Of all the different inventory management systems in which we have had the opportunity to participate, kanban may be the most consistently effective; especially from the manufacturer’s point of view. At RESCO we have supported vendor managed inventory, consigned inventory, bonded inventory, and a variety of dock-to-stock programs. But consistently the kanban based systems have been the easiest to manage and the most consistently effective.
Just so we are all on the same page, kanban is an inventory management concept based on the lean manufacturing principle of pull. Where “pull” means that demand from the customer for the final product causes demand at the manufacturer for that product and then through the manufacturer’s supply chain-based for the components and raw material required to produce that product.
Famously developed in the 1950s by Taiichi Ohno, an industrial engineer at Toyota, kanban systems aim to replace inventory only as it is consumed. This is in sharp contrast to “push” or forecast based systems which attempt to predict the need for inventory. The fundamental problem with push-based systems is that the forecasts are inevitably wrong causing unnecessary build-ups of inventory (forecast too high) or inventory shortages (forecast too low). Kanban has been proven across most every industry to reduce inventory by making sure that only the material being consumed is re-ordered and that the right inventory is on-hand and none of the wrong material is filling warehouse shelves.
Typical Kanban Systems
Most kanban systems work by sending kanban cards or electronic releases (more often the case these days) from the manufacturing floor to the supplier as material is consumed. Typically the material is requested and delivered in predetermined set quantities. One of the most common implementations is the “three bin system”. In the three bin system, one bin (or quantity) of inventory is maintained on the factory floor, one bin in the factory stockroom and final bin at the supplier. Once the bin on the factory floor is consumed, a signal is sent to the stockroom for replenishment. This causes the stockroom inventory to be depleted which triggers a signal to the supplier to ship. At the supplier, the resulting depletion of its inventory creates demand to produce more of the component or raw material. Ultimately, kanban systems are easy to understand and when properly designed and easy to manage.
Supplier Selection is Critical
Of course for any kanban system to work effectively and for the benefits to be fully realized, a manufacturer must have a flexible, capable, and engaged supply chain. Manufactures must find suppliers in each commodity that have the flexibility to adapt their systems to conform to those of the manufacturer. The suppliers must also have the capability to consistently supply quality product precisely at a designated time and place. Finally, the manufacturer and suppliers must be engaged in true partnership where information is freely shared and an open daily dialog exists. For a supplier to commit to an effective kanban system that supply needs to feel a true partner with the manufacturer and secure in their position with that manufacturer.
Consistently, our experience has shown that kanban based inventory management systems are among the most effective and easily managed. Although there are many variations on the kanban theme, the core process is always one where demand drives replenishment through the entire supply chain. Finally, the benefits of lower inventory investment and fewer stock-outs are real but can only be realized by selecting the right supplier partners and by developing supplier relationships where information is freely and frequently shared.
About the Author
David Copenhaver is President of RESCO Electronics, a Baltimore based manufacturer electronic assemblies and value added reseller of auto ID equipment to original equipment manufacturers. Before joining RESCO in 2003, David was the Senior Vice President of Operations and member of the Board of Directors for US Office Products, a publicly traded distributor of office products that is now part of Staples. Beginning in 1989, David co-owned and managed The Smith-Wilson Co., an Orlando based distributor of office products that was sold to US Office Products in 1996.
David has a Bachelor of Science in Electrical Engineering and a Masters in Business Administration both from the University of Virginia. He is married and lives in Arlington, Virginia with his wife and three sons.