A Kanban inventory is oftentimes seen in conjunction with Lean Manufacturing and Just-In-Time philosophies. The purpose of a Kanban inventory system is to minimize inventory levels, and to keep materials at hand when needed in e.g. production lines or production cells. Any given inventory should ideally only hold the amount of e.g. raw materials and parts that will keep production flowing, where orders for new materials should only be issued when these materials are actually needed.

 

Production at both internal and external suppliers should therefore only be initiated, when customers or linked production lines demand new materials or finished products. Excess inventory that is not needed immediately, and hence put in stock, is in this view regarded as waste, and will only add costs to the products supplied by the company.

 

Kanban is the Japanese word for "card". This "card" can be seen as the authorization for the next production of products, parts or materials to begin.

In a Kanban inventory, a card will appear at the level of reordering. For instance, an inventory of a certain spare part may have a card placed on top of containers in the inventory, where each container contains a specific amount of e.g. spare parts. When a container has been emptied, the card at the top of the next container is reached.  This card signals that a new order of parts must be placed to other production lines or suppliers. The card will then be given to internal or external suppliers, physically or electronically, which will signal that production of this part or product must begin.

 

The Kanban inventory therefore tries to maintain a constant flow of production, and tries to "pull" inventory through the shop floor based on actual customer demand. Likewise, Kanban inventories try to minimize the waste of excess inventories, where no production will be initiated before a specific customer order penetrates the shop floor.

 

However, this system often uses some amount of safety stock, that can potentially absorb variability en e.g. quality or production times from suppliers.

The exact size and numbers of Kanbans in an inventory in front of e.g. the final assembly line can be calculated this way:

 

Kanban Calculation - optimum number of Kanbans (containers) in given inventory

 

Number of Kanbans in Inventory =	Demand during lead time + Safety Stock
	Container Size (Based on EOQ)

 

EOQ = Economic order quality

EOQ is an inventory-control technique that minimizes the total of ordering and holding costs.

Link to the use of EOQ formula here

 

Example:

Company X sells bicycles that are made to order. In the production line's final assembly line, the seat of the bicycle is mounted. Every bike is, as said, made to order, and the company wishes to know how many Kanbans should be put in the inventory of seats.

 

Daily demand = 1000 seats

Production lead-time = Wait time + Material handling time + Processing time = 4 days

Safety stock = 1 day

Container size of seats (Determined on EOQ basis) = 50

 

Number of Kanbans in Inventory =	1000 + 250	=  5
	250

 

In this example, five Kanbans (containers) will be in circulation in this particular Kanban inventory with seats.