Make to Stock versus Make to Order

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When designing an inventory management plan, every purchased and manufactured item should be evaluated for whether it should be held in stock or purchased/produced as needed.

Definition of Make to Stock (MTS) versus Make to Order (MTO)

Make-to-stock items are consumed on a regular basis and are therefore held in inventory and always available. Defining what is meant by “used on a regular basis” varies based on the business. Some manufacturers stock items that are used at least weekly and others carry items used at least on a quarterly cadence.

Make-to-order items are only in stock when there is a valid customer order for the item, and therefore the item in stock is for that specific order. These are generally items that are produced infrequently or that are customized for each customer order. Note that “customer order” also refers to internal demands driven by a customer order, such as the demand for an internal sub-assembly required for a specific customer assembly.

The MTS/MTO discussion is an integral part of the concept called “plan for every part,” or PFEP (pronounced PEE-fep.) Before we can confirm a reasonable inventory plan for an item, we must first select the philosophical approach for that item. In additional to evaluating the frequency of demand, an item’s plan depends on how customer orders will be filled and therefore how associated material must be managed. Will customer orders be filled from finished goods inventory? Or, will WIP be held in stock and converted to finished goods when a customer order is received? Is it possible that raw material is the only inventory held in stock, and manufacturing occurs only after a customer order is received?

The decision of where to hold inventory throughout a site depends on how much time is allowed from customer order to shipment for standard items.

  • If customers expect shipment the same day as the order is placed or soon after, it might be necessary to hold finished goods in inventory, plus raw material and possibly work-in-process items that will be used to replenish finished goods as they are consumed.
  • If customers allow slightly more time, hold WIP that can be converted to the correct finished goods within the allowed time, plus the raw material that backfills WIP as it is consumed.
  • If customer lead times are longer, hold raw material in stock and process it only when a specific customer order is received. This implies that the only WIP and finished goods that are in stock at any given time are for specific orders.

 

Assign MTS to the Right Items

Start by defining where inventory should be held, i.e., which processes should hold finished goods, WIP, or raw material in stock to meet customer lead times.

Next, evaluate individual items wherever inventory is supposed to be in stock to determine if all items are used frequently and should be in stock, or if perhaps some items are used infrequently and can be made to order. This might be manual analysis, or it might be streamlined if demand data can be downloaded into monthly or weekly buckets. For example, if the threshold for MTS items is anything that is used at least monthly, download six months of demand data into monthly buckets and eliminate items with zero demand in one or more months.

HINT: Any finished goods item that is held in stock should drive the appropriate levels of WIP and raw material stock, so that when that FG is consumed it can be refilled. This is basic “pull” or kanban logic.

Once the population of MTS items has been identified, define the correct inventory solution for each item, including the replenishment method to be used (kanban, VMI, consignment, or MRP) and the individual replenishment solution, such as 2 cards at 100 each.

Click here to read about how kanban works.

replenishment-methods-flowchart

Replenishment Methods

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There are four basic methods that can be used to trigger replenishment orders for items that are held in stock.

MRP – Materials Requirements Planning

Materials Requirements Planning (MRP) is one of the most common replenishment methods. It uses system data to generate MRP recommendations or take automated actions to order purchased or manufactured items. The logic for MRP is simple:

Demand during the defined time period – current balance – expected receipts in the time horizon = required quantity to order.

The GIANT weakness in any MRP system is the complete dependence on system data: errors in customer orders or forecast, on-hand balance, bills of material, or incoming receipts can result in the wrong MRP recommendation.

Other common weaknesses include the inability to round for minimum order or standard package quantity limits, so it creates an order that supplier won’t accept, or logic that can assign a due date that the supplier can’t meet.

Kanban

Kanban is a visual replenishment system based on actual consumption, not system data. Kanban activity occurs at point of use (POU) and therefore it covers many of the errors that derail MRP (e.g., on-hand balance, backflushing, tracking open orders) because it puts the replenishment process in the midst of consumption activity, especially if kanban orders are triggered at point of use.

The biggest challenge or weakness in most kanban systems is the sizing process, or getting correct kanban solutions.

