Guide
How Does Batch Size Change the Setup Cost in Each CNC-Machined Part?
Setup cost is the labor and machine time spent preparing a CNC machine for one production lot, and it reaches each part as that one-time cost divided by the number of parts in the lot. The short answer: at 10,000 to 20,000 parts a year the setup is spread over a lot, not over the year, so the decision is how many lots to release, and splitting a year into more lots raises the setup term in direct proportion while a kept program and proven fixtures push it back down.
By Saola Manufacturing engineering team · Published · Updated
This guide is for a buyer looking at a quote with a setup line and wondering whether four lots a year is cheaper than two. It shows how the per-part cost is built, works the lot-size arithmetic with symbols instead of prices, and gives a rule for choosing the number of lots. It does not quote prices, because the setup charge depends on the part, the number of operations and the machine. For the one-time charges that sit outside the lot, see the guide to NRE cost; for every other cost driver, see CNC machining cost drivers.
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What is setup cost per part, and how is it built into a quote?
Setup cost per part is the setup charge for one lot divided by the parts in that lot, added to the machining time multiplied by the shop rate and the material cost of each part. In symbols, unit cost is S divided by Q, plus the cycle time t times the rate R, plus the material m.
S is everything the shop does to get the machine ready for a lot and prove the first piece: loading the program, mounting the fixture or soft jaws, setting tool offsets, running and measuring the first piece, and adjusting. Q is the lot size. The terms t times R and m are the same for every part in the lot, so they do not change when you change the lot. Only S divided by Q does.
Two parts of that formula are easy to miss on a quote. First, a part with two operations (turned, then milled) often carries two setups per lot, one on each machine, so S is the sum. Second, the setup that repeats with every lot is a different charge from the one-time engineering of a new part. Programming a part from scratch, building a fixture and approving the first article happen once and are billed as non-recurring cost; loading and proving the job again for the next lot is recurring and belongs in S.
The idea that setup sets a floor on sensible lot sizes is more than a century old. Ford Harris's 1913 article, reprinted in Operations Research in 1990, put it plainly: the cost of setting up the job fixes a minimum lot size, and interest on the capital tied up in wages, material and overhead sets a maximum.
How does lot size change the setup cost in each part?
The setup cost in each part falls in inverse proportion to the lot size: halve the lot and the setup term in every part doubles. Over a full year, the setup spend is the setup charge times the number of lots, so two lots cost the buyer twice the setup of one lot.
The table works this out for an annual volume D and a setup charge S, with no prices in it. It also shows the cost that moves the other way: the more parts you take in one lot, the more finished stock sits somewhere, and someone pays to hold it. Average stock is about half a lot, since a lot is drawn down to nothing and then replaced.
Read the table as a trade. Going from one lot to four multiplies the setup term by four and divides average stock by four. Whether that is a good trade depends on how large S is compared with the cost of holding stock, which is the question the next sections answer.
| Lots per year (annual volume D) | Parts in each lot | Setup term per part | Average parts held in stock | Months of demand in each lot |
|---|---|---|---|---|
| 1 | D | S ÷ D | D ÷ 2 | 12 |
| 2 | D ÷ 2 | 2S ÷ D | D ÷ 4 | 6 |
| 4 | D ÷ 4 | 4S ÷ D | D ÷ 8 | 3 |
| 12 | D ÷ 12 | 12S ÷ D | D ÷ 24 | 1 |
Why does the setup term shrink on repeat orders?
Because the work that makes up S is mostly reusable: a kept program, a proven fixture, a saved tool list and a known first-piece result turn a hard setup into a routine one. The supplier still sets up the machine each time, but the trial and error disappears.
Setup reduction is the best-documented lever in lot sizing. In the lecture notes behind this guide, Columbia's IEOR4000 Lecture 2 (Gallego, 2004), the optimal average cost rises with the fixed cost per run, and the notes observe that Japanese manufacturers were quick to recognize the value of reducing setup costs. The same square-root structure means that cutting the setup charge to half shrinks the best lot size by a factor of the square root of two, so cheaper setups let you run smaller lots without paying for it.
For a buyer, the practical steps are about keeping things stable. Freeze the drawing revision between lots, so the program does not change. Ask the supplier to store the program, tool list and fixture with the part number, and to say so on the quote. Order the same part regularly instead of once every few years, since a fixture that sits on a shelf for a long time can be lost, damaged or reused. The cost of reproducing a lost fixture is a one-time item that belongs in the conversation about who owns the tooling.
A shop that turns or mills the same family of parts every month can also batch setups across part numbers on one machine, with similar bar sizes and chucking. That is a supplier decision, not something you can order, but a family of related parts in one RFQ makes it possible.
How many lots a year suit 10,000 to 20,000 parts?
For a stable part with a moderate setup, two to four lots a year is a reasonable starting point to test against quotes, and the right number is the one where the yearly setup spend and the yearly cost of holding stock are about equal. Lot size is a decision about cash, drawing stability and setup size, not a target number.
The classic economic-order-quantity result says the best lot size grows with the square root of the setup charge and with demand, and shrinks with the square root of the holding cost per part. Gallego's notes show something more useful for a buyer: the total of setup and holding cost is flat near the best lot size. A lot that is twice or half the best size raises that total by a quarter, so being roughly right is nearly as good as being exactly right. You do not need an exact calculation. You need to avoid the extremes of one huge lot or monthly lots on a part with a heavy setup.
