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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.

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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.