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Inventory management

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Inventory
Management
Prepared by
Narendra Singh Chaudhary
Meaning-Inventory
 The raw materials, work-in-process 
goods and completely finished goods that are 
considered to be the portion of a business's 
assets that are ready or will be ready for sale.
 Inventory represents one of the most important 
assets that most businesses possess, because the 
turnover of inventory represents one of 
the primary sources of revenue generation and 
subsequent earnings for the company's 
shareholders/owners.
 Every such stock involves blocked capital (or resource). It 
is, therefore, important to plan a proper level of inventory. 
The nature of inventory depends upon the type of business 
activity of the firm. For example, a manufacturing unit 
carries raw material, some purchased or sub-contracted 
parts, WIP, and finished goods. It may also carry tools, 
spare parts, etc., for the next few weeks. 
 For example, a hospital keeps a reasonable stock of 
medicines, life saving injections, operation and surgical 
equipments, hospital ward including beds, etc. Even house 
wives prefer to keep some stock of food-stock in reserve. 
This is nothing but inventory. 
FUNCTIONS OF INVENTORY
Despite being blocked capital, certain level of inventory is 
desirable in most of the situation. This is for the following 
reasons:
1. Inventory is required to meet the anticipated demand. 
Customer generally does purchasing without any pre-
information to the seller or producer. Many times, he is 
undecided about the model, make or quantity of the 
purchase. 
     He would like to see the performance of all the available 
models. After judging his need and expenditure, he would 
select one piece. It is almost impossible to know how many 
pieces of a product would be needed each day. Therefore, 
inventory serves as a buffer to the anticipated demand.
2) Inventory guards against stock-out situations. 
There could be many exogenous factors due to 
which the arrival of raw material may be delayed. 
Inventory works as the safety stock for such 
situations.
3) Inventory ensures smooth flow of production 
process. Satisfaction of customer is dependent 
on the timely availability of finished goods and 
spare-parts. Inventory plays an important role in 
it.
 4. Inventory management is a high priority 
area in industry or service sector. This is 
due to conflicting role of inventory. For 
example, the salesman wants high level of 
inventory to keep the promises and quick 
delivery. On the other hand, warehousing 
people of the same industry will prefer 
lower finished goods inventory so that 
less storage space is needed

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Inventory management

  • 4. FUNCTIONS OF INVENTORY Despite being blocked capital, certain level of inventory is  desirable in most of the situation. This is for the following  reasons: 1. Inventory is required to meet the anticipated demand.  Customer generally does purchasing without any pre- information to the seller or producer. Many times, he is  undecided about the model, make or quantity of the  purchase.       He would like to see the performance of all the available  models. After judging his need and expenditure, he would  select one piece. It is almost impossible to know how many  pieces of a product would be needed each day. Therefore,  inventory serves as a buffer to the anticipated demand.
  • 7. Need for stock control  Materials represent an important asset and is the largest single item of cost in almost every business; accordingly the success or failure of a concern may depend largely upon efficient material purchasing, storage, accounting, utilization and control.  Where materials are not properly controlled, excess stock of some items are likely to occur with a result unnecessary tying up of capital and loss through deterioration and obsolescence. Shortages of other materials may arise at the time when they are urgently needed and production will then be delayed.  The purchasing of materials is a highly specialized function. By ordering the right quantity and quality of materials at the most favorable price, and by ensuring that it arrives at the right time, the efficient buyer is able to make a valuable contribution to the success of a business.
  • 8.  The efficient material control costs out losses and forms of waste that otherwise ten to pass unnoticed. Theft, misappropriation, deterioration, breakage and additional storage costs can be reduced to a minimum by proper controls, and much avoid idle time in the factory will be cut out if materials are available to meet the demands of the production staff.  Finally and most important to the cost accountant, it is impossible to produce reliable costing information if the records of materials issue are unsatisfactory, because a cost statement cannot be more accurate than the information on which it is based.
  • 16.  The materials purchased by a concern may be classified as stock items which are taken into store and held until required, or as direct deliveries to the point of consumption. The control of those materials which are stock items is known as stock control.  The function of stock control is to obtain the maximum stock turnover consistent with the maintenance of sufficient stocks to meet all requirements. Stock turnover is the ratio which the cost of the materials used per annum bears to the average stock of raw materials.
