Logistionary: Kanban

Kanban is a visual scheduling system for lean manufacturing.

It all started in the early 1940s when the first Kanban system was developed by Taiichi Ohno for Toyota automotive in Japan. It was created as a simple planning system, the aim of which was to control and manage work and inventory at every stage of production optimally.

The Kanban method gets its name from the use of kanban, visual signalling mechanisms to control work in progress for intangible work products.

Kanban aligns inventory levels with actual consumption. A signal tells a supplier to produce and deliver a new shipment when a material is consumed. This signal is tracked through the replenishment cycle, bringing visibility to the supplier, consumer, and buyer.

In contexts where supply time is lengthy and demand is difficult to forecast, often the best one can do is to respond quickly to observed demand. This situation is exactly what a kanban system accomplishes, in that it is used as a demand signal that immediately travels through the supply chain.

Kanban cards are a key component of kanban, and they signal the need to move materials within a production facility or to move materials from an outside supplier into the production facility. The kanban card is, in effect, a message that signals a depletion of product, parts, or inventory. When received, the kanban triggers replenishment of that product, part, or inventory.

Three-bin system

An example of a simple kanban system implementation is a "three-bin system" for the supplied parts, where there is no in-house manufacturing. One bin is on the factory floor (the initial demand point), one bin is in the factory store (the inventory control point), and one bin is at the supplier. The bins usually have a removable card containing the product details and other relevant information, the classic kanban card.

When the bin on the factory floor is empty (because the parts in it were used up in a manufacturing process), the empty bin and its kanban card are returned to the factory store (the inventory control point). The factory store replaces the empty bin on the factory floor with the full bin from the factory store, which also contains a kanban card. The factory store sends the empty bin with its kanban card to the supplier. The supplier's full product bin, with its kanban card, is delivered to the factory store; the supplier keeps the empty bin. This is the final step in the process. Thus, the process never runs out of product, and could be described as a closed loop, in that it provides the exact amount required, with only one spare bin so there is never oversupply.

If all this is confusing, and you´re still not clear on how Kanban works, Im sure the next image will make everything fall into place! One image is indeed worth a thousand words as they say!

Logistionary: Decoupling inventory

 

Decoupling inventory is the process of setting aside extra parts or raw materials to ensure there aren’t any delays or disruption in the production of finished goods in the event of a supply shortage or machinery breakdown.

In simple terms, decoupling inventory is a type of safety stock, but what it hedges against is slow production and stoppage, not unseen fluctuations in demand, acting as a buffer that allows to continue fulfilling orders even as production issues are happening.

The main benefits of decoupling stock are:

Increased efficiency: Can increase efficiency across production lines and supply chains by allowing each stage of production to work autonomously even in the event of a disruption.

Increased flexibility: Helps mitigate the effects of unforeseen circumstances helping businesses become more agile and ready to respond to unexpected disruptions in the supply chain.

Perform spot maintenance on parts of your manufacturing equipment: Decoupling inventory is particularly advantageous in the event of a facility outage for repairs or machine maintenance.

Provides Protection During Periods of Uncertainty: When manufacturers are unable to obtain sufficient raw materials to finish producing a product, decoupled inventory offers protection to continue production without any delays.

Logistionary: Vendor Managed inventory (VMI)

 

Vendor Managed Inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimising the inventory held by a distributor/retailer.

In traditional inventory management, a retailer makes its own decisions regarding the order size and frequency, while in VMI the retailer share their inventory data with the supplier such that the supplier is the decision-maker who determines the order size and frequency.

In VMI practice, inventory location depends on the arrangement between the vendor and the customer. The first option is for the inventory to be located both at the customer's and the supplier's premises. For the supplier, this serves as a safeguard against short delivery cycles or synchronised production cycles.

Another option can be for the supplier to deliver to the retailer’s central warehouse or alternatively, to a third party's warehouse. Managing the inventory at the central warehouse enables better optimisation of deliveries and lower costs.

Finally, a third option would be for the inventory to be located directly at the retailer’s premises such as the shop floor itself.

From an inventory ownership point of view, in vendor managed inventory, there are several solutions in terms of payment and transfer of ownership.

In the first alternative, the supplier is the owner of inventory at the premises of retailer. Invoice is issued when the items are sold from the stock.

In the second alternative, retailer assumes ownership of the inventory receiving an invoice upon delivery. However, the supplier is not paid until the retailer sells the items from.

In the third alternative, retailer owns the inventory upon delivery, while the supplier invoices the retailer once the shipment has been made.

