This article is Part-3 of a 3-part series on planning kanban inventory reductions.
Part-1 covers estimating inventory reductions.
Part-2 covers planning supplier negotiations.
Part-3 covers estimating the timing of inventory reductions.
Phase 3: Estimate Inventory Reduction Timing
Inventory reduction plans often have an initial “bleed-off” period where many inventory items don’t require replenishment, due to having high on-hand balances. The time it takes to consume the excess inventory (i.e. the bleed-off period) will be different for each item. It may be days, months or even years. This, of course, delays inventory reduction results. Unfortunately, many manufacturers overlook the negative impact bleed-off time has on seeing inventory reduction success. They assume, for no good reason, that inventory reduction will occur almost instantly (i.e. 30 days or less), across the board. This is rarely, a realistic expectation.
You should determine the scope of the delay so that you have a realistic timeline for how long it will take to see your inventory reduction results. To do that, follow these steps:
- Compare the current on-hand dollars to expected average inventory to find the expected inventory reduction amount.
Use this calculation:Expected Inventory Reduction Dollars = Current On-Hand Dollars – Expected Average On-Hand Dollars
- Predict the unit and dollar values that you can bleed off in each week.
Weekly Bleed-off Units = Daily Demand – Workdays per WeekWeekly Bleed-off Dollars = Weekly Bleed-off Units * Standard Cost
- Determine how many weeks each item will take to consume the extra inventory.The following calculation assumed kanban solutions are completely implemented, new material is not yet ordered, and consumption of excess inventory is occurring.
Weeks to Bleed Off = Inventory Reduction Dollars / Weekly Bleed-off Dollars
- Choose a review period (e.g. 12 weeks) and make determinations about the volume of reduction you can expect to see for each item in that period.
- Estimate each item’s inventory reduction expected during the defined review period. Don’t forget to consider that each item’s bleed-off period is likely to vary from the review period. For each item, if total bleed-off weeks are less than review period weeks then your estimate will be your original inventory reduction estimate. For parts with a bleed-off period exceeding the review period your estimated inventory reduction will be the item’s weekly burn x review period weeks.
- Add up the expected reductions that you gathered in Step-5 to see what the site can expect to see in inventory reduction for your defined review period.
- When resizing shows that items with low inventory should increase on-hand balance, it probably means that your current inventory levels are too low. If current on-hand balance is less than it should be, assume that item number will be replenished immediately and that your levels are already at the new recommended level.
- Calculate the expected net inventory reduction. Determine how much reduction you can expect from the bleed-off of all excess inventory (Steps 1 through 6). Next, add in the amount of inventory that you expect to receive to increase low-inventory items (Step-5). The result is the expected net inventory reduction.
That does it for part 3 of this 3-part series on planning kanban inventory reductions! To learn more about kanban best practices check out Calculating Kanban Solutions