Inventory Management

Objective:

To have the right material / products at the right time to meet production / customer demand while optimizing the overall inventory investment.

It aims at:

• Minimizing average inventory level
• Maximizing utilization of stores / warehouse capacity
• Reduce lead time
• Increase production efficiency
• Improve customer satisfaction

Main functions of Inventory Management:

• Inventory analysis.
• ABC - based on consumption and value
• XYZ - based on stock value of item
• VED - (Vital Essential Desirable) based on criticality

· Determine ordering policy

• Determine stock parameters like safely stock, Re-order point, Economic order quantity, minimum stock, Review Period.

· Stock accounting

• Inventory maintenance and stock valuation

· Physical stock verification

Inventory classification according to material group:

· Raw material

· Semi-finished good

· Sub-contracted items

· Bought-out parts

· Consumables

· Tools & gauges

· Jigs & fixtures

· Machine spares

Stock parameters used for controlling inventory:

· Lead time of procurement

· Safety stock or minimum stock to handle unexpected demand, changed rejection rate, to avoid stock out condition

· Re-order point

· Maximum stock

· Economic order quantity (EOQ)

· Average consumption for the period

· Review period

· ABC, XYZ, VED classification

Different stores where material is stored:

• Inward store
• Raw material store
• Semi-finished stock store
• Finished parts store
• Finished goods store
• Rejection store
• Scrap store
• Maintenance store
• Tools store
• Jigs, fixtures, patterns etc store

Inventory Transactions:

Material receipts:

• Goods Receipt Report (GRR)
• Goods Receipt & Inspection Report (GRIR)
• Supplementary GRR
• Customer’s Material return note
• Material return note from Production (MRN) against excess or wrong material issue
• Delivery note from Production (DN)
• Transfer Note from other store location (TN)
• Material Rejection Note
• Positive Stock Adjustment update store record after physical counting

Material Issues:

• Material issues note to part production (MIN)
• Material transfer note to other stores
• Assembly issue note to assembly production
• Dispatch challan to sub-contractor for returnable material
• Dispatch challan to customer for Finished Goods /Spares
• Material rejection challan for sending rejected material to supplier
• Negative Stock Adjustment

Reference documents for Inventory transactions:

• Purchase Order (PO)
• Sales Order (SO)
• Material Requisition Note
• Production Work Order
• Goods Receipt Report

Need of Lot Traceability / Serial Tracking:

• Inventory stored by Lot/ Serial Number on receipt and also issued
• Inventory can also be stored by Grade, Potency, etc.
• Keep track on inventory w.r.t. Shelf life, Sell-by Date, Display until Date, Best before Date
• Used for forward / backward traceability w.r.t. Quantity, Rejection, etc.

Stock control systems:

Different methods for stock control

• Re-order level system
• Two bin system
• Review system of replenishment

Re-order Level System (ROL):

• Item is replenished as soon as stock of item falls to or below ROL
• ROL = min. stock + (LT * Average Consumption)
• Quantity ordered is EOQ which might be modified due to constraints like lot size, discount on Qty.
• Max Level = Stock-on-hand + EOQ

Two bin System (Kanban):

• Physically entire stock is segregated into two bins.
• First the stock is been consumed from Bin-I
• The empty Bin-I indicates that stock has reached ROL
• Bin-II contains stock equivalent to ROL
• The quantity ordered is divided into both the bins

Review system of Replenishment:

• Stock is reviewed at a pre-fixed period
• Ordered quantity varies as per the stock at the time of review.
• Computation of Economic Review Period so as to minimize Total Procurement & Inventory carrying cost.

Economic Order Quantity (EOQ):

It is the quantity where inventory carrying cost equals cost of procurement

Inventory carrying cost = Cost of procurement

• Inventory carrying cost includes
• Investment cost (Interest on capital)
• Storage cost (Storage, Insurance Handling, Obsolescence, Loss due to deterioration)

· Inventory procurement cost includes

• Cost of processing Purchase Order (PO) or Work Order (WO)
• Cost of handling

Calculation of EOQ:

EOQ = SQRT (2 * R * S / K * C)

Where:

R = Annual requirement or Consumption

S = Set-up cost in production or Procurement cost

K = Carrying cost as a % of average inventory cost

C = Unit cost of Item

EOQ is modified due to following constraints:

• Suppliers minimum order quantity conditions
• Lead time
• Seasonal availability
• Packing restrictions
• Risk of obsolescence or deterioration
• Price discount
• Market condition
• Government restrictions

A-B-C Analysis:

Classification is based on consumption value

• A-class items
• Usually 5-10% items accounts for 70-75% of money spent on material
• These items require detailed & rigid control
• Need to be stocked in smaller quantities
• B-class items
• Usually 10-15% items accounts for 10-15% of money spent on material
• These items do not need detailed & rigid control
• Normally stock are reviewed once in 1 or 2 months
• C-class items
• Usually 70-80% items accounts for 5-10% of money spent on material
• Do not require close control
• These items need to be procured infrequently in bulk to get quantity discount
• Application of A-B-C Analysis:
• Degree of control
• Stock records
• Safety stock level
• Price discounts
• Value engineering

Oracle Configurator...

