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
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.
- 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!
- Calculate the average demand for one lead-time period based on the lead-time buckets from step #1.
- Calculate the standard deviation of each item’s lead-time buckets.
- 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.