In the majority of the cases, the products will be in the possession of the retailer but will not be owned by them until the sale takes place, meaning that the retailer simply houses the product. This is referred to as consignment stock.

There a many advantage for both supplier and retailer of using VMI:

Retailers benefit from reduced risk of going out of stock since the supplier can have information about how the products are selling. 

Retailers also benefit from reduced carrying costs since they shouldn’t need to carry as much excess stock.

Supplier benefit from more control and more customer contact.

Suppliers get to gather information as to the demand for the products, this should also help reduce the amount of safety stock that suppliers need in their warehouse.

This practice can prevent the bullwhip effect since the supplier will have control over the end to end inventory.

 

Do you know how Amazon receives your inventory?

 

Even wondered why Amazon is able to receive, pick and dispatch orders within hours?

Have a look at how Amazon receives inventory from their suppliers. Did you noticed how streamlined and strict their policies are when it comes to accepting new parcels into their fulfilment centres?

The Internet of Things

A lot has been written already about the Internet of Things (IoT) and how it will affect nearly every business and industry; In my opinion, one of the most exciting areas of impact and disruption is the global Supply Chain.

One great example to illustrate this is this short clip from the TV show Portlandia, in this episode, two friends are dinning out and before ordering they insist on knowing as much as possible about the chicken they will be eating. They find out his name, what he was fed, his social habits etc. The process of assessing the chicken before agreeing to eat it might be a bit too bizarre, but with the IoT, this will become the norm. We will be able to experiment that type of transparency, and eventually it will be demanded by suppliers, customers and end consumers.

Among many other, some of the benefits that the IoT will bring are:

- Operational efficiency: The real-time visibility derived from the IoT enables information to be shared at every level allowing deficiencies to be identified quickly so that problems can be immediately rectified, or possibly even prevented altogether. Companies can see delays, slowdowns or trends that will affect the bottom line and inefficient processes that are costing them money can be identified and corrected

- Customer services: The IoT will dramatically reduce the amount of time from click to fulfillment. With customers demanding more and more information the IoT will fulfill up to the minute details on where their item is in transit and accurate alerts notifying them of delivery dates and times.

- Inventory management: The IoT will allow organizations to automatically know when products must be restocked or reordered, eliminating delays or inventory issues that would send customers to the competition.

Linked to this, loss management will greatly improve: with sensors tracking every movement, it will be almost impossible for merchandise to simply “disappear”, and if it does, it will be possible to know exactly where the incident happened and what factors may have contributed to merchandise loss.

- Asset Tracking and in transit visibility: New RFID (we talked about RFID technology here) and GPS sensors can track products “from floor to store” and even beyond. At any point in time, manufacturers can use these sensors to gain granular data like the temperature at which an item was stored, how long it spent in cargo, and even how long it took to fly off the shelf.

With some many possibilities, challenges will also need to be considered:

- Need of many different technical elements to deploy the end-to-end IoT solutions: Network infrastructure, devices, applications, platforms, security solutions, and integration services.

- Security: All the information must be prevented from falling into the wrong hands, or hacked. Sensors should only send specific information, which must be held in a secure, private cloud environment. Here is where Blockchain technology (see more about Blockchain here) will play a definitive role.

Overall, with everything becoming much more internet-driven, IoT in the supply chain is still only in its infancy, but sure to take off, exciting times lie ahead!

Just in time

Just-in-time manufacturing (JIT) also known as the Toyota Production System is a methodology aimed at reducing flow times within production systems as well as response times from suppliers and to customers.

It originated in Japan in the 1960s and 1970s, but the wise use of the term JIT faded in the 1990s as the new term “lean manufacturing” was established as a more recent name for JIT.

Benefits:

- Lower warehouse costs. Since less space is needed, this reduces the amount of storage an organisation needs to buy or rent.

- Less amount of inventory obsolescence, when companies use the traditional method of inventory they can end up with pallets of unsold items that simply go to waste

- Defect rates are reduced resulting in less waste and greater customer satisfaction.

Risks:

- You become reliant on your suppliers. Suppliers need to be able to supply materials quickly with very limited advance notice and any unexpected even can derive in long term out of stocks.

- Employees are at risk of precarious work as employers seek to easily adjust their workforce in response to supply and demand conditions by increasing the amount of contracting and temporary work.

- By not carrying much of stock, the risk of out of stocks is higher making imperative to have the correct procedures in place to ensure stock can become readily available.

- More and better planning is required to ensure stock is available at all times

If you want to learn more, check out the video below that explains in detail what JIT is and all the elements around this philosophy. 