Kanban generally uses a visual signal, such as a kanban card or empty tote, to signal the need for replenishment.

VMI – Vendor-Managed Inventory

Vendor-managed inventory (VMI) is on-site inventory that is reviewed and refilled by the supplier on a defined cadence, generally once or twice a week. VMI is similar to kanban because refilling the bin is based on actual consumption, with no system dependence.

The biggest potential weakness for VMI is allowing over-sized bins to be over-filled by an over-eager supplier, thereby increasing on-hand inventory.

Consignment

Consignment inventory isn’t owned by the operation until it’s “opened” or pulled into use. This reduces on-hand dollars by delaying the ownership transaction, but no space reduction occurs. In fact, required space often goes up if the supplier prefers to ship larger quantities.

Consignment can work well for overseas suppliers that want to save freight by shipping full containers, and they are willing to delay invoicing as product is pulled into production.

The biggest risk or weakness with consignment inventory is managing the transfer of ownership. To meet financial requirements and to be fair to the supplier, inventory must become the property of the receiving site before it is consumed, and not at the time it is backflushed.

Which method?

Consignment reduces the financial impact of on-hand inventory, which is a huge benefit.

VMI reduces the effort required to manage inventory, which is a productivity benefit.

Kanban is a streamlined way to manage inventory and it also protects on-hand inventory from system errors.

MRP should be the last choice.

replenishment-methods-flowchart

 

 

 

Kanban as Plan-Do-Check-Act

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Kanban is one of the primary Lean tools. It is a pull-based inventory management system that relies on real-world inventory usage to trigger replenishment signals.

Plan-Do-Check-Act (PDCA)

One of the most effective ways to analyze kanban is to compare it to the Plan-Do-Check-Act cycle.

Plan = Size, or calculating kanban solutions

In PDCA, the Plan phase is when targets, action plans, key metrics, and owners are defined. This step shouldn’t be shortchanged since it is the foundation for everything that comes after it. Within the context of kanban, this is when kanban data is gathered, solutions are calculated,and cards and boards are deployed. This is also when standard work should be written for all the associated kanban processes or tasks.

For kanban, the sizing process is a repetitive loop that calculates and deploys kanban solutions.

Do = Execute, or performing processes that manage kanban signals, cards, orders, & boards

The “Do” or execution portion of PDCA is when defined action plans and processes are accomplished. Since most manufacturing and operational processes are repetitive, this phase of PDCA is performed over and over, which is one of the primary reasons why PDCA is considered a loop. Every time a process is repeated it should be viewed in the larger context of the overall plan along with any follow-up activity.

In kanban, execution revolves around the care and feeding of kanban cards and boards; cards trigger replenishment orders and boards manage open orders. Click here to read more about kanban cards, and click here to read about kanban boards.

 

Check = Audit, reviewing the health of the kanban system

The Check phase is the oversight portion, which is often overlooked or under-resourced, and the intent is to find shortcomings and areas for improvement. A discovery in this phase doesn’t necessarily indicate failure, though that could be the case, but instead it is meant to maintain that desired focus of continuous and intentional improvement.

Kanban audits are key to maintaining a healthy system. By its very nature, kanban gets out of sync over time if any of the underlying data changes, such as daily demands or lead times. Kanban gaps can also occur if new employees aren’t fully trained or if standard work doesn’t keep up with current process and material handling conditions. These are just a short sampling of the many reasons why kanban audits must be regular occurrences with broad coverage. It is helpful to think of audits in a few broad categories, as in this graphic.

Act = Respond, addressing anything that was discovered during the prior 3 steps

The Act phase closes the loop on all the prior steps because it drives any action that came out of the prior steps. Whether something was missed in the plan, or the execution phase didn’t quite meet the expectations, or the audit process discovered potential improvements, this is when those gaps are closed. It can also be appropriate to view this phase as the time to celebrate identified successes from any of the prior phases. Yes, continuous improvement focused much more attention on the next improvement than it does on the latest success, but associates deserve the chance to celebrate their wins.