*For better visibility open pictures in new window.

Advantages and Disadvantages of Kanban

Advantages of Kanban
1. Optimize inventory and reduce product obsolescence.
Since component parts are not delivered until just before they are needed, there is a reduced need for storage space. Should a product or component design be upgraded, that upgrade can be included in the final product ASAP (As Soon As Possible). There is no inventory of products or components that become obsolete.
This fits well with the Kaizen system on continual improvement. Product designs can be upgraded in small increments on a continual basis, and those upgrades are immediately incorporated into the product with no waste from obsolete components or parts.

2. Reduces waste and scrap
With Kanban, products and components are only manufactured when they are needed. This eliminates overproduction. Raw materials are not delivered until they are needed, reducing waste and cutting storage costs.

3. Provides flexibility in production
If there is a sudden drop in demand for a product, Kanban ensures we are not stuck with excess inventory. This gives us the flexibility to rapidly respond to a changing demand.
Kanban also provides flexibility in how our production lines are used. Production areas are not locked in by their supply chain. They can quickly be switched to different products as demand for various products changes. Yes, there are still limits imposed by the types of machines and equipment, and employee skills, however the supply of raw materials and components is eliminated as a bottleneck.

4. Increases Output
The flow of Kanban (cards, bins, pallets, etc.) will stop if there is a production problem. This makes problems visible quickly, allowing them to be corrected ASAP.
Kanban reduces wait times by making supplies more accessible and breaking down administrative barriers. This results in an increase in production using the same resources.

5. Reduces Total Cost
The Kanban system reduces our total costs by:
• Preventing Over Production
• Developing Flexible Work Stations
• Reducing Waste and Scrap
• Minimizing Wait Times and Logistics Costs
• Reducing Stock Levels and Overhead Costs
• Saving Resources by Streamlining Production
• Reducing Inventory Costs

6. Improves Flow
7. Prevents overproduction
8. Places control at the operations level
9. Improves responsiveness to changes in demand
i.e. Synchronization of supply and demand

10. Lead time is kept to a minimum
11. Totally customer driven demand
12. Better machine utilisation
13. Reduced or eliminated queues
14. Limit the spaces for WIP to hide.
15. Quickly improve factory control and WIP reduction efforts.


Disadvantages of Kanban:

1. It is less effective in shared-resource situations. Suppose the upstream station made several parts. Then a request to make more of the part needed by the downstream station will have to wait if other parts have to be made. A buffer is needed to ensure the downstream station doesn't run out meanwhile. And, because each part needs a separate signaling card, the system becomes more complex than if the resources were dedicated.

2. Surges in mix or demand cause problems because kanban assumes stable repetitive production plans. It is less suited to industries where mix and volumes fluctuate.

3. Kanban in itself doesn't eliminate variability, so unpredictable and lengthy down times could disrupt the system; poor quality in terms of scrap and rework also affect its good functioning.

4. Kanban systems are not suited for manufacturing environments with short production runs, highly variable product demand, poor quality products, and a multitude of product types.

5. A breakdown in the kanban system can result in the entire line shutting down.

6. The throughput of a kanban system is not managed but is instead a result of controlled WIP and known cycle times.

Advantages and Disadvantages of Kanban

KANBAN introduction

THE JAPANESE KANBAN PROCESS- MORE THAN INTERNAL 'JUST IN TIME PRODUCTION' TECHNIQUES

Most Japanese manufacturing companies view the making of a product as continuous-from design, manufacture, and distribution to sales and customer service. For many Japanese companies the heart of this process is the Kanban, a Japanese term for "visual record", which directly or indirectly drives much of the manufacturing
organization. It was originally developed at Toyota in the 1950s as a way of managing material flow on the assembly line (Perelman, 1994: 85). Over the past three decades the Kanban process, which Bernstein (1984: 48) identifies as "a highly efficient and effective factory production system", has developed into an optimum manufacturing environment leading to global competitiveness.

The Japanese Kanban process of production is sometimes incorrectly described as a simple just-in-time management technique, a concept which attempts to maintain minimum inventory. The Japanese Kanban process involves more than fine tuning production and supplier scheduling systems, where inventories are minimized by supplying these when needed in production and work in progress in closely monitored. It also encourages; Industrial re-engineering, such as a 'module and cellular production' system, and, Japanese human resources management, where team members are responsible for specific work elements and employees are encouraged to effectively participate in continuously improving Kanban processes within the Kaizen concept

WHAT IS KANBAN?
Kanban (in kanji 看板 also in katakana カンバン, where "kan 看 カン" means visual, and "ban 板 バン" means card or board) is a concept related to Lean or Just In Time (JIT) production, but these two concepts are not the same thing. According to Taiichi Ohno, the man credited with developing JIT, kanban is the means through which JIT is managed.
Kanban (kahn-bahn) means “visible record” or “visible part”. In general context, it refers to a signal of some kind. Thus, in the manufacturing environment, kanbans are signals used to replenish the inventory of items used repetitively within a facility. The kanban system is based on a customer of a part pulling the part from the supplier of that part. The customer of the part can be an actual consumer of a finished product (external) or the production personnel at the succeeding station in a manufacturing facility (internal). Likewise, the supplier could be the person at the preceding station in a manufacturing facility. The premise of kanbans is that material will not be produced or moved until a customer sends the signal to do so.

