THE SMITH GROUP

The Smith Group is a leading U.S manufacturer of high-quality power and hand tools, such as electric drills, hammers and so forth, and a major competitor to ATW*. Like ATW, Smith enjoys a very successful partnership with their distributors and dealers, who provide the majority of their revenue, and like, ATW, Smith has always had VMI# (Vendor-Managed-Inventory) agreements with their large distributors. Smiths small distributors, however, have not traditionally had electronic data transfer capability necessary to implement VMI. To overcome this, however, Smith implemented a Kanban system with many of the small distributors. In this approach, the Smith Group is imitating the Kanban approach developed by Toyota to govern the flow of material through a plant. In the Kanban system used by Toyota, production is triggered by a demand through the use of cards. This is also the approach taken by Smith. When delivery trucks arrive at distributors facility, they collect all the cards that were detached from items sold by the distributors. This provides the Smith group with information about the customer demand that they can use in their production and distribution planning. The Kanban approach designed by the Smith group is a clever way of implementing an approach similar to VMI strategy without the need for electronic data transfer (EDI). The system provides Smith with almost real-time information about customer demand without the need for EDI. A careful analysis of the card system used by the Smith group suggests that it effectively manages inventory at the distributor level. Indeed, in this periodic review environment, the optimal inventory policy is known to be a base-stock policy. Interestingly, the card system implies that inventory is managed based on a base-stock level, thus effectively reducing distributors inventory cost.

The system may allow the Smith Group to switch to a make-to-order environment further reducing inventory cost on the manufacturing side. In fact, the key concept behind the Kanban approach developed by Toyota is a pullbased process. The make-to-order strategy will make the Smith group supply chain a pull-based system, and hence a more responsive supply chain.

Discussion Questions
1. What is the advantage to the Smith group of implementing the Kanban system described in the case? 2. Explain how the card system implies that inventory is managed on a basestock level. 3. How might the system allow the Smith group to switch to a make-to-order environment? 4. What is the risk of the Kanban system for the smith group? 5. If the Kanban system is going to allow the Smith group to reduce its inventory, what is the impact on the distributor? What are the distributors going to do with the extra space? Note: * ATW American Tool Works is a leading U.S manufacturer of highquality power and hand tools, such as electric drills, hammers, and so forth. The company has manufacturing facility all over the world, and its main market are in Europe and North America. Products are sold through distributors and dealers or directly to home owners and tradesmen. The relationship between ATW and its distributors and dealers is through VMI agreement.
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VMI - Under a VMI (Vendor Managed Inventory) agreement, a supplier takes

full responsibility for maintaining stock of its products at a customer's facility. Source: Designing and Managing the Supply Chain, Concepts, strategies and Case Studies David Simchi-Levi