The use of small transfer batches in serial flow production of discrete parts allows reduction in lead time for an economic production batch. However, transfer batches increase the load on the material handling system. Processor capacity may also be lost due to minor setups or operator-assisted moves. In this paper we examine the optimal number of transfer batches that should be used per process batch in a manufacturing cell when lead time is the primary objective but transfer batches reduce capacity due to operator-assisted material handling. A heuristic for determining the number of transfer batches is presented along with empirical results that demonstrate the performance of the heuristic as a function of the time lost in transferring batches under dynamic flow shop conditions.