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Kanban Inventory Management

Updated 3 weeks ago by Dale Mandeville

Kanban Inventory Management in Wheelhouse

Introduction to Kanban: From Toyota to Modern Inventory Management

The word "Kanban" (看板) literally means "signboard" or "billboard" in Japanese, reflecting its origin as a visual signaling system. Developed as part of the Toyota Production System (TPS) in the late 1940s and early 1950s, Kanban was inspired by how American supermarkets restocked their shelves: only when items were purchased did they trigger replenishment from the backroom—a genuine "pull" system driven by actual consumption.

Manufacturing and distribution businesses today face the same fundamental challenge that Toyota sought to address: maintaining optimal inventory levels that balance service availability against capital investment. Too much inventory ties up working capital and increases carrying costs, while too little risks stockouts and lost sales. The elegant simplicity of Kanban provides a structured approach to this complex challenge.

Wheelhouse's implementation of Kanban principles brings this time-tested system into the digital age, allowing businesses to:

Optimize inventory investments by maintaining just enough stock to meet customer demand without excess
Establish controlled inventory parameters that management can adjust based on business needs
Create standardized replenishment signals to maintain target inventory levels consistently
Support data-driven inventory decisions rather than reactive or arbitrary stocking practices
Balance the competing priorities of service levels, carrying costs, and operational efficiency

The Strategic Value of Inventory Optimization

Inventory typically represents 20-40% of a manufacturer's or distributor's assets. Optimizing this substantial investment offers significant benefits:

Financial Benefits

Reduced working capital requirements: Every dollar not tied up in excess inventory is available for other business needs
Lower carrying costs: Including storage space, insurance, handling, obsolescence, and shrinkage
Improved cash flow: Faster inventory turns translate to improved cash position
Enhanced profit margins: Reduced inventory costs flow directly to the bottom line

Operational Benefits

Increased productivity: Less time spent managing excess inventory or resolving stockouts
Improved space utilization: Optimal inventory levels free up valuable floor space
Enhanced quality management: Smaller lot sizes make quality issues easier to detect and address
Greater operational visibility: Clear parameters make inventory status transparent to all stakeholders
Simplified decision-making: Standard replenishment rules reduce the cognitive load on staff

Strategic Benefits

Improved customer service: Well-managed inventory leads to more reliable delivery commitments
Increased responsiveness: Lower inventory with frequent replenishment enables faster adaptation to market changes
Supplier collaboration: Consistent ordering patterns improve supplier relationships and performance
Competitive advantage: More efficient inventory management can translate to faster delivery and lower prices

Management Control Through Parameter Setting

One of the most powerful aspects of Kanban in Wheelhouse is that it gives management direct control over planned inventory levels through adjustable parameters. Rather than allowing inventory to grow or shrink reactively, managers can:

Set strategic inventory targets based on business priorities
Adjust parameters systematically in response to changing market conditions
Implement different inventory strategies for different product categories or suppliers
Create accountability through clear, measurable inventory targets
Track performance against established inventory parameters
Drive continuous improvement with data-informed parameter adjustments

The parameters discussed in this document—Order Frequency, Lead Time, Safety Stock, and Average Daily Usage—provide the levers management can adjust to implement their inventory strategy while maintaining the discipline of a pull-based system.

Physical Cards and Digital Signals: The Best of Both Worlds

Wheelhouse maintains the powerful simplicity of traditional physical Kanban cards while enhancing the system with digital capabilities. This hybrid approach offers significant advantages:

Physical Cards: The Tangible Foundation

Natural workflow integration: Physical cards align perfectly with physical inventory movement
Visual management: Cards provide immediate, highly visible signals on the shop floor
BOM independence: Cards decouple inventory consumption from Bill of Material calculations, reducing the impact of BOM errors
Immediate adoption: Physical cards require minimal training and technology adaptation

