Friday, May 2, 2014

Why Kanban Doesn’t Work For #Manufacturers

For many #manufacturers, Kanban is a way of life. It assures minimal inventory and costs of goods sold. They’ll produce only what parts are needed for the next operation or shipment to the customer. On paper, this is terrific. In practice, well, here’s the rest of the story.

For manufacturers that have predictable requirements AND have done research to determine the proper lot size to release in terms of time required and cost for that number of parts, Kanban works pretty well.

Here’s the rub. Many manufacturers adopt Kanban releases without considering how the new system will impact the internal and external systems. For example, let say this manufacturer got a firm order for 1,000 parts from their customer with deliveries of 100 per month for 10 months. However, their internal processes
to make, buy and/or assemble this part are not predictable and may even be described as erratic. For instance, they are not able to process 100 parts per month through their system making or buying these parts. In addition, the time required to make 100 or even 200 parts exceeds a month.

What they should do is have an honest internal discussion and face the reality that only putting 100 pieces at a time into the system causes both higher per piece costs and delivery issues. A second step would be to increase the release size to take into account the completion and needs variations and suck up the inventory costs to carry parts that can’t be delivered.

The worst-case scenario is when an outside vendor is involved and all of the inventory risk is borne by the vendor without any commitment that their customer will take the parts. The customer issues an order for 200 pieces and asks the vendor to “have and hold” another 200 parts on the shelf. They dangle the 1,000 pieces order out there, but will not commit to the entire volume. Since the customer has not resolved their own internal process issues, the 100 parts per month goes out the window and the vendor is left guessing as to how many parts to make if the customer moves deliveries in and out. The irony is that the customer has that firm order for the 1,000 pieces but is somehow afraid to commit to this volume to the vendor.

Remember that pesky fact that the lead time to make the next lot of parts is greater than one month? Just because the part is outsourced, the customer may be looking at a stock out situation if their internal schedule is really out of whack and the vendor cannot make the parts before the next delivery requirement.

Clearly, long-term agreements are in order but many customers refuse to even discuss this possibility because they may feel that the vendor will ship inventory to them if it is un-needed at the end of the agreement. I’ll go out on a limb here and state that most vendors will be reasonable with their customers and accommodate their wishes.

In other words, strict adherence to Kanban practice can and will make for a disaster if the time is not taken to really address the structural issues that are plaguing a company. Involving an outside vendor in the production process will only make for a lot of hard feelings. There will be internal pressure to “fix” the problem by switching sources when a simple sit down with all cards on the table would probably solve both companies concerns.

Kanban is not a panacea for all parts and processes. It works well if properly implemented but will reduce profitability for all concerned if it is put into place with no concern on the effects it has on the entire manufacturing process.

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