Kanban actions are essentially limitless, but it commonly includes responding to data changes or errors (e.g., new daily demand, updated minimum order quantity), process errors (e.g., missing cards, boards not updated), unexpected events (e.g., stock outs, late deliveries), and general performance misses (e.g., inventory reduction not occurring as planned.) One of the most powerful actions that can be taken within kanban is to negotiate with internal and external suppliers to get better order quantity limits (lower minimum order and standard package quantities) and short lead times. These factors are often the biggest contributors to excess inventory.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.

Safety Stock in Kanban Solutions

Safety Stock in Kanban Solutions

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Kanban is one of the primary Lean tools. It is a pull-based inventory management system that relies on real-world inventory usage to trigger replenishment signals. Click here to read about how kanban works.

Kanban solutions must be accurately calculated, which requires accurate data. A kanban solution is calculated around 3 parameters: daily demand, lead time, and safety stock and there are standard equations for 2-card solutions with empty-a-bin or break-a-bin trigger timing. Click here to read about trigger timing.

Break-a-bin 2-card order quantity

= (Lead time * Daily demand + Target safety stock) / 2

Empty-a-bin 2-card order quantity

= Lead time * daily demand + Target safety stock

For an in-depth book about calculating kanban solutions, click here to see Banking on Kanban on Amazon.

Lead time comes from supply data, and it is the actual lead time experienced for a kanban item over a certain time period.

Daily demand can be average demand over a relevant historical period, or it can be based on a demand forecast. Most sites don’t have accurate forecast data, so the vast majority of kanban solutions are calculated based on history.

Safety stock is buffer inventory that is added to a kanban solution to protect the item from inventory shortages drive by either supply or demand volatility. Safety stock has a huge impact on inventory levels because it sits below the sawtooth curve. Click here to read about the sawtooth curve. Unfortunately, very few sites have robust processes or tools to analyze variation and assign safety stock.

Safety stock for supply variation

The supply of an internal or external item can exhibit volatility in supplied quantity, lead time, or quality.

  • Quantity errors don’t deserve safety stock because suppliers that ship the wrong quantity should be instructed to ship exactly what is ordered. In addition to the supply volatility that quantity gaps cause, it also wreaks havoc on reconciling purchase orders and manufacturing orders.
    • There is no valid reason to add safety stock because the supplier can’t ship the right quantity!
  • Lead-time errors should first be addressed by getting a commitment from the supplier for the lead time they can consistently achieve. If the standard lead time is 10 workdays but the supplier regularly takes 12 days, it might be best to change the lead time to 12 days and not add any safety stock. In many cases, a supplier will correct delivery delays if they’re informed of the impact it has on internal operations. Yes, talking to the supplier is the right first step! If delays still occur, add safety stock to cover the risk that exists.
    • Simplified safety-stock process: For each item, calculate the average lead time for receipts in the prior 3-6 months, or whatever time period is representative of reality. Next, calculate the standard deviation of those lead times, keeping in mind that standard deviation is always a positive number due its formula, and that shipping early also counts as a deviation from the average. Compare the deviation to the average to get a sense of the level of impact. A standard deviation of 0.5 days versus a 3-day lead time might be significant, but 0.5 days on a 40-day lead time probably doesn’t move the needle.
  • Quality errors mean that some or all of the received quantity is not usable. Like lead time gaps, the first step is a conversation with the supplier to implore them to ship 100% high quality with zero defects. Until that happens, add safety stock to cover the risk.
    • Simplified safety-stock process: If errors are rare, skip the safety stock. If rejects are disruptive to your operation, ask the supplier to keep finished goods inventory in stock, ready to ship overnight if defects arrive at your door. If the supplier refuses to carry finished goods, calculate the percentage of orders received that contained defects. Next, calculate the impact in days from an impacted order. If parts are sorted and good ones are used to keep work cells running, and if the supplier can provide replacement parts quickly, the impact might be minimal. If defects result in rejecting the entire shipment, calculate how long it takes to get replacement parts, which will approximate how many days of safety stock to add to the kanban solution.

Safety stock for demand variation

There are two basic types of demand variation: seasonal demand variation and day-to-day variation.

Seasonal demand variation is covered by resizing kanban solutions up or down as demand changes.

