How many times have we heard that we can’t implement Lean manufacturing, specifically kanbans, because our demand is not constant and kanbans work best with steady, stable demand. That is truly unfortunate because steady, stable demand is exceedingly rare in today’s environment. But before we give up on managing inventory using kanban, let’s look a bit deeper.
A kanban is a device that limits inventory. It can be a card, a space on the floor, a tote able to carry a fixed amount of parts or even an electronic signal that authorizes movement. In order for inventory to exist, it must have a kanban to authorize it.
When setting up a lean system, you will at some point need to calculate the number of kanbans, or in other words, the inventory authorized in the system. In its simplest form, this level of inventory can calculated based on replenishment cycle times and demand levels for the parts in the system. The number of cards is based on the inventory level and the container size. Other items that need to be considered include supply variability, demand variability, resupply costs and available space.
Let’s think about how demand variations impact your lean system. To do this, its easiest to picture yours supply chain as a hose. The diameter of the hose is the allowable level of inventory. The allowable level of inventory is based on the number of kanbans in the system as described above. When the allowable level of inventory is greater than needed to satisfy demand and buffer against supply and demand variation, we tend to end up with excess inventory. Drive the inventory too low to account for normal variation and you’ll end up with stock outs.
The water in the hose is the inventory moving through your supply chain. When I have lots of inventory, (picture a fire hose) with normal demand, water (inventory) trickles through the hose. If my demand increases, the volume of water in the hose increases and the trickle becomes a stream. No problem. The diameter of the hose (inventory) is hiding many of the problems in my supply chain such as quality problems however this extra inventory adds inventory costs. Now let’s imagine that we’ve been actively eliminating waste and lowering the levels of inventory in our supply chain and reducing our cycle times. Now, instead of a fire hose, picture a garden hose. The authorized level of inventory (the hose diameter) has been reduced and inventory moves through the system much faster.
Now let’s assume that demand being satisfied by the garden hose has increased. The volume of inventory moving through your garden hose sized supply chain will increase – to a point. At some point your supply chain (the hose) can’t keep up with the demand and the system fails. This failure occurs because we can’t move the inventory fast enough and stock outs occur. To prevent stock outs from occurring, we need to authorize more inventory. For short term demand spikes, some companies use special kanbans to authorize short term inventory to cover the spike. If your demand change is longer term, and you can’t accommodate the higher levels of demand through process improvements in your supply chain, you will need to recalculate your kanban levels (make the hose larger). In other words, re-apply the kanban calculation formula.
For companies that manually manage kanbans, this can be a big job (not impossible, but challenging). Best in class companies, however, are letting their systems manage the kanban calculations automatically. Because we want some stability in our kanban levels, we don’t want the kanban level to vary continuously as demand changes from month to month. Instead, we want the system to only authorize a change in kanban levels when we’ve exceeded a certain tolerance over time. This can raise problems of course when we have a short term spike. We don’t want to change our current kanban level, but we need to manage this spike. For this purpose, an automated system must recognize that the current kanban levels will result in a stock out as a result of this spike and recommend a temporary special use kanban (I’ve heard them called Single Use Kanban, Silver Bullets, etc). This special kanban temporarily allows extra inventory to cover the spike. In most cases, these special kanbans must be authorized, but that depends on the processes in your company.
There are still going to be some situations where kanban will be difficult to manage normally, like parts with sporadic demand for example. However, for most companies, the majority of their products can be managed automated kanban calculations. So why haven’t you started to implement lean?
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The question isn’t if Lean applies but how it applies. In my experience the failure of a “cookie cutter one size fits all” approach has created the misconception that lean doesn’t apply in high mix or highly volatile environments. How can the identification and elimination of waste not apply? But a kanban system that does not have an appropriate mechanism for adjustment may not. A SIOP process, which may not be necessary in a low mix stable environment, can be the key to success in the less stable situations.
The real world example I use involves a high cost 26 week lead-time item that was a product option. A sales associate worked for over one year to penetrate a huge region (India) and as luck would have it, this option was critical to the sale and regional penetration. We hadn’t sold any in two years, never had a demand for over 20 in a given month. Suddenly we needed 500 in three weeks but could get away with a 50 pc increment in the first month. The day the order was booked was the day operations was informed of the demand.
The fundamental question is how we know when to make an adjustment and how we make it. If history tells you that you can wait to react to actual demand and you can accept the inventory ramifications, life is good. If you need a managed risk taking process to balance responsiveness with inventory then you had better implement the process.
Rick
John and others,
I have been studying the lean manufacturing process and have a couple of comments / questions. It would appear to me that the process of not having excess inventory requires the supply chain to keep it for you instead. If you ask the supply chain, particularly manufacturers, how they would prefer environments they will tell you that they need forecasts and visibilities as they as well do not like inventories and particulary dislike holding finished goods.
Questions:
1) Do you believe that one pays more for materials to operate a lean manufacturing environment? And if not, who covers the costs of “turns” and the buffer for when the hose turns on?
2) As the hose turns on and you find shortages do you start to lose significant savings as you dip into the broker or 2nd tier supply chains?
3) Particularly surrounding the electronics sector: Do you find as demand hits and the supply buffer can’t help does ones chances of counterfiet increase and then eat into potential savings enjoyed by Kanban?
4) Again surrounding electronics sector: Do you believe that with few distributors in the USA that prices compared to Asia’s Kanban Franchise one can compete well on price?
