This article is Part-2 of a 3-part series on planning kanban inventory reductions.
Part-1 covers estimating inventory reductions.
Part-2 covers planning supplier negotiations.
Phase 2: Plan Supplier Negotiations
Implementing ideal kanban solutions can be quite challenging, but they shouldn’t be dismissed. Ideal kanban solutions promise greater inventory reductions than recommended kanban solutions because they are based on target lead time without regard to order quantity constraints. Your goal for kanban deployment should be to achieve as close to ideal as possible.
3 Areas to Negotiate
- Lower package limits. Anytime a supplier requires that you order a minimum number of items, or only offers items in certain standard package quantities (SPQs), you will often end up receiving more inventory than you site needs. As a result, you’ll tend to see unnecessarily high inventory levels.
- Shorter lead times. When lead times are shorter, there’s less risk of a stock-out. A result is that can confidently make smaller orders, which often means you can carry less on-hand inventory at any given time.
- Fewer inventory transactions. Shorter lead times often require more transactions. Unfortunately, every transaction has a cost that negatively impacts efficiency. Sometimes high transaction counts can even impact kanban effectiveness. In these cases, it can often make sense to lengthen lead time while maintaining higher inventory levels.
Some of these negotiations might seem to contradict one another, and you may feel like you’re not sure where your negotiations with your internal and external suppliers should start. You need to prioritize.
Identify Negotiation Priorities
When trying to reduce inventory, you want to first make the changes that will have the biggest impacts as soon as possible. Before contacting suppliers with negotiation requests, you’ll need to analyze your needs at the part number level. Take the following steps to make some helpful estimations that can assist you in determining which negotiations you should tackle first.
- Consider every part’s ideal kanban solution and estimate on-hand currency.
- Figure out the difference between the sum of ideal solutions versus the sum of recommended solutions to determine the potential for inventory reduction.
Potential Ideal Kanban Inventory Reduction = Ideal Kanban OH$ – Recommended Kanban OH$Use this formula to calculate the potential for inventory reduction for each item and then sort them with highest reduction potential items at the top of your list.
- Classify your reduction potential threshold(s). Based on the potential ideal kanban inventory reduction value calculated in step-2, you need to define one or more thresholds for classifying potential inventory reduction. For example, a potential reduction of $100,000 or more might be classified as “high”. A potential reduction of $50,000 to $100,000 might be classified as “medium”, and a potential reduction of less than $50,000 might be classified as “low”. Your thresholds should be dictated to by your unique circumstances. For each category, binary-flag (i.e. “1” or “0”) each part according to your reduction threshold classification rules.
- Sum the total inventory reduction dollars for all items within each reduction category.
- Assess each item that you have deemed a high priority for inventory reduction due to the benefits that reduction will bring. For each high potential inventory reduction item, decide what combination of lower MOQ, lower SPQ, and shorter lead time would improve the item’s performance the most. Keep in mind, that items needing longer lead time should typically not be considered a high-priority.As mentioned earlier, this is because the advantage of longer lead times is often in reduced transaction costs. A common exception to this rule is Receiving being habitually behind as direct result of a high number of daily transactions. Whenever this is the case, you should strongly consider making increased lead time negotiations a priority.
- Make negotiation lists. Sort suppliers in terms of biggest potential reduction. Keep in mind that if there are parts from that supplier that are low-priority changes, now would be the time to address them. It’s a good idea to present all potential changes to a supplier all at once so that they have a better understanding of your intentions. However, don’t forget to sort each supplier’s list in order from highest to lowest potential impact inventory items.To increase effectiveness, the negotiation responsibilities should be assigned to specific planners with clear due dates. Make sure your planners have manageable, balanced workloads. You may need to reassign some work cells so that the management of inventory items is more evenly distributed.
Prioritize Kanban Deployment
While you wait for your suppliers and internal processes to adjust to new goals, you may not be able to deploy the ideal kanban solutions. During this time, however, you can begin to implement your recommended kanban solutions. To do that, take the following kanban deployment steps.
- Immediately resize all items with negative safety stock so that your safety stock needs are met.
- Resize those items that have a good potential for a large reduction of inventory.
- Broaden the scope of your kanban initiative by deploying kanban for all new items added to kanban.
- Take items off kanban that no longer qualify to be managed by kanban.