Blue Wave Enterprises is a Canadian manufacturer of party products. A new line of birthday candles is selling successfully but not profitable. The production process is fairly but takes 4 days and candles have to retail at a very low price to be competitive. The owner of the company feels that the greatest cost is in keeping 50,000 packages of candles in inventory. She wants to implement a Kanban system to reduce storage costs. The operations manager provides the owner with the following information: Daily demand: 3000 packages of candles Lead time: 4 days Safety stock: 1 day Container size: 250 packages How many Kanbans will be required and what does this mean?
Daily demand: 3,000 packages of candles
Lead time: 4 days
Safety stock: 1 day
Container size: 250 packages
How many Kanbans will be required and what does this mean?
The Kanban system is a system used with just-in-time production (JIT). In JIT production, a firm tries to have the minimum possible amount of materials on hand so that it does not have to spend money unnecessarily on things like storing excess materials. Management in a JIT system attempts to determine how many Kanbans must be moving through the production process at any one time. A Kanban is a unit that is denominated in containers. By finding out how many Kanbans are needed, we determine how many containers of the product (in this case, candles) must be in the production process at any given time.
To find how many Kanbans are needed, we must use the following equation:
# Kanbans = (Demand during lead time + Safety stock) / Container size
In your question you provided us with the following information:
- Daily demand: 3,000 packages of candles
- Lead time: 4 days
- Safety stock: 1 day
- Container size: 250 packages
We must use this information to determine the demand during lead time.
Demand during lead time is determined by multiplying the lead time by the daily demand. In this case, that is 3,000 x 4 = 12,000. So our demand during lead time is 12,000 and our safety stock demand is 3,000.
Now that we have this information, along with safety stock and container size, we can determine the number of Kanbans needed. Using the equation above, (Demand during lead time + Safety stock) / Container size, we find:
# Kanbans = (12,000 + 3,000)/250
# Kanbans = (daily demand + safety stock demand) / container size
So, we can determine that 60 Kanbans are needed, which means that 60 containers of candles will be moving through the production process at any one time.