  • 17.  Discussions with regard to the quantity of materials stocked are reached after may consideration such as:  The availability of capital for the provisions of stocks  The storage space available  The cost of storage  Risk of loss due to fall in prices, deterioration, obsolescence, theft etc.  Economic order quantities  Delivery delays
  • 18.  For effective control of materials, it is important to decide upon different levels of materials. These levels are maximum limit or level, minimum limit or level and re-order level or ordering point or ordering level. Maximum, minimum and re-order levels are not static. They must be varied to suit the changing circumstances.  Thus, alteration will take place if the usage of certain materials is increased or decreased. If the re-order period changes, or if, in the light of a review of capital available, it is decided that the overall inventory must be increased or decreased.
  • 20. Unit Cost of Inventory  Unit cost of inventory is the price, which is paid to the supplier for  procuring one unit of the inventory. For parts manufactured in  house, cost of inventory is the direct manufacturing cost. The unit  cost of inventory may be independent of quantity of inventory  produced. In this case, unit cost of inventory is irrelevant for the  inventory models. This is because the decision regarding how  much and when to order is independent of the unit cost of  inventory.  In some situations, the unit cost of inventory is dependent upon  the quantity of inventory. For example, on a bulk purchase, some  quantity discount is offered. Quantity discount means that if  inventory is purchased in bulk, it is available at a price lower than  the normal unit price. In such cases, the cost of inventory affects  the decisions regarding when and how much to order. Therefore,  in quantity discount model cost of inventory is considered in the  inventory models.
  • 21. Ordering Cost   This is the cost associated with the placement of an order  for the acquisition of inventories. The expenses, incurred in  the purchase department, are its main constituents. Salary  of purchase deptt,  postages bills, telephone, stationary and  follow-up measure by the purchase department are clubbed  together to determine ordering cost.  If in case, a company is producing its own inventory rather  than taking it from an outside supplier, then the cost of set- up for making one batch of product is termed as set-up cost.  Set-up cost is used when inventory is made within the  organization. Similarly, in case of buy situation, we use  ordering cost.
  • 22. Holding Cost or Carrying Cost     Holding costs are incurred due to  maintaining an inventory level in the  organization. It is due to interest on the  held-up capital in inventory, insurance  cost, rent, salaries of storage staff,  obsolescence, deterioration and  pilferage/theft of material, depreciation of  material handling equipment, etc.  Generally, carrying cost is expressed as a  percentage of the inventory value.
  • 23. Shortages Cost or Stock-out Cost     When there is a stock-out situation, the  customer demand is not satisfied. In case of raw  material/WIP shortages, the production gets  disrupted. This causes loss due to emergency  purchase. Unsatisfied customer results in loss  of goodwill and lost-sale. The lost-sale may be  due to two reasons:   (1) the customer may postpone or drop the idea  to purchase and  (2) the customer may go to another producer of  similar product/services.
  • 25.  A buffer stock scheme (commonly implemented as intervention storage, the "ever-normal granary") is an attempt to use commodity storage for the purposes of stabilising prices in an entire economy or, more commonly, an individual (commodity) market.  Specifically, commodities are bought when there is a surplus in the economy, stored, and are then sold from these stores when there are economic shortages in the economy
  • 28.  Economic Order Quantity (EOQ) Economic Order Quantity (EOQ)
  • 29. Concept of Economic Order Quantity  For ideal conditions there should be no stocks at all. Every item should arrive just before it is required in right quantity. This however is not practical for two reasons. Firstly, the supplies & requirements are not so certain and, secondly, the costs of placing orders and follow-up work will shoot up very high, if ordering in such small batches is resorted to.  So, for a particular annual consumption as we go on increasing the quantity of order, the average stock increases and, hence, carrying charges go on increasing.
  • 30.  Thus, the total cost of ordering and inventory carrying will vary as shown in the graph in Figure 4-1. 7-9 maintenance engineering and management  While the ordering quantity is varied it may be seen from the graph that at a particular ordering quantity, the total cost will be the lowest and that ordering quantity is called Economic Ordering Quantity (E.O.Q).
  • 31.  Figure 4-1.  It may be established mathematically that 2 A S  Expressed Mathematically, E.O.Q = √-------- i C Where A = Annual consumption of items in Units S = Cost per order in Rupees i = Carrying charges per year expressed as fraction C = Unit price E.O.Q = Economic Order Quantity in Units.
  • 32.  Now if we consider an over-simplified procurement and consumption cycle for an item having a steady consumption all through the year and which is available instantaneously on placing an order (without fail), the procurement and consumption cycle can be shown as given in Figure 4-2.
