a profit of 58,500 yuan per month.

Although it is true that mode B "mass production" has a larger monthly "profit margin". However, at the same time, it can be seen that in order to achieve "mass production", the liquidity needed is also very huge.

Therefore, if we consider the "profitability" of investment funds, the "mass production" of mode B is much worse than that of mode A. In fact, "J cost theory" is just a different way to explain this problem.

In addition, the above example only concerns the inventory of finished products. In fact, in the case of mass production, the inventory of semi-finished products is larger than that of finished products. Similarly, the stock of raw materials needed to produce these semi-finished products is larger than that of semi-finished products.

In this way, I think you can understand it. From the whole process, the company as a whole, it is not only the above calculation results. It has to add several times the amount of inventory. It is for this reason that the "authentic Toyota way" proposed to resolutely challenge small batch production.

Reducing the cost of switching is the most essential idea. For instance,

Next, we can see from the point of view of the site improvement personnel.

Should the batch size be increased correspondingly when the cost of switching lines on the production site is very high? At this time, can we really recover the investment of increasing batch?

Now let's assume that the cost of each product is 100 yuan, and the cost of switching is 100 times 10,000 yuan per time. At this time, because the cost of switching is too high, many companies in order to reduce losses, will try to reduce the number of switching. As a result, progress will never be made and the cost of switching is always high.

In fact, in this case, instead of increasing the batch to reduce the number of line changes, it is better to maintain a small batch of multiple production. Reduce switching costs by improving activities.

Instead of "20,000 yuan is needed to change a line, so we need to increase the production batch as much as possible", we need to think about "how can we reduce the cost of 20,000 yuan to 18,000 yuan". And it does not need any additional investment, only relies on the strength of the site to "improve".

The most taboo of the "authentic Toyota way" is to ignore the high cost of switching. Its understanding of the causes and results is usually contrary to the prevailing understanding in the general society. It is believed that "because the number of wire changes is small, there will be no need for improvement, which will not be made. " As managers, they even intentionally increase the number of line changes to stimulate the need for improvement. When demand arises, improvements will be made. At the beginning, the cost of 10,000 yuan once will gradually decrease, and may soon drop to less than 1,000 yuan once.

Concluding remarks

Instead of focusing on superficial "profits", we should pay attention to the real "earning power"= "profitability".

On the production site, it should soon be found that reducing unit prices by increasing production volumes is only a superficial cost reduction.

It seems that manufacturing costs can be reduced by mass production. But can the invested funds really be effectively recovered? Keep observing your company from this perspective.

In your company, in order to increase the surface "profit", is the mass production of semi-finished products and finished products everywhere in the production site waiting for shipment?

Idle funds are ineffective. Real "earning power" will only diminish. The production site is "the place where products are produced", not "the place where idle products are produced".

No matter how you protect the controlled goods, no one will pay for the use of the warehouse. What is more, the invisible J costs will continue to increase over time. As long as we master "J cost theory" skillfully, we can find a way to pursue real "gaining profits".

Compared with "mass production", the "small batch production" is more profitable.