How the Kanban Inventory System Works to Increase Efficiency

Maintaining appropriate inventory levels can be a constant challenge for retail business owners. Excess inventory incurs storage costs and potential waste, while insufficient stock can lead to costly stockouts. Strategies like lean manufacturing can help you maintain minimum inventory levels, but finding that sweet spot is often easier said than done. Fortunately, the Kanban system offers a solution.

What is Kanban inventory management?

Kanban inventory management is a system used to manage inventory levels and production flow by only restocking when necessary; it relies on a series of colored cards to indicate progress through the production process and signal the need to replenish inventory. It’s designed to optimize the flow of materials through production, minimize waste and ensure efficient use of resources.

The Kanban methodology originated within the Toyota production system (TPS) in Japan in the 1940s, when industrial engineer Taiichi Ohno introduced Kanban—“visual cards” in Japanese—to signal when and how much inventory should be replenished. It was a pull-based system, where items were restocked only as needed. This allowed Toyota to maintain minimum inventory levels, cut waste, avoid excessive lead times, improve manufacturing efficiency, and let customer demand drive production.

What are the rules of the Kanban system?

The Kanban system is based on core principles that help optimize processes, minimize waste, and improve manufacturing efficiency. Here are the three primary Kanban inventory guidelines:

Limit work in progress

Work in progress (WIP) refers to the tasks, items, or activities actively being worked on but not completed. Limiting WIP is a fundamental principle in the Kanban system because it prevents overburdening the production line, reduces multitasking, and promotes focused work.

Maintain minimum inventory levels

Excess inventory ties up valuable capital and resources, which increases holding costs and potential waste. Minimizing inventory can free up cash flow and optimize storage space. Maintaining minimum inventory levels promotes faster product turnover, lowers operational costs, and allows for more flexibility.

Use visual cues

The Kanban system is named for its use of visual signals or Kanban cards—physical or digital visual cues used to represent tasks. As tasks are completed over the course of the production cycle, the corresponding Kanban cards are moved along with them to indicate progress to workers. These cards are crucial in maintaining production flow, prompting the restocking process, and offering transparency.

For example, let’s say you own an ecommerce business that sells standing desks and want to monitor your parts inventory using the Kanban system. You can create a Kanban card for each shipment of parts, including motors, desk frames, and desk surfaces. These cards would be placed on a Kanban board that has columns for each step of production, such as “Incoming from supplier,” “In warehouse,” “Ready for assembly,” “Sold,” and “Shipped.” This way, the whole team can visually track how parts are progressing through the production process, and it becomes easier to identify when inventory is low or if parts are stuck at any stage of the process.

Types of Kanban cards

Depending on the need and context, you can use several types of Kanban systems. Common types include:

Production Kanban

A production Kanban is a type of Kanban card that informs workers in the initial stages of the production process which items to begin manufacturing. For example, if workers on the downstream process for assembling a phone need additional memory chips, they can send a production Kanban back to workers in the earlier stages to collect or assemble the necessary parts.

Withdrawal Kanban

A withdrawal Kanban card is a visual cue that prompts movement of parts to downstream processes to replenish inventory items. In a hypothetical cellphone factory, receiving a production Kanban indicating a need for more memory chips would prompt workers to assemble the necessary parts. Then, they would attach a withdrawal Kanban when the batch of memory chips is ready to be moved downstream by material handlers. Once the downstream workers receive the parts, they remove the withdrawal Kanban.

Express Kanban

Workers on a downstream process send an express Kanban to workers on an upstream process when there is an urgent shortage of parts that must be addressed immediately. By addressing unforeseen shortages quickly, an express Kanban can prevent a manufacturing slowdown.

Emergency Kanban

Emergency Kanban are additional visual signals for issues that require immediate attention, such as equipment breakdowns or defective parts. An emergency Kanban can be used to prompt expedited production or replenishment if, for example, a batch of parts turns out to be defective.

Tips for implementing the Kanban system

Implementing Kanban requires careful organization, buy-in from team members, and some trial and error. Here’s how to set up your Kanban system:

Visualize the production cycle

The Kanban process is all about visual cues. Whether you use physical Kanban cards or electronic Kanban systems, try to visually represent the entire manufacturing process, breaking it down into stages or steps. 

Kanban signals can help you and your employees visualize the entire production and replenishment cycle. Just as important, the visual signals serve as a trigger for actions, such as production or replenishment, at the appropriate time in the production cycle. 

Standardize processes

Clearly defined rules and policies are fundamental to the success of the Kanban system because they reduce confusion, create alignment among team members, and promote consistent and predictable inventory flow. Establish standardized processes and outline roles and responsibilities. Make sure your business’s policies are transparent and adaptable, allowing for both structure and flexibility when needed.

Monitor the production flow

Monitor the movement of items or tasks through each stage of the production cycle. This can help you identify and address sticking points, idle time, and any other inefficiencies that may be slowing down the manufacturing process.

You may even extend the Kanban system up the supply chain to the supplier. Kanban signals for external suppliers indicate when you need them to produce and deliver more inventory items.

Limit work in progress

Set a maximum limit for the number of items or tasks in progress at each stage of the manufacturing process. Consider demand and your team’s capacity. You’ll likely need to experiment to find optimal production flow.

Encourage collaboration

The Kanban system requires team members to rely on one another, as each Kanban task is an important part of the lean manufacturingproduction cycle. Encourage collaboration and solicit feedback by inviting team members to identify issues, propose solutions, and implement changes. 

Aim for continuous improvement

Even once you’ve established an effective Kanban system, be open to ideas to further optimize processes. Whether your supply chains are experiencing issues or you receive feedback from employees managing inventory flow, there are always ways to improve manufacturing efficiency.

Benefits of implementing the Kanban inventory management system

The Kanban inventory management system made a huge difference in improving Toyota’s production process and has since been employed in many successful business ventures. Here are three main benefits of implementing Kanban: 

Optimized inventory levels

Kanban optimizes inventory levels by making sure inventory items are only restocked when needed. This prevents excess inventory from piling up and driving up holding costs.

Increased efficiency

Using the Kanban system can boost efficiency because it focuses on producing for customer demand. Production and withdrawal Kanban cards keep parts or inventory items moving as needed. This increased efficiency translates to shorter lead times, cost savings, and increased adaptability. 

Better workflow visibility 

The visual signals used in the Kanban system show what tasks need to be done and the progress made in completing them. This transparency allows teams to collaborate more effectively and makes it easier to identify sticking points.

Challenges of implementing the Kanban system of inventory management

Implementing Kanban can be worthwhile for many businesses, but it may not be appropriate for every successful business venture. Determining appropriate minimum inventory levels and WIP limits can be challenging, especially in industries with varying demand or unreliable supply chains. If relative stability in those areas is possible for your business, slowly transition to the Kanban system, communicate clearly with employees, and expect some trial and error.

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