The typical kanban signal is an empty container designed to hold a standard quantity of material or parts. When the container is empty, the customer sends it back to the supplier. The container has attached to it instructions for refilling the container such as the part number, description, quantity, customer, supplier, and purchase or work order number. Some other common forms of kanban signals are supplier replaceable cards for cardboard boxed designed to hold a standard quantity, standard container enclosed by a painting of the outline of the container on the floor, and color coded striped golf balls sent via pneumatic tubes from station to station.

Kanbans serve many purposes. They act as communication devices from the point of use to the previous operation and as visual communication tools. They act as purchase orders for our suppliers and work orders for the production departments, thereby eliminating much of the paperwork that would otherwise be required. In addition, kanbans reinforce other manufacturing objectives such as increasing responsibility of the machine operator and allowing for proactive action on quality defects. However, kanbans should not be used when lot production or safety stock is required because the kanban system will not account for these requirements.

Push vs. Pull System:

A Pull system is a method of controlling the flow of resources by replacing only what has been consumed. A pull system relies on customer demand. A Kanban system is a Pull system that uses color-coded cards attached to parts or part containers to regulate the upstream production and delivery flow. In a Kanban system, we establish the minimum and maximum on-hand quantities for raw materials, supplies, and each assembly or product manufactured.
As an example, a color-coded card is used to indicate that a specific quantity of parts needs to be made. When the card is delivered to a machinist, he or she will create the specified number of the part ordered – no parts are made until this card is received. Another simple Kanban incorporates a color-coded carton that will always contain a particular part. The container is delivered back to the producing department for refilling when it becomes empty, triggering the creation of more of that specific part.
When customer demand drives the flow of resources and delivery of product in this way, we reduce the wastes incurred by overproduction. Since our workers are not spending time making excess product, overall turnaround times decrease. This decrease in turnaround time increases customer satisfaction, as well as our ability to compete for orders, and decreases our investment of time and resources in forecasting and scheduling systems.

The Kanban system described is a pull system. Traditionally, a push system is and has been employed. The push system is also more commonly known as the Materials Requirements Planning (MRP) system. This system is based on the Planning Department setting up a long-term production schedule which is then dissected to give a detailed schedule for making or buying parts. This detailed schedule then pushes the production people to make a part and push it forward to the next station. The major weakness of this system is that it relies on guessing the future customer demand to develop the schedule that production is based on and guessing the time it takes to produce each part. Over-estimation and under-estimation may lead to excess inventory or part shortages, respectively.

One of the major reasons kanbans are used is to eliminate or reduce the above mentioned wastes throughout an organization due to the pull system that is employed. Waste can come from over-production (inventory) and therefore, the need for a stockroom. This waste is eliminated. Part shortages (under-production) are also eliminated. Costs are reduced by eliminating the need for many of the purchasing personnel and the paperwork associated with purchasing. The planning department’s workload is also reduced as they no longer need to produce work orders.

TYPES OF KANBAN


Dual-Card Kanban

This kanban system is more commonly referred to as the Toyota kanban system as Toyota was the first to employ this system in full scale use. It is a more useful kanban technique in large-scale, high variety manufacturing facilities. In this system, each part has its own special container designed to hold a precise quantity of that part. Two cards are used: the production kanban which serves the supplier workstation and the conveyance kanban, which serves the customer workstation. Each container cycles from the supplier workstation to its stockpoint to the customer workstation and its stockpoint, and back while one kanban is exchanged for another. No parts are produced unless a P-kanban authorizes it. There is only one C-kanban and one P-kanban for each container and each container holds a standard quantity (no more, no less).


Single-Card Kanban

The single-card kanban system is a more convenient system for manufacturing facilities requiring less variety in their parts. Essentially, the single-card kanban system is simply a dual-card kanban system with the absence of the production kanban and designated stock points.

KANBAN DEVELOPMENT

Implementing a kanban system entails four major steps (which may be slightly modified depending on the requirements of the facility):

Step #1 is to pick the parts we would like to kanban. In general, these parts should be used repetitively within the plant with fairly smooth production requirements from month to month.
Kanban is not suited for all inventory items – look for
– items with frequent usage
– items with short lead times
– items with “willing” suppliers

Step #2 is to calculate the kanban quantity
The weekly part usage is, as the name implies, the quantity of the part under consideration used per week. The lead time is given by the supplier. The usual manufacturing facility lead time is 5 working days per week. The number of locations tells us how many locations should have a full container to begin with. The smoothing factor is used to account for seasonal fluctuations in demand. It is a constant determined by the ratio of the fluctuating demand to the regular demand.

Step #3 is to pick the type of signal and container to be used which holds a standard quantity. The container should aid visual identification, ease of storage, and count of material at the point of use.

Step #4 is to calculate the number of containers.

KANBAN introduction

Lets see how does Kanban replenishment cycle works in Oracle...