  • 33. Figure 4-2.  At time 'A' the stock is zero is and hence an order will be placed and (the delivery 7-10 maintenance engineering and management being instantaneous) the stock will be brought up to a level 'Q'.  The item will be steadily issued up to a time 'B' and another order will be placed at 'B' to bring up the stock to Q and so on.  The average inventory in this model will be Q/2. Also the delivery of each order is instantaneous.  The computation of safety stock is done as follows:
  • 34.  If the fluctuation in lead time is predominant, then the safety stock can be computed by the following formula.  Safety stock = (Maximum Lead Time - Normal Lead Time) x Normal Consumption rate  If the fluctuation in consumption rate is predominant, then the safety stock can be calculated by using the following formula.  Safety Stock = K x √D  where K is a factor chosen on the basis of the assurance level required for protecting the item for stock out and D is the average consumption during lead time.
  • 35.  For various assurance levels, the values of K are as given below:  Assurance level (%) 50 75 80 85 90 98 99 99.9 Value of K 0 0.7 0.8 1.0 1.3 2.1 2.3 3.3  The following K-values are suggested for each item on the basis of ABC & VED classification. K Values V E D  A 2 1 0.5  B 2.5 2 1  C 3 2.5 2
  • 36.  In a practical situation, the consumption over a period fluctuates. Having fixed up the ordering quantity based on EOQ system, the order has to be placed while the stock level is equal to the sum of average lead time consumption and safety stock.
  • 37. Example:  The data regarding a particular type of bearing is given below :  Annual consumption = 120 Nos.  Unit price = Rs. 100  Inventory carrying cost (variable) = 0.20  Ordering Cost (variable) = Rs.30  The suggested value of K is 2. The normal lead time is 2 months. If it is decided to follow EOQ system of inventory control, what will be the parameters for operating 7-11 maintenance engineering and management the system. The supplier will be supplying the bearing packs of 12 Nos.
  • 38.  Solution:- 2 A S  EOQ =√ -------- i C 2 x 120 x 30  =√ --------------- = 19 0.20 x 100  The ordering quantity could be either 12 or 24. This will be based on the estimated total costs for both cases. If ordering quantity is 12, then Total Cost = 12/2 x 100 x 0.20 + 120/12 x 30 = 420/-
  • 39.  If the ordering quantity is 24  Total cost = 24/2 x 100 x 0.20 + 120/24 x 30 = Rs. 390/-  Hence, the Ordering Quantity of 24 Nos. is recommended.  Safety Stock = K X√D = 2 x √( 2/12) x 120) = 10 Nos.  Reorder level = Safety Stock + Lead Time Consumption = 10 + 20 = 30 Nos. The average inventory in this system will be = Safety stock + Ordering Quantity/2 i.e. = 10 + 24/2 = 22 Nos.
  • 40. a.) Fixation of inventory levels : Fixation of inventory levels facilitates easy maintenance and control of various materials in a proper way. However, following points should be remembered: Only fixation of inventory levels does not facilitate inventory control. A constant watch on the actual stock level of materials should be kept, so that proper action can be taken in time The levels which are fixed are not for permanent basis and are subject to regular revision.
  • 41.  Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.
  • 42. Economic Order Quantity (EOQ)  In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.  The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.
  • 43.  The carrying cost of inventory may include:  Interest on investment of working capital  Property tax and insurance  Storage cost, handling cost  Deterioration and shrinkage of stocks  Obsolescence of stocks.
  • 44.  Formula of Economic Order Quantity (EOQ):  The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.  A = Demand for the year  Cp = Cost to place a single order  Ch = Cost to hold one unit inventory for a year  * = ×
  • 45. Assumptions of Economic Order Quantity:  The ordering cost is constant.  The rate of demand is constant  The lead time is fixed  The purchase price of the item is constant i.e. no discount is available  The replenishment is made instantaneously, the whole batch is delivered at once.
  • 46.  Example:  Pam runs a mail-order business for gym equipment. Annual demand for the Trico- Flexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. Calculate economic order quantity (EOQ)
  • 48.  -Maximum Usage -Lead Time -Storage facilities available -Prices of material -Other various costs involved like insurance, storage cost etc. -Availability of funds for procurement of materials -Nature of material - EOQ
  • 49. c.) Minimum level: This level is fixed below the re-order level but above the danger level. The level of stock should not be reduced below this level. If it does, then it involves the risk of non availability of material whenever required. This level is fixed after considering two factors: Rate of Consumption and Lead Time. d.) Re-order level: This level is fixed between maximum and minimum level in such a way that the requirement of materials for the production can be met properly till the fresh supply of material is received. This level of material stock indicates that steps should be taken for procurement of further lots of material.
