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.

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.