Digital Enhancement: Adding Intelligence and Visibility

Parameter calculation: Automated calculation of optimal reorder points
Performance tracking: Historical data on consumption patterns and service levels
Cross-location visibility: Real-time inventory status across multiple facilities
Analytical tools: Identification of improvement opportunities and parameter optimization
Integration capabilities: Connection with purchasing systems to streamline ordering

This balanced approach recognizes that while technology offers valuable enhancements, the tangible simplicity of physical cards often provides the most intuitive and reliable method for shop floor inventory management. Wheelhouse supports both methods, with many customers finding that physical cards provide the most robust foundation for their Kanban system, particularly in environments where BOM accuracy issues might compromise a purely digital approach.

Business Days vs. Calendar Days

Wheelhouse uses business days for all Kanban calculations for several important reasons:

Production Reality: Manufacturing operations typically run on business days, not calendar days. Using business days directly corresponds to actual production capacity.
Holiday Impact: Calendar day calculations obscure delays caused by holidays and non-working days.
Operational Flexibility: Companies operate on different schedules (4, 5, 6, or 7 days per week). Business days provide standardization across these different operational models.
Resource Planning: Labor and equipment availability is planned around business days, making business day calculations more directly useful for resource allocation.
Supplier Alignment: Most suppliers also operate on business days, making this unit of measure more relevant for replenishment planning.

Key Kanban Parameters

Order Frequency (OF)

Definition: The number of business days between orders placed with a supplier.

Example Calculation:

Weekly ordering = 5 business days
Monthly ordering = 21.6 business days (based on 260 working days per year)
Bi-weekly ordering = 10 business days

Strategic Importance: More frequent ordering generally reduces inventory levels and variability but must be balanced against order processing costs and supplier capabilities. Some suppliers may impose minimum order quantities or favor less frequent, larger orders.

Adjustment Considerations:

Reducing OF can lower average inventory but may increase ordering costs
Supplier partnerships might enable more frequent ordering with smaller quantities
Different product categories may warrant different OFs based on value and usage patterns

Lead Time (LT)

Definition: The total number of business days from order placement to receipt of goods at your facility.

Components:

Supplier processing time
Production time (if made-to-order)
Transit time
Receiving and inspection time

Strategic Importance: Lead time is a critical factor in inventory planning. Reducing lead times through supplier selection, transportation improvements, or streamlined receiving can significantly reduce inventory investment.

Improvement Opportunities:

Supplier negotiations to improve response times
Alternative transportation modes or carriers
Streamlined receiving processes
Local sourcing to reduce transit time
Supplier certification to reduce inspection requirements

Safety Stock (SS)

Definition: The buffer inventory maintained to protect against variability in demand or supply.

Factors Affecting Safety Stock Needs:

Demand variability
Supply reliability
Consequence of stockout
Item value
Acceptable service level

Strategic Importance: Safety stock represents a balance between service level and inventory investment. Higher safety stock improves product availability but increases carrying costs.

Customization Approaches:

Critical items may warrant higher safety stock
High-value items might justify lower safety stock with expedited alternatives
Items with stable demand patterns can often have reduced safety stock
Seasonal items may need dynamic safety stock levels

Average Daily Usage (ADU)

Definition: The average quantity of an item consumed per business day.

Calculation Methods:

Historical usage: Total quantity used ÷ Number of business days
Forecast-based: Projected usage based on sales forecasts or production schedules
Weighted average: Giving more weight to recent usage patterns

Strategic Importance: Accurate ADU values are essential for proper inventory sizing. Regular review and adjustment of ADU values helps maintain appropriate inventory levels as demand patterns change.

Data Quality Considerations:

Outlier management for unusual demand spikes
Seasonality adjustments
Growth trend incorporation
New product forecasting approaches

Minimum on Kanban (MOK) Calculation

The formula for calculating Minimum on Kanban, or the Minimum in Circulation, is:

MOK = (Lead Time + Order Frequency + Safety Stock) × Average Daily Usage

This calculation determines the minimum inventory level that should trigger reordering.

