A Kan-Ban is a fairly simple production process. The idea
is to have semi-finished goods in various operations, all waiting for customers
to place orders. That customer demand initiates the process by moving semi-finished goods
to the next operation in order to replenish the finished good counts. In the
end, it’s the ideal solution to a demand-driven industry and it’s
fairly easy to implement and manage.
Working Without a Kan-Ban
Think of all the individual operations your company performs in order to turn a raw material into a finished good. Now think of how long it takes to complete this process. Depending upon the product offered, fulfilling an order could take precious days, weeks or months. After all, there is a cost to starting from “scratch”.
Depending upon your market or industry, that delay could mean losing out on an immediate sale, losing gross profit, and ultimately, losing valuable market share. At the very least you can be assured that your customer won’t be pleased with an extended delivery time. Worse yet, this approach doesn’t protect your customer from in-process production issues, ones that can easily lead to further delays.
The production process below outlines a fictitious example where five basic steps are needed to move from a raw material to a finished good. Without any work-in-process inventory there’s no way to shorten the lead time on delivery. Each step must be completed before moving to the next. In the end, it's a laborious process.
Ultimately, this entire process impacts your sales, is difficult on cash flow, and puts your company in a vulnerable position against its competitors. Again, you only start to manufacture a product upon receipt of a customer order. As such, you are guaranteed to have a longer lead time. So, how does running a Kan-Ban help?
Simplifying Kan-Ban Processes
A Kan-Ban operates differently from the above example. Instead of moving from step one to five, the process moves backwards from step five to one. This means the process starts from what happens to the finished goods inventory counts - not the raw material inventory counts.
The key is to have semi-finished product in each individual operation (step) in the production process. That semi-finished inventory is held in stasis until demand is pulled from the finished good quantity. A card is used to convey the inventory counts at each operation.
Long before MRP systems tracked work orders, the process within the Kan-Ban relied entirely on cards. In fact, this approach is still used today. That card is held up, put in a high traffic area, or made available to the previous operation. Either way, the information is more manual in nature. Regardless, the process is simple and extremely effective. The video below explains how the entire process works.
Looking at the above, it’s important to remember that the information is transferred from the finished goods quantity backwards. Since each operation is holding work-in-process inventory, the goal is to replenish the next operation in the process when prompted to do so. For instance, once all the products are purchased, that zero inventory count will force the fourth operation to replenish the finished goods inventory count. Next, the fourth operation will register a zero inventory count. That information will force the third operation to finish its work in order to replenish the fourth operation (tune & assemble). Again, it's all possible because there is work-in-process inventory being held in each location.
The video I've included shows how the process works for both a fixed bill of materials and a semi-fixed bill of materials. The second example explains how the process would work for Dell: You can read more by going to: Dell Push-Pull: An Order Fulfillment and Supply Chain Strategy
To get a sample contract, please go to: Sample Kan Ban Contract: Finished Inventory, Semi-Finished Inventory & Raw Materials Inventory
To read about the differences between this agreement and a blanket order, please go here.
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