  • 50.  Danger level: This level is fixed below minimum level. If the stock reaches this level an immediate action must be taken by the company in respect of getting supply. This level indicates a panic situation for the company as it has to make purchases in a rush which may involve higher costs.
  • 51.  Maximum Inventory- it indicates the maximum figure of the inventory quantity held in stock at any time.  Perpetual inventory-It represents a system of records maintained by stores department. It in fact comprises:  1)Bincards and  2)Stores ledger.
  • 52. Formula of Re-order Level or Ordering Point:  The following two formulas are used for the calculation of reorder level or point.  Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time  The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided.  When safety stock is provided then the following formula will be applicable:  Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time + Safety stock
  • 53. Example 1:  Minimum daily requirement 800 units  Time required to receive emergency supplies4 days  Average daily requirement 700 units  Minimum daily requirement 600 units  Time required for refresh supplies One month (30 days. Calculate ordering point or re-order level. Calculation:  Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time = 800 × 30= 24,000 units
  • 54. Example 2  Two types of materials are used as follows:  Minimum usage 20 units per week each  Maximum usage 40 units per week each  Normal usage60 units per week each  Re-order period or Lead time of Material A: 3 to 5 weeks Material B: 2 to 4 weeks. Calculate re order point for two types of materials.  Calculation:  Ordering point or re-order level = Maximum daily or weekly or monthly usage × Maximum re-order period = A: 60 × 5 = 300 units, B: 60 × 4 = 240 units
  • 55. Minimum level or minimum limit  Minimum level or minimum limit can be calculated by the following formula or equation:  Minimum limit or level = Re-order level or ordering point – Average or normal usage × Normal re-order period Or the formula can be written as:  Minimum limit or level = Re-order level or ordering point – Average usage for Normal period
  • 56. Example:  Normal usage100 units per day  Maximum usage130 units per day  Minimum usage70 units per day  Re-order period25 to 30 days. Calculate: minimum limit or level  To calculate minimum limit of materials we must calculate re-order point or re-order level first.
  • 57. Calculation:  Ordering point or re-order level = Maximum daily or weekly or monthly usage × Maximum re-order = 130 × 30= 3,900 units  Minimum limit or level = Re-order level or ordering point – Average or normal usage × Normal re-order period = 3900 – (100 × 27.5*) 1150 units  *(25 + 30 ) / 2
  • 58. Formula: Maximum level  Maximum level or maximum limit can be calculated by the help of following formula:  Maximum limit or level = Re-order level or ordering point – Minimum usage × Minimum re-order period + Economic order quantity  Example:  Normal usage 100 units per day  Maximum usage 130 units per day  Minimum usage 70 units per day  Re-order period 25 to 30 days  Economic order quantity5,000 units. Calculate maximum limit or level.
  • 59.  In order to calculate maximum limit of stock we must calculate re-order point or re-order level first.  Ordering point or re-order level = Maximum daily or weekly or monthly usage × Maximum re-order = 130 × 30= 39,000 units Calculation:  Maximum limit or level = Re-order level or ordering point – Minimum quantity used in re-order period usage + Economic order quantity = 3900 – (70 × 25) + 5,000 = 7150 units
  • 60. Formula: Danger level Danger level can be calculated by the help of the following formula or equation: Danger level = Average daily requirement × Time required to get emergency supply
  • 61. Example  Normal usage or average requirement700 units per day  Maximum usage800 units per day  Minimum usage600 units per day  Re-order period25 to 30 days  Time required to receive emergency supplies 4 Days. Calculate danger level. Calculation: Solution- Danger level = Average daily requirement × Time required to get emergency supply= 700 × 4 = 2,800 units
  • 62. SDE Analysis:-  Classification based on the lead time: This classification is carried out based on the lead time required to procure the spare part. The classification is as follows:  Scarce (S) : Items which are imported and those items which require more than 6 months' lead time.  Difficult (D) : Items which require more than a fortnight but less than 6 months' lead time.
  • 63.  Easily available (E) : Items which are easily available i.e., less than a fortnights' lead time.  This classification helps in reducing the lead time required at least in case of vital items. Ultimately, this will reduce stock-out costs in case of stock-outs.  A comprehensive analysis may ultimately bring down lead time for more & more number of items. This will also result in streamlining the purchase and receiving systems and procedures.