Couldn´t finish this post without some music. Happy week!

Slow moving inventory...your worst nightmare!

Mid-year review, and slow moving and obsolete stock start coming up in every single meeting…it´s pretty much inevitable; inaccurate forecasts, undersells, overstocks, there can be hundreds of reasons why a sku become a slow moving, and we might explore in deep some of them in future posts, but whatever the reason is, when inventory doesn’t move, the business will incur in associated carrying costs and lose of valuable resources that could be used to invest in your business.

Defining what is “slow moving” is not easy as the criteria will vary from company to company, and what is considered slow moving from some retailers might not be for others, but there is a general rule that can be applied to most companies to define if a reference is slow moving or not; Having stock worth 6 or more months of demand for any given item will indicate that this particular sku is a slow moving.

Now we know what slow moving is, we can focus on the impact that slow moving stock has in our business. From an outside perspective, you can think that slow moving stock shouldn´t be the focus of an organization as “it only has a negative effect on our inventory”, but if we dig a little bit further, we will realize that the impact of slow moving stock affects a business in ways that we never thought about before.

• Interest paid on borrowed money. When inventory doesn't sell, you are incurring more interest charges. 
• Insurance costs derived of inventory on hand. 
• Obsolescence provisions; financial reserve to cover losses, write-offs, etc 
• Storage space of course. 
• Costs incurred when your warehouse is full of slow moving inventory; outside storage costs, build of new facilities, movement of stock from one picking location to other etc.
• Cost of destruction of obsolete stock. 
• Depreciation of the inventory month after month. 
• Time and personnel, including managers, stock keepers, material handlers, cycle counters, planners and controllers.

These are only some of the aspects in which slow moving stock has an impact, therefore the sooner you tackle the “slow movers” the more profitable your business will be.

In future posts I will try to extend this topic and underline the causes and also possible solutions to slow moving inventory.

Inventory methods

Inventory; What a topic to start this year 2014, but, for so many companies the last section of the year and the beginning of the new campaign is devoted to this tedious but essential task.

Inventory is a necessary evil in any organization, therefore we couldn´t let the year end without dedicating a post to thistask.

Every unit of inventory has an economic value and is considered an asset of the organization irrespective of where the inventory is located or in which form it is available. Primary focus should be placed in maintaining optimum levels avoiding lower lever but also the excess of wares.

After this brief introduction let’s skip the preambles and focus on the main objective of this post, to shed some light over the several existing inventory classification methods.

           ABC classification

In most of the organizations inventory is categorized according to ABC Classification Method, which is based on Pareto principle.

The ABC method provides a mechanism for identifying which items have the biggest impact on the overall inventory cost, implying this merchandise should be categorized and hence managed and controlled in a different way.

The ABC method group the merchandise in three different categories:

A – Items are very import for the organization due to their high value. This items requires tight control and frequent value analysis.

B – Items are important but less important that items A. These items should be controlled but not comprehensive control is needed.

C – Items are marginally important.

  
Based on the experience and the data collected in most cases the conclusion reached is that 20% of the inventory accounts for 80% of the annual activity. Following this reasoning the

Items A – Approx. 20% of the Items account for 80% of the consumption value
 

Items B – Approx. 30% of the Items account for 15% of the consumption value
 

Items C – Approx. 50% of the Items account for 5% of the consumption value

Whereas there are no fixed percentages, and they may vary depending on the company´s discretion, these are the most commonly applied.

XYZ classification

XYZ inventory system is very similar to the ABC but they differ in an essential point, whereas ABC method structures the wares in terms of value and quantity, the XYZ method is more used in relation with the consumer demand for finished goods.

Items X - Are highly demanded goods

Items Y - Medium demanded products

Items Z - Products with very low demand.

The company will again have to decide the number of items included in the clusters but the percentages used in the ABC method can be successfully applied in the XYZ method. 

HML classification

Again HML method is similar to the ABC and the XYZ analysis except that the items under this method are classified based on their unit prices. The goods are categorized in three groups:

Items H – High price items

Items M – Medium price items

Items L – Low price items

        

VED classification

While in ABC classification inventories are classified on the basis of their consumption value and in HML analysis the unit price is the basis, criticality of inventories is the basis for VED analysis.

Items Vital - Items critically needed. Production will come to halt unless they are available at all times.

Items Essential – Itemswith lower criticality but whose stock out is very high.

Items Desirable – Items with the lowest criticality which won´t cause immediate loss of production.

Overall, the VED analysis is used to determine the criticality of an item and its effect on production and other services.

                SDE classification

SDE inventory method is based on the purchasing availability of the items.

