What is Kanban?

Kanban is a Japanese term that refers to the 'just-in-time' inventory method's signal to a supplier to send more inventory.

How Does Kanban Work?

Just in time (JIT) is an inventory management method whereby materials, goods and even labor are scheduled to arrive or be replenished only exactly when needed in the production process. Toyota Motor Company developed JIT in the 1950s. JIT is often referred to as a 'pull' system, whereas traditional inventory methods are often referred to as 'push' systems or 'just-in-case' management.

The goal of JIT and kanban is to improve product quality by keeping only enough inventory on hand to meet immediate production needs. In order to effectively employ JIT, a company must accurately forecast demand. JIT's encouragement of planning, simplification and standardization is aimed at reducing production errors and, by extension, encourages the limitation of the number options a product has. These methods rely on kanban communication, but eliminate the expense of housing idle materials, and lower the costs of defective products, wasted space, extra equipment, overtime, warranty repair and scrap.

Why Does Kanban Matter?

Kanban speeds the production process, thereby eliminating long lead times and improving delivery performance. It works best for companies using repetitive manufacturing functions.

Possible indicators of a company's use of kanban methods are high inventory turnover ratios and high asset turnover ratios. Low inventory balances mean a company's choice of inventory accounting methods has minimal impact.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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