Kanban Solution Calculation – Step-by-Step – Part 5/5

  • On-Hand-Inventory-Dollar

This article is Part-5 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.

Part-5 completes Phase-3 of the Kanban Solution calculation process: Estimating total on-hand inventory dollars and tracking percent on Kanban.

Total Estimated On-Hand Dollars
Every item held in inventory represents a financial value. Even though each unique part can be expressed in a variety of different units of measurement, the value of each of them can be quantified in terms of currency or On-Hand Dollars (OH$).

Calculating aggregate OH$ (or total on-hand inventory dollars for all items) is straightforward. Simply sum up all your individual estimates. However, keep in mind that this aggregate prediction assumes that Kanban is deployed in perfect time for every recommendation. The value does not account for order backups, changes in demand or any other variations from Kanban plans.

Whether or not your glorious Kanban plans are ever implemented, the predicted totals should accurately reflect your actual inventory situation. For the aggregate minimum, average and maximum inventory levels:

Total Estimated OH$ = SUM (Estimated OH$ for all items)

Total Average Estimated On-Hand Dollars
The Central Limit Theorem tells us that the total actual inventory across a large population of inventory items should be approximately the same as the average inventory expected for the same group of items. Thus, by calculating the sum of all average balance estimates, you can arrive at the total average estimate of on-hand dollars. You should compare this sum to the on-hand balance that is actually on-site.

Total Maximum Estimated On-Hand Dollars
Total Maximum Estimated On-Hand Dollars is the predicted dollar amount for the case of every item being on hand at its maximum replenishment and safety stock — that is, every item’s stock being at the top of the sawtooth curve. When Kanban is first rolling out, you may actually see that your actual on-hand dollar amount is even greater than the predicted maximum. Kanban calculations can be quite drastic at first, and it might be a challenge for operations to actually reflect all Kanban recommendations.

Another reason you might find that your actual OH$ is greater than the predicted maximum is that resizing has happened in the time since the calculations were completed. If many items experience changes in minimum order quantities, lead times or demand, the estimations won’t reflect them.

High On-Hand Dollars
Sometimes Kanban on-hand dollars might be consistently, and significantly higher than the predicted maximum. While some discrepancy may be due to normal and acceptable variations in supply and demand, any item that maintains on-hand dollars of 10% or more than it’s expected maximum on-hand dollars indicates a real problem. Understand, it’s vital to your success to recognize the following reality; If you find that actual on-hand dollars are always higher than your expected maximums, then you are suffering one or more of the following systemic materials management failures:

Materials Management Failure #1. Kanban is not dictating replenishment. Kanban cards are meant to trigger orders only when it’s truly time for an order. Timing is based on actual item and supplier characteristics. If Kanban cards are being used but they are not controlling replenishment the Kanban replenishment system can start to break down. When this is the case, the cause is often due to poor processes or controls, such as cards being overridden by human workers or signals being unclear or poorly communicated.

Materials Management Failure #2. Calculations contain mistakes – With so many calculations, mistakes and typos can sabotage Kanban calculations. If someone types in a 0 when they really meant a 9, the results will not portray real circumstances, and all aggregate data will be skewed.

Materials Management Failure #3. Early Delivery – If you allow suppliers to replenish early or too often, then you’ll end up with more on-hand balance than what was estimated. If a card was scanned to trigger an order before it was time to do so, more items will be moved in, again resulting in more on-hand dollars than intended. Verify that all workers understand procedures, that actual lead times are accurate and that suppliers only ship and deliver when it’s time.

Materials Management Failure #4. Replenishment quantities are higher than KOQ – This can happen anytime actual SPQs or MOQs are higher than the quantities planned for in your Kanban calculations. When KOQs have been calculated correctly, suppliers may be the culprit. Some suppliers may make changes to the minimum order quantity or the package quantities without telling you or they may simply delivery excess for any number or malign reasons. Regardless, any supplier sending more than required, must be stopped. Routine or frequent over delivery should easily be identified when reviewing purchase orders, so processes should be in place to quickly catch and communicate any delivery deviations to the supplier.

Materials Management Failure #5. Demand is overestimated – Daily demand is an essential value in the Kanban process. If demand levels fall, you must resize so that Kanban reflects the true nature of the movement of the item. Failing to do so can result in overstocking.

Remember, if your actual on-hand dollar amount is regularly higher than your expected maximum by 10 percent or more, then you MUST check for these failures so that you can root out and resolve the cause responsible for sabotaging your efforts.

Percent on Kanban
It’s smart to measure and track the extent of Kanban deployment in your facility. When doing so, it is vital to note that you specifically want to measure percent of spend, NOT percent of part numbers. Remember to always analyze Kanban from a financial perspective.

Annual Purchased Spend Percent on Kanban
A great metric for quantifying the extent of Kanban deployment is the percent of purchased part spend actually managed on Kanban. The percent of annual purchase spend on Kanban should be at least about 80%.

For items that are manufactured rather than purchased, good flow will mean low inventory. Because of this, you might discover a low percent of annual manufactured spend is managed on Kanban. That is fine. It’s always best to segment your purchased and manufacture red items so that you can analyze them in isolation of each other. When calculating total purchased annual spend, remember to exclude manufactured items and count only the purchased inventory managed on Kanban.

ABC Class Priorities for Kanban
Many managers additionally examine how effective Kanban processes are by the percent of annual spend for A, B and C items. For the best management of your funds, shoot for managing 100% percent of your A items on Kanban. In that case, roughly 80% of your total annual spend would be managed on Kanban.

Accordingly, adding an additional 100% of Class-B parts on Kanban, would increase your percent of annual spend on Kanban to 95%. Of course, while putting A and B inventory items on Kanban will have the biggest impact, adding Class-C items on Kanban can only improve the efficiency and effectiveness of your inventory management. Just imagine, 100% of your total annual purchased part spend being managed on Kanban!

That concludes part-5 of this 5-part series on calculating Kanban Solutions. If you have any questions, comments or recommendations for improving this or any of our content, drop us a line. We’d love to hear your feedback!

2019-03-11T08:47:33-04:00March 11th, 2019|Categories: Inventory Management, Lead Time Reduction, Lean Manufacturing, Supply Chain|

About the Author:

Aaron is the Marketing Director at Falcon Fastening Solutions, Inc. He is focused on sharing Falcon's unique approach to fastening and class C production component supply chain solutions with equipment manufacturers.

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