Response to Rick Reiner’s Comment:
Thanks for your insightful comments Rick. I completely agree that a good SIOP or S&OP process is critical in any business whether they are lean or not. I also agree that lean principles apply in all environments, but as you point out, there may be some situations where standard Kanban design may not be appropriate. In your example, it sounds like the demand for the option in India was unpredictable. Kanban is best suited for dealing with stable demand. With some imagination and some different tools, you can apply Kanban to parts with variable demand as I pointed out in my article. Unpredictable demand is much harder to set up repeatable processes to manage. In this case, Kanban may not be the ideal tool, but again that doesn’t mean we should stop looking for, and eliminating waste in that value stream.
Hello All,
The question of how to deal with demand volatility in a lean environment admittedly is counter intuitive to most of us lean practitioners. However, if we consider the mechanics of how a pull system works, we can find that there is a way to make a flexible pull system that naturally adapts to changes in demand. The tradeoff is that rather than merely relegating the replenishment signal to simultaneously coordinate timing and product information, we may want the replenishment signal to only coordinate timing, while we coordinate the release of product information. A system like this will work similar to a rubber band – it will have flexibility, but it will have a limit.
Having said this, the greater issue in my mind is the need for appropriate policies, methodologies, and tools in customer service, as well as in production itself. In other words, one cannot produce any more than they have capacity to produce within a certain timeframe; regardless of the number of replenishment signals generated (otherwise, we should accept the make-to-stock approach). Therefore, in certain cases, bigger gains are made when we improve the policies and procedures that govern demand at the strategic level, coordinate more intelligent demand planning at the operational level and ensure smoother, more flexible flow at the tactical (or shop floor) level. If these occur, many of the supply chain cost issues mentioned by Ken will be abated.
Response to Ken Auga’s comment
Thanks for your comments and questions, Ken. I think that the biggest mistake manufacturers make is to start their lean programs by forcing inventory to their suppliers. So many times I’ve heard companies say that they are lean because they have forced their suppliers to hold all the inventory for them. That’s not lean, it’s just moving inventory around the supply chain. Successful lean implementations start inside the four walls. Get your own house in order. Reduce your own internal lead times, eliminate your own waste. Offer smaller lot sizes to your customers. Only then, once you have learned the lessons the hard way…by doing it, are you ready to approach your suppliers. Start with the key suppliers, those that provide a majority of your materials or those that are sole suppliers of unique goods. In some cases, you don’t have the leverage to drive change in your supply base…but sometimes you do. Bring your suppliers into your business. Show them how your business is operating. Show them the benefits of waste elimination. Show them how lowered inventory levels allow you to see where the problem areas are. Then explain how you need suppliers that can work in your lean framework and improve as you improve. If you don’t have the leverage to foster change in your suppliers, make sure that lean practices are a consideration when sourcing parts. When partnering with suppliers to implement lean, you need to provide your suppliers with the best information you have about your future needs. As you point out, suppliers need forecasts and visibility so that they can best support your needs.
I’ve reproduced your questions below and provided my thoughts;
1) Question: Do you believe that one pays more for materials to operate a lean manufacturing environment? And if not, who covers the costs of “turns” and the buffer for when the hose turns on?
Answer: If you can bring a supplier with you on the lean journey, I think you could see a reduction in price. That being said, I don’t thing price should be the key concern when sourcing lean suppliers. What I’ve seen is that having a good supplier that allows you to lower inventory levels, improve quality and reduce lead time results in significant cost savings that far outweigh the price savings from cheaper, non lean suppliers.
2) Question: As the hose turns on and you find shortages do you start to lose significant savings as you dip into the broker or 2nd tier supply chains?
Answer: Again, if your primary concern is price and you go with the lowest cost over other factors, then it’s likely that you will have stock outs when the hose turns on and you will see a cost increase because you will need to use a higher cost supplier. If however, you select suppliers based on their ability to fit into your lean framework as described above then you will likely NOT have stock out situations.
3) Question: Particularly surrounding the electronics sector: Do you find as demand hits and the supply buffer can’t help does ones chances of counterfeit increase and then eat into potential savings enjoyed by Kanban?
Answer: If you’ve selected a supplier based on lean principles, quality and lead time, instead of price alone, the risk is greatly reduced. If however price is the only factor, than the risk is there that you may be dealing with unscrupulous suppliers.
4) Question: Again surrounding electronics sector: Do you believe that with few distributors in the USA that prices compared to Asia’s Kanban Franchise one can compete well on price?
Answer: I’m not sure I quite understand the question here, but I’ll take a crack at it anyway. I think we’ve seen that the supply chains have become global in nature. Companies establish regional factories using regional suppliers. Companies also source components from around the world. That comes at a cost in terms of lead time and flexibility sometimes. A company sourcing from a local supplier could see a reduction in lead time and the possibility of a closer working relationship that could offset potential price savings found using an overseas supplier.
Response to Rick Reiners example:
Rick’s example is a good discussion topic, i.e. how does a company manage a 2500% demand spike within lead time. The simple answer is it can not be done without serious excess inventory held for just that probability. No replenishment system on earth will accomplish this task. What it sounds like in Rick’s senario is that there was a serious breakdown in forecasting information from the Sales group. Lets face it, all replenishment systems rely on some form of reasonable forecasting intelligence, without it, not only will Kan Ban fail but so will MRP driven order points, bin reserves or any other methodology short of the magic wand approach which by the way I have employed many times in my carrier. The bottom line; if sales had no clue the orders were coming in, they didn’t desserve to have the material available for sale, plain and simple! To that end as has been mentioned previously forecast collaboration is crucial. In the replenishment game Kan Ban does nothing more than emulate actual demand while MRP driven senarios emulate the forecast however both methods require some form of forecast on which to base their response to the market.
Ron Freiberg