The Smith Group, a U.S. manufacturer of power and hand tools, is just one of many companies that has benefited from the implementation of a Vendor-Managed Inventory (VMI) system in their supply chain. IN VMI systems, the supplier; or in this case, The Smith Group, has control over managing the inventory levels at their retailers. However, in order to establish a VMI system it is necessary to have advanced technological capabilities. For many of The Smith Group’s existing customers, this does not pose a challenge. Unfortunately, some of the smaller distributors do not have the infrastructure to transmit the necessary data to carry out a successful VMI system. To combat this issue, The Smith Group has implemented a Kanban system with the distributors who are unable to support a VMI relationship. The Kanban system, developed by Toyota Motor Corporation in the late 1940s, is an inventory management system that uses a pull strategy to signal upstream when and which inventory needs replacement. The Kanban system is related to just-in-time production, meaning that little to no excess inventory is carried, rather, the inventory is manufactured and stocked exactly when it is needed. Prior to advancements in technology, the Kanban system used physical cards on each product that were collected and relayed to the supplier when sold. Once the cards were collected, the supplier knew exactly which products needed to be replenished at each retail location and could adjust their manufacturing and shipments accordingly. This process reduces the need for inventory demand forecasting on the supplier’s end as well as simplifies the inventory ordering process on the retailer’s end. By implementing this system, The Smith Group is able to better communicate about inventory levels with its smaller retailers, almost on a level that exists with their VMI system relationships.
When, for example, a certain power drill is sold at the vendor, the card associated with this product, which contains relevant information, is collected and relayed to The Smith Group upon the delivery truck’s arrival at the distribution facility. In contrast, a VMI or a modern Kanban system would deliver the information from the cards to The Smith Group via an electronic interface. However, since the smaller distribution centers do not have the technology requirements to do it electronically, the card system provides the next-best method. There are several direct benefits to using this system in addition to easing the inventory ordering and management. The Kanban system provides manufacturers direct access to customer demand trends. Thus, they are able to analyze and react to consumer preferences much more rapidly than in a push-based strategy. Particularly in electronics and technology sectors, this type of information is key to staying ahead of the game and eliminating the production of obsolete goods. Additionally, the distribution facilities are able to save money in several areas. For one, they can cut down on the inventory holding costs. There is also the possibility to reduce the size of the distribution facilities, since they would not be storing excess levels of inventory, which would reduce rent and overhead costs. The supplier is also able to reduce costs by ensuring that they do not produce large quantities of excess inventory that cannot be sold. Another advantage of utilizing the Kanban system is that it reduces waste, which is greatly beneficial to the environment. As with any method of supply chain management, the negatives must also be considered in addition to the positives. Since the Kanban system is not an electronic system, there is always going to be room for human error. One of these are manual entry errors that may cause a disruption in the manufacturing of replacement inventory. There is the possibility that either too few or too many products would be manufactured as a result of this human error.
Another example is lost cards that would result in not getting the product delivered when it is needed because there would be no recognized “demand” for it. By using the Kanban system, the lead time it takes for the delivery trucks to collect the cards that were detached from the sold inventory and transmit them back to The Smith Group would be higher than using an electronic system. If the data was transmitted automatically and electronically, The Smith Group would have much more rapid access to the information. Due to the fact that technology is ever changing and updating, other companies that use an electronic data transfer program could possibly get products to the distribution factory more accurately and in a timelier manner, which would result in more competition. Also by using this pull method, thereby reducing inventory at the distribution factory, there is a greater chance for stock outs if there is an unpredictable surge in demand for a specific power or hand tool. Finally, since The Smith Group is starting to use a made-to-order process, transportation costs may be higher because if their distributor’s inventories are lower and might need to be replenished more often, delivering their products may have to be more frequent. The Kanban card system implies that inventory is managed at a base-stock, or the minimal inventory level required to sustain continuous operations. This is due to the fact that the Kanban system utilizes a pull strategy as opposed to a push strategy. In a push strategy, the manufacturers must forecast future sales based on past trends. The manufacturer produces higher levels of inventory to send to the distributor to “push” the product to the consumer. Although there is a much lower risk for stockouts, the inventory and holding costs are higher. However, in a pull strategy, a company uses current trends and reacts directly to the products being sold and manufactures inventory replacements according to this. Thus, no—or very little—excess inventory is manufactured. Establishing the Kanban system and a pull strategy would give The Smith Group the ability to expand their current production into more customizable made-to-order production. Instead of the push system where they would make many power and hand tools to send to their distributors, the Smith Group would set up an additional communication network between the customers and themselves to analyze customer trends and decide how much of a certain product they will manufacture.
There are different levels of customization that The Smith Group could implement; they could simply produce a certain amount of products, and react to customer purchases and demand by making more of a certain item and less of another, which would be a very basic method of made-to-order production. However, they also could create a more advanced network to allow the consumers more levels of customization. Regardless of what level of customization The Smith Group wants to offer, this idea of made-to-order production is facilitated and simplified through the introduction of the Kanban pull strategy system. The implementation of the Kanban system allows The Smith Group to reduces its inventory and as a result, the distribution facility will also seeing a reduction in the amount of inventory it has to hold. A reduction in inventory will lead to excess storage space in the distribution facility. The distributor then has a variety of options as to what to do with the empty space. One option for the distributor would be to use a smaller facility, which would result in cheaper rent and overhead costs. Another option would be to lease out the extra space in their current facility is not using and generate additional revenue. Lastly, the distributor has the potential to establish new relationships with different manufacturing plants and use the extra space to hold and distribute some of their inventory. The Kanban system, which was developed by Toyota from recognition of the need for an improvement in customer driven inventory management, has provided companies with an extremely effective way of inventory management since its creation.
Although most modern Kanban systems have foregone the card system in exchange for a technology based communication method, similar to VMI, the same principles still apply. This system was particularly useful to The Smith Group and their small distributors because it allowed them to establish a pull-based strategy, which otherwise would not have been possible due to technology barriers. Without additional information about the costs associated with the implementation of the Kanban system, such as the initial costs, the possible increased transportation and manufacturing costs, and the reduction in inventory and holding costs, it is hard to provide a definite recommendation. However, assuming that the costs are not extremely excessive, we would highly recommend using a Kanban pull-strategy system. Particularly for The Smith Group, whose products are not greatly susceptible to drastic changes in demand, which is a major risk for pull-based strategy management, the advantages of Kanban seem to greatly outweigh the risks.