Daily demand variation must be covered by safety stock. This is a highly simplified explanation of demand variation analysis.

  1. Break the demand history for each item into lead-time buckets, or periods of time that equal one lead time.

HINT: Don’t skip this step! It adds time and complexity to the analysis, but demand variaiton analysis must be done in lad-time buckets!

  1. Calculate the average demand for one lead-time period based on the lead-time buckets from step #1.
  2. Calculate the standard deviation of each item’s lead-time buckets.
  3. Convert standard deviation into days of demand by dividing it by daily demand. This is the estimate of safety stock for this item, in days of coverage.

Safety stock can be assigned to individual items or to groups. Grouping items takes more work up front, but it’s to manage in the long run. Please keep in mind that the process for analyzing demand history to quantify demand variation is very complex and it requires a high level of comfort with spreadsheets. Refer to Banking on Kanban for more details – click here to see it on Amazon.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.

How Do Kanban Cards Work

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Kanban, one of the primary Lean tools, is an inventory management system that relies on real-world inventory consumption (demand) to trigger replenishment signals (supply). Click here to read more about kanban.

When a kanban bin is opened (break a bin) or emptied (empty a bin), a replenishment signal is sent to the supplier to order the standard quantity at the standard lead time. Click here to read about kanban timing, e.g., empty a bin or break a bin, along with kanban types (1-card, multi-card, and 2-card solutions.)

3 Status choices for kanban cards

A kanban card spends its life in one of 3 states.

  1. Kanban cards are linked to on-hand inventory. For break-a-bin items, the card stays with inventory until the first piece is removed from the bin. For empty-a-bin items, the card stays with inventory until the last piece is removed from the bin.
  2. Kanban cards hang on a kanban board while waiting for a supplier shipment. Click here to read about kanban boards.
  3. Kanban cards are in limbo for a short time between when they are delinked from inventory, or turned in to be processed, and when they are linked to a new replenishment order.

HINT: It should take no more than 4 hours from the time a card is turned in until it is processed to generate a replenishment order.

How kanban cards work

  1. As inventory is consumed, kanban cards are triggered. Some sites use break a bin, where the first piece out of a kanban bin triggers an order, and other sites use empty a bin, where the last piece out of a bin is what triggers an order triggered. Click here to read about trigger timing.
  2. Kanban signals are transmitted to the item’s supplier, which can be an internal manufacturing cell or an external supplier. For internal suppliers, sometimes the card actually travels to the supplying work cell, but the signal can also be electronic, such as an open purchase order or an email request.
  3. While waiting for material from the supplier, the kanban card hangs on a kanban board, seen in picture below. Each card hangs on the numbered peg that stands for the due date for that order. Click here to read about kanban boards.

  1. When replenishment material arrives, the associated card is taken from the board and placed with the material in the correct storage location.

This trigger-and-receipt process is repeated over and over for every kanban item.

Design your kanban cards

A kanban card is a signal to order material and therefore it should include the basic information about the item and its kanban solution.

  • Part number
  • Description
  • Supplier
  • Lead time
  • Kanban order quantity (KOQ)
  • Standard package quantity (SPQ)
  • Number of containers per card
  • Total number of cards
  • Storage location
  • Reorder point (only required for 1-card solutions)

This is an example of a kanban card.

Several other items can be included on the card to help with processes on the floor or when processing the card.

  • Barcode, if the card is scanned to generate a new order
  • Revision date of the card, to make it easier to sort old cards from new cards when deploying updated cards to the floor
  • ABC classification
  • Supplier part number, if different from the in-house identifier
  • Planner or buyer, the person who manages this item

Cards should be no smaller than about 2” x 3” (picture a business card or credit card) and no larger than ¼ of a sheet of paper. Card size has a direct impact on the amount of space required for kanban boards, so don’t make cards too large!

Spike cards

Sometimes an item or work cell experiences a temporary increase in demand that doesn’t justify resizing kanban solutions, but supply must increase for a while to support the higher demand. The most common driver for spike cards is past-due shipments that must be accelerated through the plant, necessitating an increase in daily output.

