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Making your ERP System live with your Kanban System

This Kanban Control Board has lead to reduced inventory, transactional workload and shortages at this small manufacturer. As materials are consumed, kanban cards are returned to this central board for re-order by purchasing.

When it comes to ensuring you have the right materials in the right place at the right time, kanban systems are a simple and highly effective tool. Kanban systems work for three primary reasons :

–      they are simple to operate (once set up),

–      replenishment is triggered by actual usage of parts rather than theoretical and error prone forecasts

–      Inventory is controlled physically rather than through an ERP system This eliminates the problem of inaccurate inventory records in the ERP system leading to the wrong materials being purchased at the wrong time.

The outcome of a well designed and maintained kanban system is that your problems with part shortages are likely to disappear. The effort required to manage materials can be dramatically reduced. However in most manufacturing businesses, inventory is the largest component of working capital and a major business asset. Maintenance of  accurate inventory records is therefore critical to maintaining an accurate balance sheet and avoiding large “profit busting” stock write offs. Inventory is usually recorded in an ERP system. Kanban’s great benefit is that it uses a visual trigger based on physical stock levels to trigger replenishment. Therefore how do you connect these physical transactions with what is being recorded on your balance sheet via your ERP system and avoid large inventory errors and write offs?

The Keep it Simple – the “Parallel Universe Approach”

I think “keep it simple” has been a message in most of the blogs I have ever written and this is no exception. If you ask your ERP vendor how to make kanban work, he or she will give you a software solution (and probably one that involves a forecast). This immediately negates the three major benefits of Kanban systems that I have outlined above and you should reject this option. The simplest solution is what you cold call a “parallel universe” approach. This means that the kanban system and the ERP operate in “parallel universes” with the minimum number of checks and reconciliations to keep inventory records reasonably in line.

 

For each supplier a monthly “blanket order” can be raised. This will include an approximate quantity that you expect to consume for the month, however the supplier should know that this is not a forecast and he is not to produce and supply this quantity. The actual quantity supplied is determined by the supply of kanbans to the supplier. Each day (in the case of daily deliveries) the supplier will supply exactly the amount determined by the kanbans he has received. The supplier provides a “proof of delivery” (e.g. a delivery docket) with each delivery and your stores team then reconciles this document against the goods received and the kanbans. At the end of the month the supplier invoices for the quantity actually supplied and this is then reconciled against the goods received. The purchase order is then adjusted to reflect the actual quantity received and closed out.

To record consumption in this simple system, a back flush is used. This means that as finished goods are completed and transferred to inventory, the ERP system automatically deducts from inventory a quantity of raw materials corresponding from the quantity of finished goods produced, based on the bill of materials.

My (controversial) suggestion for work in progress is not to record this in the ERP system at all and aim to have “single level” bills of materials that just record the raw materials that are required in the finished goods. Work in progress can be accounted for through a periodic stock count. Most accountants will blanche at this suggestion and then admit that their WIP inventory records are never accurate, are a constant cause of problems and adjustments and add a huge additional transactional load. I can hear the screams of an army of terrified accountants at the idea of not recording WIP, however there are few points to remember. Firstly, we are not removing all control from WIP. On the contrary, we are putting in place a lean system (a kanban system) which very tightly controls the location the quantity and the production of WIP. The level of WIP will not exceed the number of kanbans in circulation. Secondly, very few companies I have dealt with manage to maintain accurate WIP inventory records anyway. This is because production recording in the ERP almost always lags the actual progress of production (some times by a whole day). As a result, by the time WIP Inventory is created in the ERP system, it has already been physically consumed in production, meaning the WIP records are never accurate anyway.

The “parallel universe” approach does require regular cyclic stock counts (perhaps monthly or bimonthly to ensure that the kanban system and the system inventory do not get too far out of alignment.

Tighter Control – for Nervous Accountants

Most large organisations are going to struggle to accept my “parallel universe” method. Also if  internal process lead times are long (which you should be trying to reduce) and WIP value is high, you may not be able to live with single level bills of materials. In this case you will need to integrate your kanban system more tightly in to your ERP.

Fortunately this is not particularly difficult, although it can add some administration time and some lead time in to the processing of purchase orders and production orders compared to the simple system described above. It may also require some software changes, which are usually costly and can take a long time to implement.

In this system material kanbans are routed via the purchasing department. For each kanban a purchase order is raised on the supplier or else kanbans for  a particular supplier are accumulated during the day and purchase order raised for all the materials required from that supplier (this batching increases the lead time, but raising a PO for every kanban may lead to a huge number of orders, which may add to administration cost). The important rule is that nothing can be ordered unless a kanban is triggered.

This system can be further improved if kanban cards are barcoded. In this case scanning the barcode on the card triggers a PO (or preferably a purchase requisition against a PO). This purchase requisition or order can then be emailed directly to the supplier.

In either case, when the goods are received they are also received on the system and the PO (or requisition) closed. The supplier is required to supply the exact kanban quantity so there should always be a match between the quantity ordered and delivered.

For work in progress, kanban cards can be routed via the production office and each production Kanban can be converted in to a production order in the ERP system. Often several kanbans will be accumulated so a batch of the WIP component can be produced. Typically this production order is attached to the kanban card(s) and sent to the upstream process for production of WIP. Item When the WIP batch is completed and returned to the line then the production order is separated from the card and returned to the production office to be closed.

This process can also be streamlined by the barcoding of the kanbans and production orders. When the kanban is triggered, scanning of the card creates a production order, then scanning of the materials or the production order back in to location closes the production order.

In terms to finished goods, when they are completed and receipted in to inventory, just the top level parts (the components and sub assemblies that go in to the final assembly) are backflushed, since the kanban system is already managing the consumption of upstream parts.

Again regular cyclic counts are recommended to ensure that stock accuracy is maintained.

Another tip is to make sure that it is not possible to “cheat” the system by scanning a single kanban card multiple times. Allowing this practice will lead to a complete loss of control of your inventory.

What About the MRP and the Forecast?

Neither of these systems rely on a forecast or the use of the MRP functionality in your system. It is also important that you don’t overlay MRP, production planning or scheduling tools over the top of the kanban replenishment systems, as this is likely to lead to conflicts, confusion and poor system performance. If your system is designed correctly, the kanban system should ensure that you always have the plants you need when you need them without reference to the forecast.

Remember that your kanban system is not “set and forget”. A understanding of monthly forecast demand is needed to ensure that you adjust the kanban system for changes in demand (e.g seasonal changes.). If demand is increasing you might increase the number of kanban cards in circulation, while when demand is falling, cards can be removed from the systems. Many companies use “temporary cards”, usually printed in a different colour to build inventory above the normal level (e.g. for a promotion). These cards are then removed from the system once this additional inventory is consumed and the cards returned to purchasing.

Summary

As I have explained there are different approaches that can be applied to maintain accurate inventory levels in your ERP system, while operating a kanban system for replenishment. A key points to remember is that no inventory management system is “set and forget” all systems require discipline, clear process rules and accountabilities and regular cyclic counts.