Time to Rethink JIT?

Fifteen years ago, in ASSEMBLY magazine, I wrote that supply chain managers were ignoring the risks associated with “just in time” inventory management. JIT made a great deal of sense when interest rates were running at 15 percent a year and more. Since then, however, the cost of money has fallen by more than 50 percent, and the savings have become far less significant. At the same time, much of the supply base has moved to the other side of the world, greatly increasing the prospects of catastrophic disruptions to on-time deliveries.

“Not true,” claim JIT proponents. “We factor in supply chain uncertainties. The benefits of JIT are too great, and international air and sea shipping are too robust to fail.”

Today, JIT has gone from aggressive to fanatical. Many factories warehouse only a few hours of parts and materials. Incoming shipments go straight from the loading dock to the assembly line. A hiccup by a single supplier can crash an entire factory, maybe for a few hours but maybe days or even weeks. The savings JIT produces in interest, warehouse space and obsolete components can be wiped out by a single supplier catastrophe. That is especially true in this era of almost-free money.

Some of these risks showed up during the Asian SARS pandemic in 2003. International travel was curtailed, and some shipping issues arose. After a brief flurry of concern, however, matters returned to normal. In fact, the SARS scare introduced even more hubris in JIT circles. “We have faced the worst,” thought supply chain managers, “and emerged unscathed.”

The truth is, we don’t know the worst. The combination of earthquake, tsunami and nuclear crisis in Japan was on no one’s radar, including the nuclear plant designers who believed seawalls for tsunami containment meant there was no need to elevate the generators that would keep cooling pumps functioning if an earthquake ruptured electrical transmission lines. As a species, we always look at the future through the lens of the past; new perils always surprise us.

The truth is, the natural disaster in Japan was more predicable than many. The country sits on the notorious Pacific “Ring of Fire.” It has seen entire cities leveled by earthquakes in the past, and there are Japanese still alive today who remember a catastrophic tsunami in the 1920s. But hubris led their nuclear designers to operate on the premise that seawall engineers had disaster-proofed their reactors.

The real risks of JIT may be immeasurable, but a few insights became apparent less than a week after the Japanese crisis began. GM announced the temporary shutdown of a truck assembly plant in Shreveport, LA, that needs parts from Japan. That, in turn, forced the closure of GM’s engine plant in New York. Other plants will surely do the same. There are rumors that Apple’s much-anticipated rollout of the iPad 2 is being crippled by shortages of memory and other components sourced from Japan.

Japanese suppliers have temporarily shuttered plants because of structural or equipment damage, worker shortages, and damage to the roads and ports needed to get products from the factory to the customer. No one knows how long it will take before a semblance of normality is restored.

The cost of closing a factory or failing to meet demand for a hot new product is substantial. Is it enough to offset the gains accrued from past JIT success? Possibly. But one thing we can be sure of: There will not be a full accounting of the costs, just as there has never been a proper assessment of the benefits.

The handmaiden to JIT has been the winnowing of suppliers. Companies that once had multiple suppliers geographically dispersed now tend to source only one supplier per part or component. Generally, this equates to lower piece price but, once again, introduces higher risk.

Today’s purchasing managers are assessed on a very simple metric-the piece price of goods and materials. The costs of such things as defective products, delayed deliveries or the need for North American personnel to conduct teleconferences in the middle of the night with supplier personnel who do not speak fluent English are not included in the piece price.

The social consequences for North America of “supply chain management” have been serious, too. As more parts were sourced from developing countries, OEMs followed their suppliers to those countries. Being close to the supplier shortened the supply chain and reduced the risk of transportation disruptions, but the migration of manufacturing has hollowed out much of America’s heartland. And, while it is almost certainly advantageous to be close to suppliers, the advantage quickly drops away if the transportation disruptions prevent getting goods to market.

Surely some more moderate form of JIT makes sense. Rather than dock-to-line timing, perhaps keeping a month’s supply of parts and materials on hand makes more sense in terms of risk management. Finding suppliers in more than one region would reduce the pain if part of the globe takes a time-out. And maybe returning production to the economy that buys the output would be the smartest move of all.

Editor’s note: Before “Shipulski on Design,” “Leading Lean,” and “Uncommon Sense,” there was ASSEMBLY magazine’s longest running and most controversial back-of-the-book column, “Unconventional Wisdom” by Jim Smith. A nationally known expert on electronics assembly, Smith never hesitates to question the sacred cows of manufacturing and economics. You can read more from him at his “Science of Soldering” blog http://blog.emsciences.com.