YOUR LEAN, RELIABLE PARTNER Kanban Replenishment Triggers
Table of Contents Introduction...1 Kanban Bin...2 Kanban Order Quantity vs Economic Order Quantity...2 Break-a-Bin Trigger Timing...4 Empty-a-Bin Trigger Timing...5 Mid-Point Trigger Timing...8 6-Step 1-Card Kanban Process...11 Final Thoughts...13 About Falcon...14 B
Introduction A lean kanban inventory replenishment system relies on triggers for timely replenishment. Signal kanban, or tangible items like cards, are used to trigger the placement of an order. Maintaining appropriate inventory quantity depends heavily on trigger timing. To determine the best trigger timing, you need to consider various factors: Lead-time: Business days from the time an order is placed until it is received. Lead-time demand: How much of the item will be used while you're waiting for more of it to be delivered? Minimum order quantity (MOQ): How many items will you be receiving with each new order? Demand variation: Does the demand for the item change on a seasonal or daily basis? Careful consideration these factors, you ll choose the best timing for your trigger: Beginning of a bin (BaB) End of a bin (EaB) Midpoint of a bin When keeping a lean inventory management system, the timing of your replenishment orders will depend on your kanban signals. The signals, or triggers, can occur at the beginning of a bin (Break-a-bin), the middle of a bin (midpoint trigger), or the end of a bin (Empty-a-Bin). Unlike economic order quantities that aim to reduce cost as much as possible, lean inventory management systems base order quantities on demand. 1
Keeping a smaller inventory can be accomplished with the trigger methods, but first, you have to understand and choose which trigger timing is right for your system. Kanban Bin It is important to note that a "bin" does not necessarily refer to a physical box or container. It refers to the Kanban Order Quantity (KOQ), or the number of items contained in an order. For example, the items in an order that contains 60 items may arrive in one box of 60 or it may arrive in three boxes of 20. In either case, the bin still consists of 60 items. Kanban Order Quantity vs Economic Order Quantity Trigger timing is based on KOQ, which differs from Economic Order Quantity (EOQ). As noted earlier, Kanban Order Quantity is based on the actual amount that is consumed. Instead of basing inventory orders on predictions about demand and variability, KOQ replenishes parts as they are consumed. The objective of EOQ, on the other hand, is to purchase parts in such a way that the annual cost of managing the inventory is minimized. EOQ can be calculated using the formula: EOQ = (2QP/C) Where Q = Quantity in annual units P = Placing an order cost C = Carry costs If you re ever in a pinch and you need to remember how to calculate EOQ, just remember that EOQ is equal to the square root of two quarter pounders with cheese. While using EOQ as an inventory replenishment method can lower the cost per part in the short term, it is not as effective as using kanban replenishment signals to reduce unnecessary on- 2
hand inventory. This is important to grasp. Consider the case of class C inventory (5% of your annual inventory investment that accounts for roughly 80% of your inventory items). While class C items typically only accounts for 5% of a manufacturer s annual material spend, they also typically account for 20%-30% of a manufacturer s total on-hand inventory dollars. Succinctly, while EOQ can come in handy when a manufacturer's only inventory goal is to reduce annual spend, KOQ helps to slash total on-hand inventory dollars while maintaining service levels. As you will see in the following pages, KOQ is calculated differently based on the specific kanban timing trigger method. 3
Break-a-Bin Trigger Timing Break-a-Bin (BaB) Trigger Break-a-Bin (BaB) trigger timing involves the signal kanban being triggered at the beginning of a bin. That is, as soon as the bin is "broken" and is no longer a full order, the card signal is triggered. Breaking the bin triggers a new replenishment order. The broken bin is consumed until empty. Once empty, another bin from bin inventory replaces it. Once the new bin = 100% full 1 unit, a kanban card is used to trigger a new order. If each kanban card triggered a full order, we wouldn t need a second card. The standard for effective kanban solutions, though, is a two-card system. This way, one card is on a kanban board waiting for new parts to arrive, and the other card is with the on-hand inventory. So, although each BaB kanban card signals an order, the order amount is only for half of the leadtime demand quantity. While it s not uncommon for BaB items to have both of the cards waiting on the kanban board, they should only ever both be with on-hand inventory in the event that demand has ceased. BaB Formulas Break-a-Bin (BaB) trigger timing involves the signal kanban being triggered at the beginning of a bin. To determine the Break-a-Bin Kanban Order Quantity: BaB KOQ = (Actual Lead Time + Daily Demand + Target Safety Stock) / (Number of Cards) You can also determine the number of cards you need if you already know what your KOQ is. BaB Cards = (Actual Lead Time + Daily Demand + Target Safety Stock Units) / KOQ To find safety stock simply find the difference between what you consume and what you order during lead-times. BaB Actual Safety Stock = (Number of Cards x KOQ) - (Actual Lead Time x Current Daily Demand) 4
