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In the context of modern manufacturing, Inventory is one of the largest types of Waste according to Lean philosophy, tying up capital, space, and increasing the risk of obsolescence or damage. The biggest challenge for managers is how to maintain continuous production while reducing inventory to a minimum. The fundamental solution lies in transforming from the traditional material management model — the Push System — to the core Lean inventory reduction philosophy: the Pull System, coordinated by the legendary Kanban tool.
1. Exposing Inventory Waste: Why is Inventory the “Hidden Enemy” Destroying Profits?
In accounting, inventory is often considered an asset. But in Lean thinking, inventory is Waste—specifically the second type of waste (Inventory) in the classic 7 Wastes. Reducing inventory is not just a goal but a mandatory action to optimize capital.
- The Hidden Costs of Inventory: Excessive inventory entails a series of hidden costs that many businesses often overlook: carrying costs (warehousing, electricity, labor), depreciation and obsolescence costs (especially in the technology and fashion industries), auditing costs, and, most importantly, the opportunity cost of capital being “buried” in the warehouse.
- Inventory Hides Problems: Inventory acts as a “buffer,” masking fundamental process issues such as equipment breakdowns, quality defects, or excessively long setup times. When you are forced to reduce inventory, these problems immediately surface, compelling you to address them.
The goal of Lean is to reduce work-in-process (WIP) and finished goods inventory to create a continuous, transparent, and efficient material flow.
2. The Push System – The “Troublemaker” Preventing Inventory Reduction Goals
The Push System is a traditional material management method that operates based on forecasts and fixed production schedules.
- Operating Mechanism: Each production stage operates based on a predetermined demand forecast or schedule, then “pushes” work-in-process to the next stage, regardless of whether that stage is ready or has an actual need for it.
- The Core Problem: Because production is based on forecasts (which are often not perfectly accurate), the Push System almost always leads to the waste of Overproduction, which in turn results in Inventory waste. When Stage B cannot process all the products from Stage A, work-in-process (WIP) accumulates between the two stages, directly contradicting the goal of inventory reduction.
- Consequences: Increased storage costs, higher risk of producing obsolete products, and complicating the business’s efforts to reduce inventory.
3. The Pull System – The “Just-in-Time” Philosophy and Inventory Reduction Goals
The Pull System, in contrast to the Push System, operates based on the actual demand of the customer or the subsequent stage. This is the foundational element for achieving JIT and inventory reduction.
- Operating Mechanism: The preceding stage only produces or supplies materials if and only if it receives a request signal from the subsequent stage (internal customer). “Customer demand” (at the final stage) “pulls” the material requirement backward through the value chain.
- Direct Benefits: By limiting production based on signals, the Pull System prevents the waste of Overproduction most effectively, thereby eliminating the root cause of excess Inventory and enabling inventory reduction.
- Creating Flow: The Pull System creates a stable, continuous, and synchronized material flow, forcing every stage to coordinate smoothly, thereby strongly supporting the goal of inventory reduction.
The stark difference between these two systems is the key: the Push System starts with a forecast, while the Pull System starts with Demand. This determines the organization’s ability to achieve inventory reduction.
4. Kanban – The “Brain” Coordinating the Pull System and Ensuring Inventory Reduction
Kanban (literally meaning “signal card” or “visual signal”) is the most important visualization and control tool of the Pull System, developed by Toyota. Kanban serves as the physical mechanism to control the amount of Work-in-Process (WIP) and reduce overall inventory.
- The Role of Kanban: Kanban acts as both a Production Order and a Movement Order. When the subsequent stage consumes all the material in a Kanban bin or area, the card (or electronic signal) is sent back to the preceding stage, commanding the production or supply of the exact amount of material used.
- The “WIP Limit” Principle: Kanban limits the maximum amount of inventory at each point in the value chain by the specific number of cards in circulation. This creates strict discipline and is the most direct method for achieving excess inventory reduction.
- Visualization: The Kanban system provides excellent Visual Management, making it easy for every employee to recognize: Which materials need to be produced? Which stage is experiencing a bottleneck? This is a crucial factor for continuously achieving inventory reduction.
5. Guide to Calculating Kanban Quantities for Effective Inventory Reduction
Applying Kanban is not just about placing cards in bins; it requires precise calculation of the necessary number of Kanbans (Kanban Loop Size) to ensure continuous flow while still achieving inventory reduction to safe levels.
