Most of my customers make the common mistake of confusing blanket orders and Kan Ban contracts, with some referring to both as JIT (Just in Time) agreements. Unfortunately, it’s never that simple. Very few Kan Ban contracts are ever able to meet the strict delivery requirements of a JIT agreement. Granted, they are similar, but their differences must be understood in order to structure the supply agreement to meet each party’s unique needs. After all, there are buyers and suppliers who enter into these agreements and both must be cognizant of their appropriate roles, responsibilities and liabilities as they pertain to the inventory needed to make these orders work.
A blanket order is an agreement between a customer (buyer) and supplier where the customer specifies a total quantity to be purchased over a specific purchase period. Most blanket orders have terms that last anywhere from half a year to a full year. The customer agrees to purchase a total quantity over the agreed upon purchase period. In return, the supplier agrees to ship smaller quantities throughout the year until the total volume is absorbed by the customer. For instance, a blanket order may be placed for 100 units and the supplier agrees to ship 10 units at a time until all 100 are purchased by the customer.
The customer is able to lower their prices through larger volumes, without having to take too large a quantity in one shipment. This not only lowers the customer’s prices, but also lowers their inventory holding costs and helps them to better manage their cash flow. These holding costs pertain to the customer’s cost of capital (cost of money), their costs of inventory obsolescence, inventory damage, inventory theft (pilferage) and other miscellaneous costs. However, while the customer saves on these holding costs, the supplier doesn’t. In fact, the supplier’s inventory holding costs increase with blanket orders – especially if they don’t specify how long they are willing to hold inventory before shipping to the customer's location.
For the most part, blanket orders are more suited for cyclical, seasonal and infrequent customer demand. The supplier builds or holds product in an agreed upon shipping quantity and ships to the customer when a release is made. Once that release is made, the supplier then replenishes the shipping quantity from scratch. Both parties should be made aware of the lead time to replenish the inventory within a blanket order.
To read more about blanket orders, please read: Sample Blanket Order Agreement for B2B Sales: Identifying Liabilities
What is a Kan Ban Agreement?
While the blanket order is made for cyclical customer demand, the Kan Ban agreement is structured around meeting linear and constant demand, demand that forces suppliers to ship quantity on a daily, weekly and or monthly basis. Because higher volumes are shipped more frequently, both parties must be willing to agree to liabilities within three inventory categories. First, there must be an agreed upon finished inventory quantity that is boxed and waiting to be shipped upon the customer’s release. Second, there must also be semi-finished inventory ready to replenish the finished inventory and third, there must be work in process inventory, or raw material inventory, that is ready to replenish the semi-finished inventory. In essence, it's a constant feedback loop where each release essentially pulls the remaining inventory from each inventory category. The outline below shows how these three inventory classes would be structured under a Kan Ban contract.
With the blanket order, a quantity is boxed and held until the customer makes a release. Replenishment starts from “scratch” and the customer must be willing to wait a considerable amount of time before making their next release. However, with a Kan Ban agreement, this period is shortened due to the semi-finished inventory that is waiting in a “semi-finished” state and because there is work in process waiting to replenish the semi-finished inventory. Because of the complexity of this type of agreement, the liabilities for each of these inventory categories must be clearly defined. In essence, the customer is not only paying for parts, but for the labor and material that is allocated to their demand. They essentially own their own production work stations at the supplier’s location.
To read more about Kan Ban agreements please read: Sample Kan Ban Contract: Finished Inventory, Semi-Finished Inventory & Raw Materials Inventory
Comments