  • 64. VED Analysis  Classification Based On Criticality:  Several factors contribute to the criticality of a spare part. If a spare is for a machine on which many other processes depend, it could be of very vital importance. Also if a spare is, say, an imported component for which procurement lead time could be very high its non- availability may mean a heavy loss.  Similarly spares required for fighter aircraft at the time of war could be of great value in terms of fighting capability. In general, criticality of a spare part can be determined from the production downtime loss, due to spare being not available when required.
  • 65.  Based on criticality, spare parts are conventionally classified into three classes, viz. vital, essential and desirable. 7-6 maintenance engineering and management  VITAL (V) : A spare part will be termed vital, if on account of its non-availability there will be very high loss due to production downtime and/or a very high cost will be involved if the part is procured on emergency basis. In a process industry, most spare parts for the bottleneck machine or process will be of vital nature. For example, bearings for a kiln in a cement plant will be considered vital.  ESSENTIAL (E) : A spare part will be considered essential if, due to its non-availability, moderate loss is incurred. For example, bearings for motors of auxiliary pumps will be classified as essential.
  • 66.  DESIRABLE (D) : A spare part will be desirable if the production loss is not very significant due to its non-availability. Most of the parts will fall under this category. For example, gaskets for piping connection.  The VED analysis helps in focusing the attention of the management on vital items and ensuring their availability by frequent review and reporting. Thus, the downtime losses could be minimized to a considerable extent.
  • 67. ABC Analysis  Classification Based on Consumption:  Another method of classifying spares is on the basis of annual consumption value. As it is true for any inventory situation, Pareto's principle can be applied to classify maintenance spares based on consumption value.  Pareto principle : The significant items in a given group normally constitute a small portion of the total items in a group and the majority of the items in the total will, in aggregate, be of minor significance.
  • 68.  This way of classification is known as ABC classification.  CLASS A: 10% of total spares contributing towards 70% of total consumption value.  CLASS B: 20% of total spares which account for about 20% of total consumption value.  CLASS C: 70% of total spares which account for only 10% of total consumption value.
  • 69.  In a specific spares control system, it is quite possible that in a single year, many spares would not have been consumed at all. In such cases, it is better to perform ABC analysis on longer consumption period data, say 3 years. Then only spares will not be left out in this classification.  Policy for 'A' items * Maximum control * Value Analysis * More than one supplier * Control by top executives.
  • 70.  Policy for 'B' items 7-7 maintenance engineering and management * Minimum control * Bulk Orders * More items from same supplier.
  • 71. JIT
  • 72.  Just-in-time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated carrying costs. In order to achieve JIT the process must have signals of what is going on elsewhere within the process. This means that the process is often driven by a series of signals, which can be Kanban ( 看板 Kanban?), that tell production processes when to make the next part.
  • 73.  Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organization's return on investment, quality, and efficiency. Some have suggested that "Just on Time" would be a more appropriate name since it emphasizes that production should create items that arrive when needed and neither earlier nor later.
  • 74.  Quick communication of the consumption of old stock which triggers new stock to be ordered is key to JIT and inventory reduction. This saves warehouse space and costs.  However since stock levels are determined by historical demand any sudden demand rises above the historical average demand, the firm will deplete inventory faster than usual and cause customer service issues. Some have suggested that recycling Kanban faster can also help flex the system by as much as 10- 30%. In recent years manufacturers have touted a trailing 13 week average as a better predictor for JIT planning than most forecastors could provide.
  • 75.  The technique was first used by the Ford Motor Company as described explicitly by Henry Ford's My Life and Work (1923).  The technique was subsequently adopted and publicized by Toyota Motor Corporation of Japan as part of its Toyota Production System (TPS).  In short, the just-in-time inventory system is all about having “the right material, at the right time, at the right place, and in the exact amount”, without the safety net of inventory.
  • 76. Stocks  JIT emphasises inventory as one of the seven wastes (overproduction, waiting time, transportation, inventory, processing, motion and product defect), and as such its practice involves the philosophical aim of reducing input buffer inventory to zero. Zero buffer inventory means that production is not protected from exogenous (external) shocks. As a result, exogenous shocks reducing the supply of input can easily slow or stop production with significant negative consequences.  For example, Toyota suffered a major supplier failure as a result of the 1997 Aisin fire which rendered one of its suppliers incapable of fulfilling Toyota's orders. In the U.S., the 1992 railway strikes resulted in General Motors having to idle a 75,000-worker plant because they had no supplies coming in.
