Hmmm... might be an idea to try combining compression methods.
If you stored the overall delivey folder arrangement as an LHA full of empty folders... and then did a series of 7-zips mini archives each with a folder content... then each folder gets its own mini dictionary, just for dealing with system files of that particular file type.
It should cut down on your system resource requirements. You may find two different compressors deal with each delivered system folder competetively.
Even if you stick with just 7 zip, that might be a way forward? What you are attempting is 6:1 compression. Better than that really, because you have to include decempression tools on your one delivering disk, as well as the 6 floppies worth of data.
Ya 6:1 compression ratio is never going to happen... I get about 2.5:1 atm. With a bit of clever optimization that gives about 2.4MB on the HDD after installation. What you won't get is A2322 support, HDBackup/BRU, Printers (except Generic), _bullet Fonts and Dan/Esp/Ita/Ned/Nor/Por Locals.
I've split the data into 4 archives, a small boot archive (everything needed to boot and use the contents on the disk), gfx (icons and fonts), txt (Dosdrivers, locales, scripts etc.) and bin (rest). By splitting so similar type of data is together I got a bit better compression anything else I've tried when it comes to store then compress either don't give better compression ratio or cost too much memory to extract.