Spike cards are handled differently than regular kanban cards. When spike cards are deployed, the “spike” inventory always goes at the back of point-of-use storage, to ensure that regular inventory is consumed first. This ensures that regular kanban cards continue to be processed at the regular cadence.

Spike cards are turned in just like regular cards, but they should not be automatically processed to place new orders, since the increase in demand is not a permanent condition. Remember, if the increase in demand is permanent or for an extended period of time, kanban solutions are resized “up” to provide a high level of supply.

Card material & color

Most kanban cards are paper or plastic.

  • Plastic cards are the best because they’re durable, easy to print, they require no secondary processing (no cutting, laminating, or sleeves), associates can write on back with grease pen, the card-type can be used for other purposes (employee or visitor badges), and they come in different colors. The disadvantage is that they require special card stock and a printer.
  • Paper cards must be modified to make them durable, such as laminating or putting them in plastic sleeves. The advantages for paper cards include the ease of using different colors and the ability to size cards to match desired layout. The disadvantages are significant. They require additional processing (cut printed sheets into individual cards then laminate them or put in clear plastic sleeves), they are not easy to print because printing requires the user to create sheets of cards to print, but different part numbers require different numbers of cards. Most people are surprised just how much work it takes to print paper cards and get the ready to deploy – even a couple hundred cards can take a day to prepare.
  • Some sites attempt to use electronic or virtual cards, and this generally doesn’t work because it removes the process and employee-engagement benefits that are gained from the visual aspects of kanban.

It is beneficial to use different colors to indicate various card categories.

  • Purchased items are often a different color than manufactured parts. This makes it easier to find cards as orders arrive at the work cell, because a stack of cards on a specific due-date peg is easily divided into external and internal cards. This is also helpful if different people manage internal versus external items.
  • Spike cards should be a bright color that stands out from a distance. Since they are not automatically reordered, they don’t need a barcode.
  • Material that goes to an external process, like plating or heat treat, or material from specific suppliers can be a designated color to help track those items throughout the site.
  • Material for a particular work area or product family can be a specific color, particularly if kanban contacts are assigned by work cell or value stream.

A purchased item might have a pink card for regular kanban and a yellow card for spike inventory.

Kanban cards are the most common replenishment signal because they’re easy to use, they have visual-management advantages, and they can provide instant access to item data and kanban insights with the right card content.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.

How Does a Kanban Board Work

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Kanban, one of the primary Lean tools, is an inventory management system that relies on real-world inventory consumption (demand) to trigger replenishment signals (supply). Click here to read more about kanban.

A kanban board manages kanban cards that are waiting for an order of replenishment parts. Click here to read about kanban cards.

Carefully design your kanban boards

A kanban board has about 3 dozen pegs, hooks, or other ways to hold kanban cards.

  • 31 pegs labeled 1 to 31, for the 31 dates that can occur in a month
  • Additional pegs for other circumstances
    • “Stock out” – cards that have zero on-hand inventory, even if a supplier order is not late
    • “Past due” – cards that were due prior to today
      • Items that are out of stock should be on the “Stock out” peg
    • “Next Month” – cards that are due in more than one month
    • “2+ months out” – cards due in more than two months, if lead times approach 8 weeks or more
    • “Waiting to be scanned” – this is only required if cards are not scanned at the board

In keeping with kanban’s mission to be a visual system, kanban boards are located where the cards live, and cards live where items are used, at point of use.

  • Boards should be easy to access, easy to reach, and in good lighting
  • If possible, process kanban cards at the board (i.e., put a scanner there) so they don’t leave the area
  • Kanban boards are “sized” to handle the number of cards expected to be hanging at any given time. Break-a-bin cards spend a large portion of their life on the kanban board, while empty-a-bin cards spend more time on the shelf. Click here to read about trigger timing.
    • For EaB items
      • For 2-card solutions, expect about half of the cards to be on the board
      • For multi-card solutions, expect all but 1 or 2 cards to be on the board, unless the item has a really high card count
      • For 1-card solutions, the card will be randomly on the board based on each item’s characteristics
    • For BaB items
      • For 2-card solutions, expect both cards to be on the board a good percentage of the time
      • For multi-card solutions, expect all but 1 card to be on the board
      • For 1-card solutions, the cards will be randomly on the board, as described above

Board count & location

In order to know how many boards we need and where tey should be placed, weneed to estimate how many cards a particular board needs, versus how many it can physically hold.

