An Alternate Method for Sizing Your Kanban
A second method, which yields results without as much data collection or calculations as the first method, is to make your current production schedule quantities the kanban quantities . This method does not lead to inventory reductions, but does have several advantages for organizations that want to move out quickly on kanban scheduling. The advantages of this method are that it:
Reduces data collection requirements and implementation time, since you simply make your existing schedule quantity the kanban quantity
Eliminates worries over incorrectly calculating the quantities, since you already know that the current schedule supports the production requirements
Although you do not engage in the same in-depth calculations as the first method, you should still follow the suggestions presented later in Chapter 9 when considering reductions in the kanban quantities. By following these suggestions, you ensure that you are not creating a problem that costs more than the savings. (Remember, there is no free lunch ”to reduce quantities some action must take place!)
For those organizations that have problems with following the schedule and are either underproducing or overproducing, you may find that this kanban will reduce your total inventory. The kanban can insert the necessary control if you design controls on containers and storage area. Figure 4-22 contains an example of this method using the data from Figure 4-10 (ten-part number) example.
Figure 4-22: Example of the Alternate Method for Sizing Your Kanban.
Note that the quantities in Figure 4-22 differ from those calculated by Method 1 (shown in Figure 4-20). The increased quantities reflect the difference between this method versus the calculation method ”you have arbitrarily picked the kanban quantities and have not modeled the kanban after your system's capability. Therefore, you have not optimized the batch size ”you still have excess production in the system.
When extending kanbans to suppliers, you need to assess their ability to resupply your process. This assessment should include: shipment intervals, delivery time, quality issues, reliability issues, and demand fluctuation. In terms of calculating their replenishment interval ”don't bother. Don't dig into their data unless your initial discussions with the supplier on kanban quantities makes them want to add safety stock to your inventory. Otherwise, relay your requirements to them and let them accept the requirements.
Don't bully your suppliers into accepting your desired kanban plans ”it is a recipe for disaster. You must work with them to develop a plan that they can support. Once you have a mutual agreement on the kanban quantities, then follow the steps outlined in Chapter 5 to develop a mutually agreeable design to control the kanban between your operation and your supplier.
If you encounter resistance when dealing with suppliers on establishing kanbans, determine whether their resistance is based on lack of knowledge or unwillingness to change. If you value the supplier, then you should consider attempting to educate them on the benefits of kanban. On the other hand, their resistance may be a signal to consider changing suppliers.
Setting Up Supplier Kanban Quantities
To develop the kanban quantity, look at the delivery interval. This becomes the maximum replenishment quantity. In other terms, if you get a weekly delivery, then the replenishment interval must be one week. As you might suspect, this delivery interval may be an opportunity for improvement. To reduce the interval, you must look at your needs and the cost, then communicate these desires to your supplier. Once again, get the supplier to accept these new requirements, don't force them.
When considering a decrease in the delivery interval, which means receiving more frequent shipments, don't forget to consider transportation cost. You may end up decreasing inventory while dramatically increasing transportation cost. We will address some creative ways to reduce the delivery intervals in Chapter 9 when we discuss continuous improvement.
To determine your buffer for a supplier kanban, consider the delivery time, quality level, reliability level, and demand fluctuation. To handle the first three items, use your historical data on the supplier's performance. Also, determine whether the buffer created to cover the demand fluctuation will cover these items. As a rule of thumb, the kanban safety stock should not be greater than the current safety stock.
To handle demand fluctuation, consider your current order variation. To assess variation, calculate an average and standard deviation of your last ten orders or some other representative timeframe. (Once again we remind everyone not to be intimidated by the statistics terms and use the canned functions found in most spreadsheet programs.) Look at the standard deviation to determine how much the quantities vary over time.
If the demand fluctuation for the product is greater than 25 to 30 percent, then seriously reconsider the implementation of kanban and stick with forecasting. Additionally, in situations of extreme demand fluctuation, wait until you have successfully implemented several internal kanbans before taking it on.
If the standard deviation is 5 percent of the average or less, then don't worry about demand fluctuation. In this case, create a buffer to just cover delivery, quality, and reliability.
If the demand fluctuation exceeds 5 percent, then use a confidence interval to size the buffer. The confidence interval is a statistical factor that predicts the likelihood of an event occurring. We would suggest using the confidence intervals generated for a normal distribution. To use the confidence interval to size the buffer, simply multiply the standard deviation by the confidence interval. This quantity will become your safety stock. Typically, we recommend a confidence interval of 90 to 99 percent depending upon the impacts of stocking out.
To eliminate the phobia associated with the use of statistics by mere mortals , we have listed confidence intervals for 85 percent to 99 percent in Figure 4-23. Additionally, to further explain this concept, Figure 4-24 shows an example of a buffer based on various confidence factors.
Confidence Interval (based on a normal distribution)
Figure 4-23: Confidence Intervals for Sizing the Kanban Buffer With Demand Fluctuation.
Figure 4-24: Calculating a Buffer Where Demand Fluctuation Exists.
Notice in the Figure 4-24 example how the buffer gets smaller as you decrease your confidence interval. Therein lies the heart of selecting safety stock confidence interval ”how much risk can you afford versus how much inventory do you want to hold?
From our experience it is best to perform a quick stock out analysis to see whether the calculated buffer would have supported the demand used to calculate the quantity. To perform this analysis:
Subtract the demand quantity for each part number from the shipment (or average order) plus the calculated buffer.
Repeat this operation for all the demand quantities used to calculate the average shipment and buffer.
Now look at the results to see whether the on-hand quantity (shipment plus buffer) went negative or close to negative.
If the on-hand quantity goes negative, then reassess the confidence interval used to calculate the buffer and make changes as appropriate. Figure 4-25 shows an example of the proposed analysis using the data from the example in Figure 4-24. Notice how stock outs occur more frequently in the example as the confidence interval decreases.
Figure 4-25: Stock-Out Analysis Using Figure 4-24 Data.