BaB Pros & Cons Visual auditing can be difficult. Since BaB requires kanban bins to have a card only when completely full, usually most bins will not have a card. For some bins, it s difficult to determine whether a bin is full or not, so mistakes can be tricky to catch. Inventory can be lowered. Shorter sawtooth curves usually indicate better inventory performance, and this can be achieved with BaB more than it can be with Empty-a-bin (EaB). Unfortunately, in many cases, lower inventory results in more orders and their associated costs. High process compliance is required. Since visual auditing is difficult, and there s more activity with more orders, it s imperative that parts remain organized and orderly. When audits are done, they require more attention in the form of counting and weighing parts. 5
Empty-a-Bin Trigger Timing Empty-a-Bin (EaB) Trigger Just as the Break-a-Bin method is a beginning trigger point, Empty-a-Bin is an end trigger point. When the last piece or part of a bin has been used (and the bin has been emptied), the kanban card is triggered. As compared to its BaB when using a two-card solution, EaB tends to keep a higher inventory count. However, visual auditing is much easier with EaB, which can make it a better method even though it results in a larger inventory. When using a two-card solution with the EaB system, kanban cards sit with parts until the bin is emptied. Then the card belonging to the emptied bin is sent to the kanban board to trigger an order. In the meantime, another card had already triggered a new order and is now sitting with the bin in on-hand inventory ready to be used. In order to keep production running, the on-hand inventory should consist of enough parts to ensure that there s no stock-out while you re waiting for a new delivery. Timing and order quantity are equally important. The quantity ordered when using a two-card solution for EaB must not only cover the parts you ll need on a daily basis, but it should also account for the number of parts that will be used while you re waiting for new stock (the lead-time demand) and the safety stock replenishment. This way, as soon as a bin is emptied, it can trigger a new order, and you will already have stock waiting for you from the last EaB card. Remember that in BaB, each card in a two-card system signaled half an order because two cards (or two orders) were issued during the lead time. With EaB, one card in a two-card system is submitted, and it covers your whole order. For two-card solutions in EaB, the cards are rarely on the board at the same time. If both cards are on the board, it means that a stock-out has occurred. Typically, you ll have one card waiting with parts in inventory or in the "active" box and the other on standby waiting for a new order. It s also not unusual for both cards to be waiting with parts. When safety stock is available and is used prior to a new bin being broken, you will actually have both cards with on-hand inventory for a short time. 6
EaB Formulas The Kanban Order Quantity covers the sum of the lead-time demand, the daily demand and the target safety stock, divided by one less than the number of cards. In a two-card system, this is 1, so KOQ simply covers demand. EaB KOQ = (Actual LT + Daily Demand + Target Safety Stock) / (# Cards - 1) Or EaB KOQ = (Actual LT + Daily Demand + Target Safety Stock) Remember that the quantity that you calculate may not conform to your supplier s package limits or minimum orders, so you may need to make adjustments. The number of cards in a system can be calculated as well. The solution must be rounded to an integer. EaB # Cards = [(Actual LT + Daily Demand + Target Safety Stock)/KOQ] +1 Calculating the Safety Stock in an EaB system is done like this: EaB Actual SS = (# Cards - 1) x KOQ - (Actual LT x Current Daily Demand) EaB Pros & Cons One of the major benefits of the EaB approach is the ease with which mistakes can be noted. Since cards are not sent to the board for reordering until the bin is emptied, every bin with parts should have a card. If you see parts with no card, there is, in fact, an error. Conversely, the two-card-solution EaB trigger method calls for higher order quantities than BaB does. With this comes an overall higher count of on-hand inventory. EaB tends to be the better trigger method, though. Because mistakes are readily noticeable, it s able to tolerate error. Therefore, audits aren t time-consuming, so it s effective even when workers are not the most disciplined. 7
Mid-Point Trigger Lean inventory management requires an adequate number of parts on hand without storing an excess amount. Using a two-card kanban solution with a specified trigger timing method is what makes it possible. When it comes to trigger timing, the Empty-a-Bin and Break-a-Bin methods, both of which can use a two-card system, are ideal because they clearly indicate to team members that a reorder is needed. A third kanban trigger method is the mid-point trigger, which is only ever employed with a onecard kanban system. One-card kanban systems are only used in special cases for a few reasons: Trigger points are less obvious to notice than BaB and EaB. The one-card solution requires more attention than the two-card solution. It is necessary to implement a specific type of kanban. One Card Kanban If you can use a two-card system in your