Objective: Calculate the number of Kanban cards ($N$) required to ensure the subsequent stage never runs out of material, while simultaneously limiting WIP to achieve inventory reduction.
Basic Kanban Calculation Formula:
Where:
- $N$ (Number of Kanbans): The number of required Kanban cards (or the number of Kanban bins). This is the decisive factor for the work-in-process (WIP) limit and your ability to achieve inventory reduction.
- D (Demand Rate): The consumption rate of materials by the subsequent stage (e.g., Number of parts used per hour/day).
- T (Lead Time): The complete cycle time of a Kanban loop, including:
- Processing/production time for materials at the preceding stage.
- Material waiting time.
- Material transportation time to the subsequent stage.
- Kanban card processing time (administrative).
- $C$ (Container Capacity): The number of parts contained in each container or Kanban unit (the smallest lot size).
- S (Safety Stock Factor): Safety stock factor (typically from 0.1 to 0.5, equivalent to 10% to 50% safety inventory) to buffer against unexpected fluctuations in demand or Lead Time. The smaller this factor, the higher the potential for inventory reduction.
Practical Example:
Suppose Company A wants to calculate the Kanban for Part X:
- D (Demand): 500 parts/day.
- T (Lead Time loop): 0.5 days (12 hours).
- C (Container Capacity): 50 parts/bin.
- S (Safety Factor): 0.2 (20%).
Substituting the numbers into the formula:
Result: 6 Kanban cards are required. This means the maximum work-in-process (WIP) for Part X at this point is 6 cards x 50 parts/card = 300 parts. If you attempt to reduce inventory below 300 parts (for example, by using only 5 cards), you will face the risk of a shortage.
6. Continuous Inventory Reduction Strategy Through Kanban
The purpose of calculating $N$ is not to establish a fixed number, but to create a limit that must be continuously challenged and used to reduce inventory over time.
6.1. The “Pull Down” Method (Kanban Pull Down)
After the Kanban system has stabilized, businesses need to implement Kaizen (continuous improvement) activities to gradually reduce the number of Kanban cards ($N$).
- Focus on $T$ (Lead Time): Any effort to reduce Lead Time ($T$) directly reduces the number of required cards ($N$). Kaizen activities should focus on:
- Reducing Setup Time (SMED): Reducing machine changeover time.
- 5S Improvement: Reducing time spent searching for materials or tools.
- Reducing Defects: With fewer errors, processing time and Lead Time are reduced accordingly.
- Reducing Safety Stock ($S$): As processes become more stable and less volatile, you can confidently reduce the $S$ factor (e.g., from 0.2 to 0.1), resulting in an immediate reduction in inventory.
6.2. Changing Container Capacity (C)
Using smaller containers (reducing $C$) is also a way to reduce average inventory, even if the number of Kanban cards ($N$) remains the same. This requires higher discipline in material transportation and handling.
7. Practical Challenges When Transitioning to a Pull System
The transition from Push to Pull is a major cultural shift, not just the installation of Kanban cards and bins. To succeed in reducing inventory, businesses must be prepared to face the following challenges:
- Cultural Resistance: Many managers and employees are accustomed to having a large inventory buffer to create a sense of “safety” or “busyness.” Forcing a reduction in inventory will create psychological pressure.
- Process Stability: The Pull system is highly sensitive to disruptions. If a machine breaks down or a process experiences a quality defect, the entire line will stop immediately (Stop the Line). This is the core difference: a Pull System forces you to solve problems and does not allow them to be covered up by inventory.
- Training and Commitment: Requires the entire team to be thoroughly trained in Lean thinking and Kanban principles. Leadership commitment to supporting the resolution of problems exposed when reducing inventory is the decisive factor.
- Accurate Data Analysis: Calculating $N$ and $T$ requires precise data on cycle times and actual demand. Using vague data will lead to setting incorrect inventory limits, causing the inventory reduction goal to fail.
Conclusion
Transitioning from a Push System to a Pull System is the most critical step in implementing the Just-in-Time philosophy and achieving Leanness. The Kanban tool serves as the perfect material control mechanism to execute this philosophy. By calculating and continuously challenging the required number of Kanbans, businesses not only reduce inventory but are also forced to continuously improve processes, thereby enhancing overall operational performance. The goal of inventory reduction is not a short-term campaign, but a part of the Kaizen culture—continuous improvement.
