Finished Goods Kanbans
Follow the same advice for setting up finished goods kanbans as for the supplier kanban. Look at the customer demand and its fluctuation. However, in this case, you will need to assess your own delivery, quality, and reliability. Once you have that information, use the calculation method to calculate the kanban quantities .
If you have extreme demand fluctuation, again consider forecasting production versus kanban scheduling. Remember, two of your goals should be customer satisfaction and on-time deliveries that maintain customer satisfaction and manage cost.
Finally, follow the steps outlined in Chapter 5 on designing the controls for the kanban. Also, carefully consider any plans for making a finished goods kanban your first implementation project. You do not want to develop kanban implementation experience at the customer's expense.
Calculating the Benefits of Proposed Kanban
Once you have completed sizing the kanban, you may want to calculate the savings from implementing kanban. Typically, most senior managers will ask what the plant gains by implementing this system, so you need to be prepared to address the question. The kanban savings come from:
Reduced carrying cost
Reduced obsolescence cost
To calculate the savings, look first at the calculated inventory versus the current inventory to determine the inventory reduction. This inventory reduction translates into reduced inventory carrying cost. To calculate the reduced carrying cost, provide the inventory reduction information to your accountants and they can do the calculations.
The space reduction savings will be based on the other potential uses for the freed-up space. This savings will take the form of cost avoidance because the new construction or leased space will not be required. However, the identification of the space reduction may have to wait for the next phase and the design of the controls. Additionally, you can only assign a dollar savings to the space reductions if you have some other use for this space.
The reduced obsolescence cost will be a future cost avoidance rather than a hard cost. This figure will be based on history and the expectation of not making the same mistakes again.
One last item on calculating cost savings is how you should respond to the management question of: Can you reduce the inventory further without making process improvements? Remember that stock outs can also cost money and that stock outs become more likely as the inventory is reduced.
On the other hand, the cost of a stock out is determined by where the stock out occurs. If you have a safety stock of finished goods, then your customer is protected from minor supply disruptions from your internal and external suppliers. Thus the finished goods safety stock can allow you to be aggressive with internal kanban sizes while minimizing the risk of customer stock outs.
So before you get too aggressive, remember the downside. Remember that part of your plan should be to reduce quantities after you have the kanban operating successfully, so don't worry about being conservative in the early days of the kanban.
What About Economic Order Quantities vs. the Calculated Kanban Quantity?
Many opponents of kanban like to discuss the need for economic order quantity (EOQ) calculations to determine whether the kanban quantities are correct. EOQ theories essentially attempt to calculate the batch size that minimizes the total cost. EOQ theory, however, does not consider the amount of inventory that can accumulate in the attempt to minimize the batch cost. EOQ supporters want to make these calculations to justify not doing kanban. Appendix E contains a detailed discussion of EOQ versus kanban and shows the benefits of kanban.
Regardless of the potential savings from using the EOQ model, you do not achieve the operational benefits of kanban scheduling without implementing kanban. Additionally, you have to store the inventory calculated by the EOQ model somewhere even if you have a lower batch cost. Therefore, when looking at the benefits of kanban, look beyond the raw dollar savings to the other benefits, such as flow, improved quality, empowerment of the operators, and space requirements.