  • 77. Problems Within a JIT system  The major problem with just-in-time operation is that it leaves the supplier and downstream consumers open to supply shocks and large supply or demand changes
  • 78. Benefits of JIT  As most companies use an inventory system best suited for their company, the Just-In-Time Inventory System (JIT) can have many benefits resulting from it which are as follows- 1. Set up times are significantly reduced in the factory. Cutting down the set up time to be more productive will allow the company to improve their bottom line to look more efficient and focus time spent on other areas that may need improvement. This allows the reduction or elimination of the inventory held to cover the "changeover" time, the tool used here is SMED. Toyota implemented a strategy now called Single Minute Exchange of Die (SMED)
  • 79. 2. The flows of goods from warehouse to shelves are improved. Having employees focused on specific areas of the system will allow them to process goods faster instead of having them vulnerable to fatigue from doing too many jobs at once and simplifies the tasks at hand. Small or individual piece lot sizes reduce lot delay inventories which simplifies inventory flow and its management.
  • 80. 3. Employees who possess multiple skills are utilized more efficiently. Having employees trained to work on different parts of the inventory cycle system will allow companies to use workers in situations where they are needed when there is a shortage of workers and a high demand for a particular product. 4. Better consistency of scheduling and consistency of employee work hours. If there is no demand for a product at the time, workers don’t have to be working. This can save the company money by not having to pay workers for a job not completed or could have them focus on other jobs around the warehouse that would not necessarily be done on a normal day.
  • 81. 5. Increased emphasis on supplier relationships. No company wants a break in their inventory system that would create a shortage of supplies while not having inventory sit on shelves. Having a trusting supplier relationship means that you can rely on goods being there when you need them in order to satisfy the company and keep the company name in good standing with the public. 6. Supplies continue around the clock keeping workers productive and businesses focused on turnover. Having management focused on meeting deadlines will make employees work hard to meet the company goals to see benefits in terms of job satisfaction, promotion or even higher pay.
  • 84.  Kanbans maintains inventory levels; a signal is sent to produce and deliver a new shipment as material is consumed. These signals are tracked through the replenishment cycle and bring extraordinary visibility to suppliers and buyers.
  • 85. KANBAN  It was out of a need to maintain the level of improvements that the kanban system was devised by Toyota.  Kanban is a concept related to lean and just-in-time (JIT) production. The Japanese word kanban is a common everyday term meaning "signboard" or "billboard" and utterly lacks the specialized meaning that this loanword has acquired in English. According to Taiichi Ohno, the man credited with developing JIT, kanban is a means through which JIT is achieved.
  • 86.  Kanban is a signaling system to trigger action. As its name suggests, kanban historically uses cards to signal the need for an item. However, other devices such as plastic markers (kanban squares) or balls (often golf balls) or an empty part-transport trolley or floor location can also be used to trigger the movement, production, or supply of a unit in a factory.
  • 87.  Kanban became an effective tool to support the running of the production system as a whole. In addition, it proved to be an excellent way for promoting improvements because reducing the number of kanban in circulation highlighted problem areas.
  • 88.  Kanban, by contrast, is part of a pull system that determines the supply, or production, according to the actual demand of the customers. In contexts where supply time is lengthy and demand is difficult to forecast, the best one can do is to respond quickly to observed demand. This is exactly what a kanban system can help: it is used as a demand signal which immediately propagates through the supply chain.  This can be used to ensure that intermediate stocks held in the supply chain are better managed, usually smaller. Where the supply response cannot be quick enough to meet actual demand fluctuations, causing significant lost sales, then stock building may be deemed as appropriate which can be achieved by issuing more kanban.
  • 89. Example  A simple example of the kanban system implementation might be a "three-bin system“ for the supplied parts (where there is no in-house manufacturing) — one bin on the factory floor, one bin in the factory store and one bin at the suppliers' store. The bins usually have a removable card that contains the product details and other relevant information — the kanban card. When the bin on the factory floor is empty, the bin and kanban card are returned to the factory store.
  • 90.  The factory store then replaces the bin on the factory floor with a full bin, which also contains a kanban card. The factory store then contacts the supplier’s store and returns the now empty bin with its kanban card. The supplier's inbound product bin with its kanban card is then delivered into the factory store completing the final step to the system.  Thus the process will never run out of product and could be described as a loop, providing the exact amount required, with only one spare so there will never be an issue of over-supply