An excellent article in the Sep/Oct 2014 issue of APICS Magazine points out how companies using a “purchased-parts supermarket” for master inventory control (often known in the field as kanban) can help cut overall safety stock nearly in half. This can translate into a considerable inventory cost savings. In this article, we’ll try to present the article’s key points as simply as possible (still, it gets a bit geeky). For the full rendering you have to go straight to the source (APICS), which requires APICS membership (a most worthwhile investment, we might add).
In the article, entitled “Portion Control” by Chris Harris (an Assoc. Prof. of Supply Chain Mgmt. at the Univ. of Indianapolis School of Business, pictured at left) and Thomas Parker, the authors remind us that “controlling the quantity and availability of inventory within a production system is one of the greatest challenges faced by supply chain and operations professionals.” They go on to point out that a centralized storage location for manufacturing components (the ‘supermarket’) is effective in releasing material to the production area in just in time fashion, minimizing production floor space for raw materials without jeopardizing manufacturing.
The idea is to set a maximum inventory level for each component, and then effectively communicate via an “informational loop” when material should be withdrawn and replenished. These max levels are based on things like frequency of supplier deliveries, component use and safety stock required to avoid outages. One of the “information loops” regulates the flow of material from supplier to your market, while the other controls material flow from your market to the floor – thus, kanban. The pull signals must be right-sized to ensure adequate quantities of material and components are available to the floor.
The key, note the article’s authors, is to determine the number of supplier-to-market pull (or kanban) signals. So, here’s where it gets geeky, although the formula is really pretty simple:
No. of Signals = ADU x (PTR + TT + RP + PPB) divided by PQ
ADU = average daily use
PTR = partner’s time to replenish
TT = transit time
RP = reorder period
PPB = purchased parts buffer
PQ = pull quantity
As the article states: “The equation allows a manufacturer to determine the size of the pull loop between the purchased-parts supermarket and the suppler.” For example: with an average daily use of 200, partner’s time to replenish of 1, transit time of 1, reorder period of 1, purchased-parts buffer of 1 and pull quantity of 200, the result is a need for 4 pull signals per component:
200 x (1 + 1 + 1 + 1)
200 = 4 Signals
Thus, on an average day, this production environment would experience one pull signal at the supplier, one in transit, one in the purchased-parts supermarket, and one from production control. These signals move regularly between the supplier and the customer to ensure that the purchased-parts supermarket is stocked with the appropriate level of inventory.
Our space is too limited here to parse out the remaining details, but the article ultimately describes the idea of ‘risk pooling’ across various locations, and how firms can reduce safety stock with this methodology by up to 46% compared to traditional methods.
To learn more about this and many more ideas for improving inventory control, look into APICS here for yourself or your team. Every manufacturing company would benefit from their knowledge. To see the full text of this article and a library of this and other APICS articles from current and past issues, become a member, then start here.