inventory management, it is strongly advised that you do so. Two-card kanban is the preferred method of triggering orders because it s far simpler to implement and track. With two-card kanban you always have one card available to you to trigger an order while the other is waiting for the order that has already been triggered. Since the two-card solution is ideal, you should default to two cards whenever you can. That said, sometimes, special circumstances dictate the adoption of a one-card kanban system. For example, a special case that you might experience is the requirement of a part whose supplier packages it in larger quantities than you need for your processes. That is, the minimum order quantity (MOQ) is larger than you need in terms of demand. If you were to use the two-card system, you would be placing a new order before you were finished consuming the appropriate amount of on-hand stock. You would accumulate way too much inventory, sabotaging your goal of reduced inventory and lean inventory management. Of course, if you re faced with this problem, one option you have is to negotiate with your supplier. You could ask them to agree to package parts in a size that is more reasonable for your 8
needs. While Falcon and other premium suppliers frequently accommodate special packaging and quantity requirements, many suppliers don t. If your supplier is willing to assist you in achieving your lean inventory management goals, then you simply want them to agree to decrease the minimum order quantity so that it is closer to your desired Kanban Order Quantity (KOQ). If this is successful then you can use the standard two-card solution. If your MOQ is only slightly too high, you may still be able to avoid the hassle of the onecard system. You can determine if it s too high by calculating the MOQ allowance. The MOQ allowance is the flexibility in the rule for how many days of demand is covered by the MOQ. If the MOQ falls within 10-20% of the desired quantity, you can still use a two-card system. To determine whether or not you need to use the one-card system, first compare your MOQ to the sum of the lead-time demand and the safety stock in terms of days of demand. Figure out how many days of demand the MOQ results in. If that number is 10-20% greater than the sum of the lead time and safety stock, you ll need to use one card. IF (MOQ Days Demand) > [(Actual lead time + Target Safety stock days) x MOQ Allowance], THEN 1 card kanban must be used. However, if the MOQ results in less than 110-120% of demand, you can use the two-card system. You ll still end up with slightly more parts than you need, which will increase the safety stock amount in inventory, but that is preferred over using the one-card system. To avoid being in this situation at all, make sure that you pay close attention to minimum order quantities when planning your processes. Mid-Point Trigger Timing Using the one-card kanban will result in using the mid-point trigger timing. Although the onecard method is not unusual, inventory managers try to avoid it because it requires taking steps that BaB and EaB do not need. It s similar to the other trigger methods in that consuming inventory triggers a card that will signal an order for replenishment. The way that it differs, though, is the point at which replenishment is triggered. With mid-point triggers, this is called the Reorder Point (ROP). Break-a-Bin Timing: Beginning of the bin
Empty-a-Bin Timing: End of the bin Mid-Point Timing: Reorder Point (ROP) The ROP is the number of parts that remain in a bin when it s time to reorder. Since the trigger depends on the number of parts that remain in a bin and not how many are consumed, the bin must be prepared prior to being used in production. This way, replenishment triggers occur on time and stock-outs are avoided. For every item that uses this method, the ROP must be calculated. Each part will have a unique ROP because each will have its own demand, lead time and safety stock targets. These are the factors considered in the ROP formula. ROP = Daily Demand x Lead Time + Target Safety Stock This is actually the same formula that is used to calculate the kanban order quantity (KOQ) for two-card EaB systems. While ROP will vary based on target safety stock, lead, time, and daily demand, KOQ will remain equal to MOQ. The only time KOQ won t equal MOQ is when one of the three ROP factors changes enough to budge the desired order amount above MOQ. Since ROP varies, it is vital that you re diligent in reviewing it on a routine basis. Remember that when calculating KOQ, it s important to round the calculated number to match standard packaging sizes. By contrast, when determining ROP quantity, it s not necessary to round. However, rounding the ROP quantity to line up with the end of a container or some other easily recognized point can make it simpler for team members to recognize when it's time to trigger a replenishment. If you do choose to round to an easily recognized point, make sure that you round up. Since the ROP quantity refers to the number of units that are remaining when you need to reorder, rounding up will ensure that you don t run out before new stock arrives. Rounding down may leave you with far fewer parts than you need. Rounding can also be helpful in the case of items whose demand varies a lot. Instead of constantly updating ROP quantity, sometimes its practical to keep ROP set to the quantity needed when demand is high. While this clearly results in increased safety stock during periods of lower demand, it can prevent you from having to repeatedly make adjustments to your ROP. 10
