Every company wants to lower pricing on parts and raw materials, but doesn’t necessarily want the added burden that comes with committing to larger volume orders. Typically, it’s a trade off between having that great price and taking on all that volume into an overcrowded inventory. When it comes to these situations, companies typically use blanket orders or Kan-Ban contractual agreements, to get the lower pricing. However, many companies lump both of these terms together when in fact, they are entirely different and structured for different companies in different situations.
Using a Blanket Order
When a company has a yearly volume requirement, but takes on lower volumes per month, and has cyclical demand patters, then the blanket order is the agreement of choice. For instance, a company may purchase 500 units a year of a product, but only take 50 units per shipment to keep their inventory levels under control from one month to the next. So, they negotiate the 500 unit price, and only take 50 per order.
It’s a fairly straightforward ordering system, and allows the company the lower pricing, without taking on too much inventory. This helps to keep pricing low, inventory levels low month to month, and secure against the potential of damage to inventory, as the company never holds more than it needs to.
These agreements are ideal for cyclical and seasonal demand, where a company knows it will need product, but isn’t exactly sure when, and doesn’t want to take on too much inventory. While everything seems perfect, there are some drawbacks with a blanket order. For instance, once those 50 units are taken, the company requires time to replenish the inventory of finished parts. In addition, if there are any quality issues with those 50 units, it’s often difficult to turn around another shipment from the vendor in a hurry.
- Good for keeping month to month inventory costs low.
- Protects against damage to inventory, as companies don’t take more than needed per shipment.
- Allows companies to lower pricing without taking on too much inventory.
- Involves long lead times to replenish shipments.
- Can sometimes cause problems on turn around time when parts are defective, and the vendor must replenish a bad shipment.
The above video explains the difference between these two supply contracts.
If you want a sample blanket order agreement, you can go to: Sample Blanket Order Agreement for B2B Sales: Identifying Liabilities
If you want a sample Kan-Ban agreement, you can go to: Sample Kan Ban Contract: Finished Inventory, Semi-Finished Inventory & Raw Materials Inventory
What is a Kan-Ban agreement?
Often lumped together, there is a difference between a blanket order and a Kan-Ban agreement. In fact, Kan-Ban refers to the communication system used within a Push-Pull inventory and Kan-Ban manufacturing system. Originally developed by the Japanese, color coded cards are held up in various production stages to indicate when work is completed, and needs to move the next stage in the process.
In terms of what a Kan-Ban agreement is, it’s really more about servicing constant and linear demand from customers who require shipments daily, weekly, and monthly. Contrary to the blanket order, where shipment are made without a specific schedule, the Kan-Ban agreement requires set schedules on delivery, and allocates both labor and work cells in production, solely for the Kan-Ban agreement. The Kan-Ban agreement is a far more serious agreement as it allocates work stations in production, and labor, solely for the work needed within the Kan-Ban. So, when a company signs on for such an agreement, it typically involves liability for both parts, and sometimes the labor, needed for the agreement to work.
Kan-Ban agreements, or Push-Pull inventory models, are ideally suited for those companies who have consistent demand, day to day, week to week, and month after month. When thinking of companies that may use such an agreement, think of companies that order wireless cell-phones, who need consistent volume, quarter after quarter.
- Kan-Ban agreements are serious agreements with liabilities for semi-finished and finished parts.
- Kan-Ban agreements often require setting aside production work stations and labor solely for the demands of the Kan-Ban.
- Kan-Ban agreements are mainly suited for companies with linear demand requirements, where companies need product consistently, quarter to quarter.
When it comes to managing your company's supply chain, proper vendor management always involves some aspect of managing contractual agreements. Blanket order & Kan-Ban agreements have a value in supply chain management, but they must be used accordingly.
Remember, cyclical demand patterns call for blanket orders because they allow companies to deal with infrequent order patterns by holding inventory. Kan-Ban agreements are more for linear and constant demand because product ships daily, weekly or monthly. However, both are excellent tools to lower company inventory costs.
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