Components Explained:

Lead Time (LT) Portion: LT × ADU represents the inventory needed during the replenishment period.
Order Frequency (OF) Portion: OF × ADU represents the inventory consumed between orders.
Safety Stock (SS) Portion: SS × ADU provides a buffer against variability.

Example Calculation:

For an item with:

Lead Time = 10 business days
Order Frequency = 5 business days
Safety Stock = 3 business days
Average Daily Usage = 25 units

MOK = (10 + 5 + 3) × 25 = 18 × 25 = 450 units

When inventory reaches 450 units, an order should be placed.

Visual Representation of Kanban Components

To understand how these components work together, consider this visual model of inventory levels over time:

Inventory
Level
   │
   │    Order      Order     Order
   │    Placed     Received  Placed
   │       ↓          ↓        ↓
   │    ┌─────┐                ┌─────┐
   │    │     │                │     │
   │    │     │                │     │
   │    │     │     Usage      │     │
   │    │     V     During     │     │
   │    │     │     Order      │     │
   │    │     │     Frequency  │     │
   │    │     │                │     │
MOK│- - │- - -│- - -  - - - - -│- - -│- - ->
   │    │     │                │     │
   │    │     │     Usage      │     │
   │    │     │     During     │     │
   │    │     │     Lead       │     │
   │    │     V     Time       │     │
SS │- - │- - -│- - - - - - - - │- - -│- - ->
   │    │     │                │     │
   │    │     │     Safety     │     │
   │    │     │     Stock      │     │
   │    │     │                │     │
   │    │     V                │     │
   │    └─────┘                └─────┘
   │
   └───────────────────────────────────── Time

Sale Lead Days

Definition: The number of business days required to prepare an item for shipment after a sale.

Strategic Importance: This parameter helps set realistic customer expectations by calculating accurate delivery dates. It accounts for the time needed for picking, packing, and any final preparation before shipping.

The system adds a company-wide Sale Lead Days Buffer to provide additional flexibility in meeting delivery commitments.

Customer Experience Impact: Setting appropriate Sale Lead Days creates several advantages:

Reliable delivery promises enhance customer satisfaction
Consistent fulfillment timelines reduce expedited shipping costs
Accurate scheduling improves production planning
Clear expectation management reduces customer service inquiries

Toyota Production System Principles in Kanban

The Kanban system in Wheelhouse embodies key TPS principles:

Just-in-Time (JIT) Production: Producing only what is needed, when needed, and in the amount needed.
Pull System: Using downstream demand to signal upstream production rather than pushing inventory forward.
Visual Management: Providing clear signals about when to replenish inventory.
Continuous Improvement (Kaizen): Regular monitoring and adjustment of parameters to optimize inventory levels.
Respect for People: Creating standardized processes that empower workers to maintain optimal inventory levels.
Built-in Quality (Jidoka): Smaller batch sizes make quality issues more visible and addressable.
Leveled Production (Heijunka): Consistent ordering patterns help stabilize both internal operations and supplier production.

Benefits of Kanban in Wheelhouse

Reduced Inventory Costs: Maintaining optimal inventory levels minimizes carrying costs.
Improved Cash Flow: Less capital tied up in excess inventory.
Enhanced Quality: Smaller, more frequent orders make quality issues easier to identify and resolve.
Increased Productivity: Visual signals streamline decision-making about when to reorder.
Improved Supplier Relationships: Consistent ordering patterns help suppliers plan their production.
Reduced Stockouts: Systematic approach to inventory management reduces the risk of running out.
Simplified Planning: Clear parameters reduce the complexity of inventory management decisions.
Enhanced Visibility: Transparent parameters make inventory status clear to all stakeholders.