  1. 31 date pegs equates to ~22 workdays and 9 weekends, so 22 pegs hold all the cards for a 5-day workweek cell.
    • Adjust the number of “active” pegs if the cell works more than 5 days per week.
  2. Determine how many cards fit on one peg. Don’t overload the pegs! Please minimize the risk that cards will fall off.
  3. Calculate how many cards belong to this board’s span of control, which is the sum of card count for all kanban items assigned to this board.
  4. Estimate how many cards could be on the board at one time, based on card count and break-a-bin or empty-a-bin trigger timing.
  5. Divide the number expected cards on the board by 22 pegs to see if the count per peg is less than how many can fit on a peg.

Kanban board process

  1. When a kanban card is scanned or processed, the due date for the new order is determined by [today’s date + standard lead time in workdays], skipping any holidays (“H”) during that period. Write the due date in some kind of erasable marker on the back of the card, so that date is available when the kanban board is audited.

HINT: Lead times are always in workdays. Why? Think about an order that is placed on a Thursday. If the plant works 5 days per week, a 3-day lead time that is processed on Thursday is due on Tuesday because three days from Thursday is [Friday-Monday-Tuesday]. If we use calendar days instead of workdays, an item with a 3-day lead time that is processed on Thursday is due Sunday [Friday-Saturday-Sunday], but Sunday is not a work day for many plants. Therefore, putting lead times in calendar days only works if 1) the site works 7 days per week and so do all external suppliers, or 2) every lead time is an even number of weeks. Since these conditions are rarely true (I’ve never seen it), lead times must be in workdays.

  1. Each of the numbered pegs from 1 to 31 stands for a date. Place the card on the board based on its calculated due date.
  • If today is May 5thand card is due on the 12th, the “12” peg on the kanban board stands for May 12th so we hang it on the 12 peg.
  • If today is May 5thand the card is due June 1st, hang it on the “1” peg.
  • If today is May 5thand the card is due on June 14th but “14” stands for May 14 so it goes on the “Next Month” peg.
    • For really long lead times, there is a peg for due dates that are farther out than one month. If today is May 5thand the card is due on July 12th, the “12” peg is May so one month out is June and July is 2 months out – hang it on “2+ months out.”
  1. The kanban board is updated at the beginning of every workday. The “Today” marker is moved to today’s date and cards that were due yesterday that did not arrive are moved to the “Past Due” peg.
  1. Throughout the workday, the board is kept in sync with card activities. Items that drop to zero are moved from the numbered peg to the “Stock Out” peg. Cards that are processed to place a new order are hung on the appropriate peg, as described above.

HINT: Cards on the pegs labeled Past due, Stock Out, or To Be Scanned are acted on at least twice per shift. Cards never wait more than 4 hours!

  1. Instruct external and internal suppliers to put the due date on the packaging for the order, so the associated card can be quickly located on the board Match the correct card to incoming parts and put both in the correct storage location.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.

kanban-types-triggers

Kanban Types & Triggers

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Kanban, one of the primary Lean tools, is an inventory management system that relies on real-world inventory consumption (demand) to trigger replenishment signals (supply). Click here to read about kanban.

Components of a kanban solution: signals, quantity, & lead time

Kanban solutions consist of a specified number of signals, a standard order quantity, and a defined lead time. The number of signals determines the type of kanban solution being utilized, e.g., 2 cards, multiple cards, or 1 card. The timing of when a replenishment signal is issued determines the trigger timing for the solution, which can be break a bin, empty a bin, or in the middle of a bin.

A typical kanban solution might be 2 cards @ 100 pieces each, 4 cards @ 500 pieces each, or 1 spot on the floor for a 55-gallon drum.

