Why Traditional Kanban Calculations Fail in Volatile Environments

Recent years have seen the extension of “kanban thinking” from the factory floor to entire supply chain networks. However, the traditional calculations used to size kanbans often perform poorly in these new environments, which are characterized by longer leads times and higher demand volatility. This article examines why that is the case, and highlights many of the common pitfalls facing practitioners when implementing kanbans or reorder points (ROPs). Among the issues tackled are why “consumption-based” reorder points are flawed in volatile environments; how companies' attempts to incorporate forecasts in kanban calculations go awry; and how confusion among alternative definitions of service level can lead to excess inventory. Keywords: kanban; reorder point; inventory; service levels; lean; volatility