Holding cost is more than interest. It includes the cash tied up, the space and handling, insurance, the risk that a drawing change leaves the stock obsolete, and the risk of damage. On a part likely to change within a year, that obsolescence risk is the term that dominates, and it argues for smaller lots even when the setup is large. The related guide on last-time buys covers the end of the part's life.
The table gives the logic by situation. It describes structures, not recommended numbers.
| Situation | Lot structure that usually fits | Why |
|---|---|---|
| Stable drawing, steady demand, setup is a small share of the part cost | More, smaller lots | Carrying cost and change risk outweigh a small setup term |
| Stable drawing, steady demand, setup is a large share of the part cost | Fewer, larger lots, with a release schedule | Each extra lot repeats a setup that you pay for in the price |
| Drawing may change in the next year | Smaller lots until the revision settles | A large lot can become scrap on the next revision |
| Raw material is a bar or billet bought in mill quantities | Lots sized to whole material buys | Part lots that strand partial bars make the supplier price the leftover |
| Supplier keeps the program and fixtures between lots | Lots set by demand and cash, not by setup | The setup term has already shrunk, so lot size matters less |
When do more lots only add carrying cost, and what does the supplier lose by splitting?
More lots help only when the stock you avoid costs more than the setups you add. Beyond that point you pay for extra setups, and the supplier loses efficiency in material buys and machine scheduling that it will price back into the part.
From the supplier's side, each extra lot is another interruption. The machine stops, is changed over, and the first piece is checked, and none of that is paid for by the parts. A buyer who splits a year into twelve small lots has not reduced the supplier's work; it has multiplied it by twelve. The supplier either prices the extra setups into the part or schedules the lots around other work, which stretches the delivery of each one.
Material also matters. Turned parts come from bar, and milled parts from bar, plate or billet bought in mill quantities. If lot sizes strand partial lengths of bar, the leftover is a cost somebody carries, and the best fix is lots sized to use whole material buys. The same applies if you order several part numbers in the same alloy: the supplier can buy once and run them in turn.
If you want small deliveries but a large lot, ask for a release schedule against one larger production lot. The supplier then makes the lot with one setup and ships it in installments, which keeps the setup term low while you hold only what you need. The blanket purchase order guide covers how those releases are written.
How should you ask for lot-size pricing in an RFQ?
Ask for the same part quoted at two or three lot sizes, with setup shown as its own line and the total and unit price given for each. That puts the supplier's own arithmetic in front of you and lets you pick the lot structure from real numbers.
This is how public buyers do it. FAR 7.202 tells federal agencies to buy in quantities that give the most advantageous total and unit cost, and lets offerors suggest alternative quantities, with each suggestion carrying a quoted total price and unit price. The matching solicitation clause, FAR 52.207-4 (August 1987), invites offerors to say whether the requested quantity is economically advantageous. You are not bound by the FAR, but the request works the same way in a commercial RFQ.
A good RFQ note has four parts. State the annual volume and the number of releases you have in mind. Ask for pricing at that lot size and at a larger and a smaller one. Ask for setup, programming and inspection to be separate lines, so you can see what is one-time and what repeats. Ask whether the program and fixtures will be kept under the part number between lots. For parts that need CNC turning or milling, the process pages for CNC turning and CNC milling describe what the lead plant runs, and a quote request can carry these questions along with the drawing.
Treat the answers as a comparison, not a negotiation. If the setup line is large and the supplier shows little price movement between lot sizes, ask what the setup consists of. If it moves a lot, you now know the lot structure that suits your cash and your drawing stability.
Frequently asked
Is it cheaper to order a whole year of parts in one lot?
It lowers the setup term, since the setup is spread over the most parts, but it raises the stock you carry and the risk of a drawing change. Near the best lot size the total is flat, so the saving from the last step up is usually small.
Does the setup cost disappear if I order the same part every month?
No. The machine is still set up for each lot, but a kept program, proven fixture and known tool list make each setup shorter and more repeatable. Monthly lots with a heavy setup still carry that setup twelve times a year.
Should setup be a separate line on the quote?
Yes, when you are comparing lot sizes. A separate line shows what repeats with every lot and what is one-time engineering, and it lets you check the supplier's price at two lot sizes against the arithmetic.
Who pays for fixtures and programs?
That is a term to agree in the quote. One-time fixtures and programming are usually a non-recurring charge, and the agreement should say who owns them and whether they are kept for repeat orders.
What if I am not sure the drawing is final?
Use smaller lots until the revision settles. A large lot made to a drawing that then changes is the most expensive outcome, because the stock may have to be scrapped or reworked.
Sources
- How Many Parts to Make at Once (F. W. Harris, 1913; Operations Research 38(6), reprint), INFORMS, 1990
- IEOR4000 Production Management, Lecture 2: The EOQ and Extensions (G. Gallego), Columbia University, September 2004
- FAR 7.202, Economic Purchase Quantities (Supplies), Federal Acquisition Regulation, FAC 2026-01, 2026
- FAR 52.207-4, Economic Purchase Quantity-Supplies, Federal Acquisition Regulation, clause dated August 1987, accessed 2026