The term lead-time demand refers to the expected consumption during one lead-time period. If an item has a lead time of 10 days and daily demand is 5, the lead-time demand is 50 pieces. Every kanban item’s solution must order enough inventory to cover the expected demand during the actual lead time, including any required safety stock for delivery or supply variation.

Regardless of the total number of signals or the timing of the triggers, when a kanban signal is sent there must be enough inventory on hand to cover the expected demand that will occur from that moment until the next replenishment order arrives. Figuring out these details is part of the complex process of calculating kanban solutions.

3 Types of kanban solutions

Once items are sorted into “on kanban” or “not on kanban,” the kanban items must be assigned a type of kanban solution.

Two card solutions are the standard or ideal kanban solution, which allows one card to be with on-hand inventory while the other is linked to a replenishment order that’s coming from the supplier. Conceptually, one card is linked to on-hand inventory while the other hangs on the kanban board.

A single card or 1-card solution is used when an item’s minimum order quantity (MOQ) exceeds the number of pieces that need to be ordered for a 2-card solution. For example, if an item has a lead-time of 10 days and daily demand is 10, we need to order 100 pieces to cover lead-time demand with zero safety stock. If the item has a minimum order quantity of 1,000 there’s no way to use 2 cards for this item because there would be piles of excess inventory. Instead, use 1 card and place a replenishment order when the on-hand balance gets down to no less than 100, which is the amount needed on the shelf when a new order is placed. One-card solutions are considered mid-point triggers because the card is not triggered at the beginning or end of the kanban bin.

Multi-card solutions have any number of kanban signals or cards, going to as low as one card and up to any number. (I’ve seen solutions with as many as 89 cards. Yes, it worked, but it’s a long story.) There are three specific circumstances that justify a multi-card kanban solution.

  • If an item has seasonal or day-to-day demand variation that necessitates frequent resizing, a multi-card solution is deployed to make it easy to resize by adding or subtracting cards from the floor.
  • If an item has a long lead time, a multi-card solution reduces on-hand inventory by breaking the order quantity into smaller batches than a 2-card solution would allow.
  • An item with a maximum order quantity (MaxQ) that is less than the 2-card order quantity requires more than 2 cards. If an item’s 2-card solution requires an order quantity of 5,000 per card, but the maximum allowed order quantity is 2,500, we need more than 2 cards.

Trigger timing

Kanban signals are triggered at the beginning, end, or middle of a kanban bin. In this context, the word “bin” means the kanban order quantity, not the physical container. If we order 100 pieces in 2 boxes of 50, the bin is 100 pieces, not a box of 50.

Break a bin (BaB) means the card is triggered when the first piece is taken out of the kanban bin. The advantage to this method is that it can reduce inventory for 2-card solutions, but break a bin is very difficult to audit because kanban items only expect to have a card with on-hand inventory when the bin is full, and it’s difficult to tell the difference between a full bin and a bin that has consumed one piece.

Empty a bin (EaB) means the card is triggered he last piece is removed from the bin. It is the opposite of break a bin, so average inventory for a 2-card solution is higher that BaB, but EaB is easier to audit because every kanban item has a card associated with on-hand inventory, from 1 piece up to a full kanban bin.

Mid-point triggers only occur with 1-card solutions, as described above.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.

kanban calculator

What Exactly Is Kanban?

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Kanban, one of the primary Lean tools, is an inventory management system that relies on real-world inventory consumption (demand) to trigger replenishment signals (supply). Since kanban signals are based on actual consumption, it is considered a visual “pull” system. The opposite of pull is push, in which material is delivered to the recipient based on the supplier’s scheduling preference and not on the customer’s need.

At its most fundamental level, kanban performs two functions

Kanban calculates replenishment solutions based on the characteristics of each item, specifically lead time, demand, and supply and/or demand volatility. Kanban solutions balance the need for meeting customer delivery requirements, specifically high on-time delivery plus short lead times, with the need for low on-hand inventory levels to boost cash flow and minimize required space. Be very clear: kanban’s primary goal is to protect delivery performance, and inventory performance is a secondary goal that is only pursued after delivery performance is successful.