6-Step 1-Card Kanban Process The one-card kanban process is the most difficult kanban replenishment type to manage, but it is possible. The following steps outline one-card kanban replenishment and prepare you to execute it yourself. Step 1. Receive your parts in the minimum order quantity. You don t have to calculate KOQ since you cannot get less than the MOQ. Your KOQ is just equal to the MOQ. The number that is received is higher than what you need, and that is why you need to use the one-card kanban process. For example, if the MOQ = 50, the KOQ = 50. Step 2. Calculate the Reorder Point (ROP). Multiply the daily demand by the lead-time days, and then add the target safety stock. ROP = Daily Demand X Lead Time Days + Target Safety Stock If, for example, ROP = 5, then the card triggers a reorder when only five parts are remaining. Step 3. When the MOQ is delivered, separate the parts into two piles. One pile will have the ROP quantity that was calculated while the other consists of all the other parts. Continuing with the example, if MOQ = 50 and ROP = 5, one pile will contain 5 parts and the other 45 parts. Step 4. Repackage the ROP quantity, label it to make it clear and obvious that using these parts means it s time to reorder and place it into the main container. At this point, you can replace all other parts as well. The other parts that are loose will be used first. When they have been consumed, the ROP set will be used. An alternative to counting out and separating the ROP quantity is available for some parts. Simply mark the bin or container so that when the parts dip below the mark, you know you are at the reorder point. While this would save you time in preparing the container for use, it might be more difficult to make necessary changes to the ROP. Also, it s not as obvious as having to open a new container, so the card might not be triggered exactly on time. 11
Step 5. Choose whether you want to treat the kanban card as part of a break-a-bin (BaB) trigger or as an empty-a-bin (EaB) trigger. Really, there will be no effectual difference, but it s ideal to have it match the methods that are used for other parts consumed in the work cell. If you choose the BaB method, your card should be packaged with the ROP quantity. This way, when you "break" into the bin, you trigger the reorder. For the EaB method, the card is placed with the loose parts, and when you ve run out, you signal the reorder before breaking into the ROP quantity. Step 6. Process the card and begin consuming the ROP quantity while you wait for the replenishment. 12
Final Thoughts Kanban is a vital tool for establishing lean inventory management and facilitating material flow. Kanban relies on timing triggers for reliable replenishment. This guide has covered the essentials for determining which replenishment timing methods works best for your kanban situation, and the need-to-know formulas for properly calculating order amounts. We hope you find this guide informative and useful. The Falcon team welcomes any feedback or questions you may have about the information in this guide or anything else to do with best practices in regards to supply chain management, inventory optimization, material flow, kanban implementation, or lean manufacturing methods. You can reach us by calling 1-800-438-0332 and asking to speak to a Strategic Coordinator. 13
About Falcon Falcon Fastening Solutions is a full-service provider of lean, data-driven inventory and supply chain solutions for fasteners and other class C production components. Our cross-disciplinary team of engineers, six-sigma experts, lean specialists, and inventory technicians enables us to contractually guarantee to all clients continuous cost savings from day one. THE FALCON TEAM HELPS MANUFACTURERS AROUND THE WORLD TO: Slash time purchasing class C production components and spend more time on high value activities. Eliminate the stress in validating fastening/joining methods. Spend more time designing products. Reduce inventory levels and supplier count through lean supply solutions. Lean-out production, increase cash flow and boost profitability. Discover more about Falcon Fastening Solutions by visiting FalconFastening.com or speaking with a Strategic Coordinator by calling 1-800-438-0332. THE FALCON PROMISE: GUARANTEED CLIENT SAVINGS Our promise is Guaranteed Uptime and Client Savings. We fulfill this promise by taking ownership of all tasks related to the management of inventory known as Class C production components. We apply best practice, technology and experience inventory and supply chain management, while utilizing our relationships with key manufacturers in order to reduce each client s total cost of ownership without sacrificing their productivity. Our guarantee is a documented commitment that is reviewed and agreed upon by you prior to Falcon becoming your supplier. We review our documented performance to this commitment quarterly, and if the savings commitment is not reached, your company is issued an immediate credit for the difference. No questions asked. If our commitment is exceeded, you realize even greater savings. Our clients never incur lost productivity on items managed by Falcon. 14