Items S – Scarce material; material that is hardly available or requires longer lead time, generally imported items.

Items D – Difficult items; goods that are difficult in sourcing, either because they have to come from distant places or because the unreliability of the supplier.

Items E – Easy material; material easily available.

Commonly, it´s the purchasing department which classifies the materials based on level of difficulty in sourcing.

FSN classification

This method classifies items on the basis of their movement from Inventory. Here the items are classified as:

Fast – Items that are frequently used

Slow – Items that are used less for certain period of time

Nonmoving – Items that are not used for more than certain duration

The higher the average-stay of an item in the warehouse, the slower is its movement from inventory.

This method helps to establish a proper warehouse layout by locating all the fast moving items near the picking area.
 

SOS classification

This inventory method has been conceived based on the nature of the items and period of their availability. It classifies all the items into two categories

Items S – Seasonal materials. Can be further classified into two groups:

-          Seasonal items available only for a short period of time during the year, (tropical fruits for example) the purchasing department will have to plan the requirements in advance.

-          Materials that are seasonal but are available throughout the year (grains for example). Despite this products are seasonal, they don´t behave as the common seasonal goods.

Items OF – Off seasonal materials, are available throughout the year without any significant price variation.

GOLF classification

This method classifies the items based on the nature of the purveyors. 

Items G – Government controlled supplies

Items O – Open market supplier

Items L – Local supplier

Items F – Foreign market supplies.

As we have seen, there are several methods used to control inventory and each method highlight a different aspect. The right method should be selected depending on the nature of the items and the purpose of the business.

Inventory

In today´s post, we will be zero in on key word in Supply Chain; inventory.

Since Toyota started its “just in time” strategy, there has been a lot of talking about the necessity of inventories and whether a company might hold raw materials, pieces, or finished goods in their warehouses. Whether your company is a retailer or a manufacturer there are several reasons for and against maintaining inventory.

Reasons for maintaining inventory:

-       Demand: Maintaining inventory ensures you always have product available when demand increases. Any business should keep an adequate supplies to meet expected and not so expected demands. This is essential for those businesses whose demand strongly flows due to seasonal or economic fluctuations or for those whose products are characterized by a rapid turnover and high demand.

-       Cost: Having enough space to keep the merchandise allows the companies to bulk buy at reduced costs. Suppliers often offer discounts on purchases above a certain quantity. Buying large amounts of goods and storing them on the companies’ facilities results in significant savings.

-      Time: For some companies the lead time from order to delivery is crucial, having enough merchandise ready to be delivered timely will ensure the customer gets the products promptly avoiding third party delivery charges and fostering new future purchases.

-          Inflation: In times of high inflation, holding vast supplies of inventory can result in substantial benefits for the company, which might be able to cope with the demand while avoiding the cost associated to the inflation.

-         Supply shortages, disruptions: When supply shortages or disruptions occurs whether they are expected or not, holding enough merchandise on inventory ensures the company´s ability to meet the demand and allows a certain degree of self sufficiency until these disruptions are solved.

Even though there are certain powerful reasons for maintaining inventories, it is true that there are also some reasons that might recommend avoiding stockholdings, some of these reasons are:

-         Space: Maintaining inventory requires a vast space in which the merchandise can be properly managed. This usually means having a warehouse with enough space to adequate a loading and unloading area, a picking space if needed, racking for efficient storage and any other facilities that are necessary to keep the merchandise stored. In addition to that, some products ask for concrete storage conditions such as specific temperature ranges, or certain isolating materials, that will help to preserve the goods or to avoid harms.

-       Cost: Holding inventory will make the company incur in costs, rent, equipment, insurance, workforce and so forth. Cost for maintaining inventory can quickly mount up getting to a position where large amounts of money are invested only to successfully manage your storage facilities.

-          Stock control and training: To effectively manage inventory, a high-tech computerized system must be installed and maintained, and staff must be properly trained. Every inventory control system will require the cooperation of all the employees and therefore adequate training will need to be provided, and that takes us to our previous point, costs. Training will imply sending the employees to training classes or holding training sessions at the workplace.

-         Time: Finally, another potential problem that comes with inventory control is that it takes time. Apart from the time invested in training, employees will have to get used to the new methods and in many cases money will be lost endowing the staff with the tools needed to manage the inventory accurately.
  

Despite of the costs associated to inventory management, it seems very complicated to avoid completely inventory and overall, the best option will be to keep a minimum amount of merchandise on inventory while arranging commercial deals with our purveyors to ensure continue flow of supplies.