Kanban initiates replenishment orders in response to material consumption, using the calculated kanban solution to trigger an order for a standard order quantity at a standard lead time, such as 100 pieces due in 2 weeks.

Unlike kanban, MRP (materials requirements planning) exists in a Big Computer System, which relies on system values for on-hand balance, expected incoming material, and upcoming demand.

Kanban utilizes visible signals such as kanban cards or empty inventory spots to manage replenishment signals. Associates can quickly and easily check kanban cards or boards to determine what is ordered, when it is due, how many will arrive, etc. This puts a significant amount of inventory management intelligence in the minds of the people who do the work, versus in the hands of a few people with access to MRP.

Kanban is a repetitive loop

Kanban can be compared to the Plan-Do-Check-Act cycle.

Plan = Size, or calculating kanban solutions

Do = Execute, the processes that manage kanban signals, cards, orders, and boards. Click here to read about kanban cards, or click here to read about kanban boards.

Check = Audit, the regular review cadence that verifies the health of the kanban system

Act = Respond, addressing anything discovered during the prior 3 steps that can be repaired or improved

Once kanban solutions are calculated and deployed, kanban is a repetitive loop that triggers replenishment orders based on consumption.

  1. As inventory is consumed, kanban replenishment signals are triggered. In many kanban systems, the physical or observable kanban signal is a kanban card, like the cards in front of the plastic inventory bins in this picture.

  1. Kanban signals are transmitted to the item’s supplier, which can be an internal manufacturing cell or an external supplier. For internal suppliers, sometimes the card actually travels to the supplying work cell, but the signal can also be electronic, such as an open purchase order or an email request.
  2. While waiting for material from the supplier, the kanban card hangs on a kanban board, seen in picture below. Each card hangs on the numbered peg that stands for the due date for that order.

  1. When replenishment material arrives, the associated card is taken from the board and placed with the material in the correct storage location.

This trigger-and-receipt process is repeated over and over for every kanban item.

Basic elements define a kanban system

First, we need a kanban calculator, or a spreadsheet to generate kanban systems. This work is essentially invisible to associates who manage kanban cards and boards, but it is the most critical element of a kanban system. The calculator is usually a spreadsheet with formulas that assign kanban solutions to accommodate demand, lead time, safety stock, and order-quantity requirements. Click here to read about safety stock. Since replenishment signals are issued based on consumption, the calculation process has to accurately trigger replenishment orders at the right time and for the right quantity. Therefore, a kanban solution that is “under-sized” results in too little inventory, which puts delivery at risk. On the other hand, a solution that is “over-sized” results in too much inventory, which eats up cash and space.

Lead-time demand equals [daily demand * actual lead time], or how much consumption occurs in one lead-time period. This is an important number to know when designing kanban solutions because every kanban solution has to order a quantity greater than or equal to the lead-time demand.

As simple as this sounds, calculating kanban solutions is by far the most difficult part of designing a kanban system. For an in-depth review of kanban, get a copy of my book Banking on Kanban: Mastering Kanban to Boost Cash Flow, Minimize Inventory, and Maximize Delivery Performance. Click here to see Banking on Kanban on Amazon.

Next, we need signaling methods, something to trigger replenishment orders wherever inventory is consumed. As stated before, this is usually kanban cards but it can be empty spots on the floor, empty containers, or anything that can serve as a visual indicator. For any type of signal, its form and function must be easy to interpret on the floor. For example, a kanban card should include part number, description, lead time, supplier, order quantity, storage location, and other information that tells associates how to manage the card and the associated inventory. Similarly, an empty spot on a shelf might be labeled with part number, type of container (e.g., box, tote, bucket), supplier, and the quantity per container.

Finally, we need processes to manage kanban orders with accuracy and urgency. Kanban boards store cards that are waiting for orders. Deploy kanban boards where triggers are generated or where they are fulfilled, depending on the defined path of the card from signal to fulfillment. In conjunction with kanban boards is the task of receiving material and putting it away. As material arrives at point of use, the correct card must be taken from the kanban board and put with the material in the correct storage location.

Need more info? Keep browsing this blog. Want specific expertise implementing kanban solutions in your organization? Contact Josette Russell today.