Maintaining Target Inventory Levels

A key advantage of Wheelhouse's Kanban implementation is the ability to not just set inventory parameters but to systematically maintain them over time through:

Automated Reorder Signals: The system generates timely alerts when inventory reaches reorder points
Real-Time Visibility: Dashboard views show current inventory levels relative to targets
Exception Reporting: Highlights items that are significantly above or below target levels
Performance Analytics: Tracks key metrics like inventory turns, fill rates, and days of supply
Parameter Adjustment Tools: Enables easy updating of Kanban parameters as business conditions change

This closed-loop system ensures that once management establishes inventory targets, the system provides the tools to consistently maintain those levels despite the variability inherent in both supply and demand.

The Evolution of Inventory Management

Traditional inventory management often relied on:

Rule of thumb approaches (e.g., "keep a month of inventory")
Min/max systems without scientific calculation
Economic Order Quantity (EOQ) formulas that assume stable demand
Material Requirements Planning (MRP) systems that push inventory based on forecasts

The Kanban approach in Wheelhouse represents an evolution beyond these methods by:

Creating a true pull system based on actual consumption
Providing flexible parameters that can be adjusted to business conditions
Incorporating visual management principles for easier decision-making
Supporting continuous improvement through parameter refinement
Enabling different strategies for different product categories

Comparing Kanban to Reorder Point Systems

While Wheelhouse supports both Kanban and Reorder Point systems, Kanban is generally recommended for most inventory situations. Reorder Point systems may be better suited for items with very high Minimum Order Quantities (MOQs) or highly irregular demand patterns, but have several limitations compared to Kanban:

Kanban Advantages:

Better visual management through physical cards
Clearer connection between consumption and replenishment
More intuitive parameter adjustment
Greater responsiveness to changing demand patterns
Better support for continuous improvement

When to Consider Reorder Point:

Items with very high MOQs relative to usage
Items with highly irregular, episodic demand
Items where physical cards are impractical due to location or handling considerations

Best Practices for Implementation

Start Small: Begin with a few critical items rather than implementing across all inventory.
Review Regularly: Monitor and adjust Kanban parameters quarterly or as demand patterns change.
Involve Suppliers: Communicate your Kanban implementation to suppliers and discuss how it will affect order patterns.
Train Staff: Ensure all users understand the principles behind Kanban and how to interpret the parameters.
Continuous Improvement: Regularly look for opportunities to reduce lead times, increase ordering frequency, or adjust safety stock levels.
Measure Performance: Track key metrics like inventory turns, fill rates, and carrying costs to validate improvements.
Executive Sponsorship: Ensure management understands and supports the Kanban approach.
Cross-Functional Alignment: Involve purchasing, operations, and finance in parameter setting.

Getting Started with Kanban in Wheelhouse

Gather Data: Collect information on current usage patterns, lead times, and ordering practices.
Categorize Inventory: Group items by value, criticality, supplier, and usage patterns.
Set Initial Parameters: Start conservative with safety stock and refine over time.
Train Users: Ensure everyone understands the concept of minimum on Kanban and how it drives replenishment.
Prepare Physical Cards: For most environments, physical cards provide the most reliable foundation for the system.
Monitor Results: Track inventory levels, service levels, and ordering patterns.
Refine Parameters: Adjust order frequency, lead time, and safety stock based on performance.
Expand Implementation: After success with initial items, roll out to additional inventory categories.

By implementing this Kanban approach in Wheelhouse, your organization can achieve leaner inventory management while maintaining excellent service levels and production capabilities. The system provides the structure to establish, maintain, and continuously improve inventory parameters, transforming inventory from a necessary expense into a strategic asset.

What began in Toyota's factories as a simple visual signaling system has evolved into a sophisticated inventory management methodology that balances service, cost, and operational considerations. Wheelhouse's implementation preserves these fundamental principles while enhancing them with digital capabilities where appropriate, making the benefits of Kanban accessible to modern manufacturing and distribution operations of all sizes.