Kanban is a Japanese term for “signal.” As used in supply-chain management, kanban is a card or other signal used to indicate the need for inventory replenishment. A system built on kanban principles is a “pull” method of keeping production lines optimally stocked with parts and components when they are needed and in the right quantity. As a product is consumed during the production process, an order for depleted inventory is immediately placed, either via a kanban card or electronically through a computerized kanban program.As this system of consumption-driven replenishment proves its applicability across tiers of distribution and supplier networks, it is becoming a compelling alternative to traditional Material Requirements Planning (MRP) for several reasons. One of the most significant is that push-style MRP systems rely on forecasts to determine what and how much to replenish. Although forecasts have proven useful in predicting overall demand, they can be poor indicators of exactly which products will be needed and when. Using MRP in multi-tiered supply chains distances manufacturers further and further from their customers, and forecasts further and further from reality. As a result, information is diluted by each layer in the distribution system, and excessive inventory and costly last- minute change orders ripple through the supply chain. In addition to these issues, manufacturers often complain that they incur large inventory-carrying costs with an MRP system, yet can still run out of key parts. These stock-outs stop production, delay customer shipments, increase premium freight charges and disrupt plant operations by forcing unnecessary and expensive changeovers. In the current MRP world there is often no clear record of how many times stock-outs occur or which parts repeatedly stock-out. Stock-outs also can lead to an overreaction of parts buying, followed by excess inventory, which is often carried for months after a stock-out. Keeping expensive inventory is a waste of resources, including working capital, storage space, and the manpower needed for handling. Unlike MRP forecast-driven replenishment, a kanban system re-orders parts and components based on actual consumption at the point of use. The simplest version of this is the “two-bin” method. In this case, an operator has two bins of material. One is being consumed and another is full. When the first bin is empty, the operator continues working using the second bin. Meanwhile, the empty bin is sent to the producing station, an obvious signal for replenishment. A full one returns before the operator runs out. In another kanban example, a manual kanban card travels with its inventory and contains information such as the description of the item or part number, and its location. Each card has a number and is used to trigger an order for replenishment when an item is consumed. Manual kanban’s benefits are severely limited when an external supplier enters the supply chain. The number of cards, and tracking them become unmanageable. An electronic kanban system can remedy this problem. Card information is translated into a bar code that is scanned and electronically communicated at each stage of the replenishment cycle (consumption, shipping, receiving). In this way, electronic kanban increases visibility and efficiency.
Information in a kanban system flows from point of consumption to suppliers. As materials flow in the opposite direction, intermediate distribution levels are eliminated.
These types of kanban benefits result from how material flows through the production cycle: While MRP systems push material through the supply chain, pull-based manufacturing synchronizes production with consumption in real time, which increases on-time delivery performance (JIT), and reduces stock-outs and costly last-minute changes. As orders arrive, material is pulled from the end of the final assembly line, which instantly sends an order to final assembly to produce more.Because a series of well-timed interconnected loops develops between the preceding and succeeding processes, buffer inventory, usually maintained at tier-transaction points, can be substantially reduced. Material replenishment levels and continuous information flow provides visibility for suppliers and customers. Demand signals flow continuously through the supply chain and are delayed at each tier only as long as it takes to consume or ship material. Due to kanban’s high visibility and predictability, intermediate tiers and buffer stock in customer and manufacturer supply chains can be eliminated. For example, as end-user cartons are consumed, signals for replenishment are sent to regional warehouses. As this signal is received, the regional warehouse sends its own order signals to a central warehouse for replenishing the cartons it is about to deplete. As the central warehouse ships goods, it sends a replenishment signal back to its supplier manufacturer’s distribution center. Depending on the pre-set pack quantity, the distribution center sends the signal to the plant to produce an equivalent quantity of finished goods. The plant could be getting signals from more than one distribution center and could therefore schedule its production based on actual demand across all distribution centers. Although a successful kanban distribution strategy seeks to bring the manufacturer closer to its distributor, there are situations when geographical distances and/or long cycle times require intermediate storage locations, such as a nearby supplier warehouse or a distribution. The key is adding intermediate levels where necessary and eliminating those that have evolved to compensate for an inefficient, push-based replenishment strategy. Letting go of the old ways, including an over-reliance on forecasts, is difficult. Many managers go halfway and find themselves with the worst of both worlds. Often, small pilot projects prove successful, but as the projects are expanded, manual kanban can not keep up. Modern technology has provided a solution. Electronic kanban signals can carry more information (including delivery location, lot size, cycle number) and occur in real time. Metrics tracked include actual cycle time versus planned cycle time; consumption patterns; supplier performance for on-time delivery, replenishment accuracy; when and what to resize; inventory versus consumption; and inventory aging. Once in place, a seamless electronic network among manufacturers, distributors and suppliers can be leveraged to deliver JIT dynamics between end user and original manufacturer.