This article is Part-4 of a 5-part series on Calculating Kanban Solutions.
Part-1 reviews the 3 key pieces of information every Kanban solution requires and introduces the 3-Phase process for calculating Kanban solutions.
Part-2 walks through the first two steps within Phase-2 of the Kanban Solution calculation process.
Part-3 walks through step 3 within Phase-2 of the Kanban Solution calculation process: Finding and correcting Kanban errors.
Part-4 introduces Phase-3 of the Kanban Solution calculation process: Estimating on-hand inventory balance.
Phase-3: Estimate Inventory Levels
Phase-3 of Kanban Solution Calculation process involves estimating average, minimum, and maximum inventory levels in terms of currency (e.g. dollars). How exciting!
Estimate On-Hand Balances
When estimating on-hand inventory, you need to estimate inventory levels for inventory managed on Kanban and for those items not managed on Kanban.
Estimating Inventory Levels on Kanban
For items that are on Kanban, you can use the following methods and calculations to estimate the various levels of your on-hand inventory:
- Estimated Minimum Inventory: Estimated minimum is the exact same as your actual safety stock units.
- Estimated Average Inventory: Divide the Kanban Order Quantity (KOQ) by 2 and add the actual safety stock.
- Estimated Maximum Inventory: Add full KOQ and actual safety stock.
To convert each of these estimated values to inventory dollars, simply multiply the standard cost of the items by the number of inventory units.
Estimating Kanban Inventory Levels NOT on Kanban
Estimating on-hand balance for inventory items not on Kanban must be done differently than items on managed on Kanban:
• Zero Demand On-Hand Balance: Sometimes, items are excluded from Kanban due to an item having zero demand. In these cases, the inventory isn’t moving, so it makes little sense to estimate inventory levels. The average, future minimum and future maximum expected balances are all equal to the value of the current on-hand balance.
• Minimum On-Hand Balance: For inventory not on Kanban, there is no guarantee that replenishment will occur before the non-Kanban item stocks out. If new orders arrive just in time so that no stock remains before replenishment, the minimum on-hand balance is estimated to be zero.
For items with safety stock, the estimated minimum on-hand balance is always equal to the item’s safety stock value. Since non-Kanban items have less predictable schedules, estimating the days or units in safety stock can be tricky. However, if safety stock exists, it must be planned and managed.
• Average On-Hand Balance: Sometimes items are excluded from Kanban because of reasons like high minimum order quantity (MOQ), low daily demand (DD) or some other unusual reason. Often, these items still have active demand, so their stock must still be managed.
Whether the item was excluded from Kanban because of low DD or a high MOQ, the item will mostly likely be ordered in quantities equal to the item’s MOQ.
For parts whose replenishment arrives just in time (leaving no safety stock to account for), estimated average on-hand balance is simply going to be the average of a full stock and a stock out, which is (MOQ + 0)/2, or half of MOQ.
For parts that are replenished before the inventory stocks out, the number of items left over (safety stock) should be added to the above average:
Estimated Average On-Hand Balance = (Order Quantity/2) + Actual SS
For other types of exclusions, you’ll have to estimate average on-hand balance using your knowledge of the item’s movement through the process stream. Consider the quantity of an item you should keep on-hand based on its demand as well as how long (in days) the item will need to be accounted for. For example, 5 days of finished goods may be required, or a work-cell may require 1 day of inventory.
• Max On-Hand Balance: To estimate the maximum on-hand balance of items that are not on Kanban, determine if there will be safety stock. If not, then the maximum balance you will have will be the quantity of your replenishment order. If the item does have safety stock, add that value to the order quantity to obtain your estimation of maximum on-hand dollars:
Non-Kanban with demand, Estimated Maximum On-Hand Balance = Order Quantity + Actual Safety Stock
Now that you have estimated the minimum, maximum and average levels of inventory for all individual items on Kanban and not on Kanban, you can now estimate your total aggregate on-hand dollars.
That concludes part 4. In part 5 of this 5 part series, we dive into Phase 3: Estimating Kanban Inventory Levels!