Can we now admit that just-in-time production systems dependent on far-flung suppliers involves great risk?
For at least 25 years, I have been writing that the short-term savings achieved by off-loading manufacturing to the cheapest supplier are accompanied by potentially fatal perils. No one paid any attention. Now, the chickens have come home to roost.
JIT is one of many ideas adopted by American companies when the Japanese seemed to be accomplishing through management what they didn’t pull off at Pearl Harbor. Authors of books like The Art of Japanese Management and fad-driven consultants got rich telling American executives to tear up the old playbook and become more like Toyota and Panasonic. Japanese companies didn’t actually operate the way the Western experts claimed, and the fad died along with the collapse of the Japanese economy in the early ’90s. But JIT endured, even thrived.
The principal advantages of JIT included savings on interest, warehousing and obsolescence.
Back in the ’80s, the cost of money was very meaningful. Double digit interest rates were normal. That is no longer true, even if the Federal Reserve is increasing rates in the face of inflation. Basically, money has been free to the point where companies actually took on debt to buy back shares. Debt to drive up share prices may be good for executives who are paid in large part through share options, but it undermines the first reason for JIT today.
Warehouses to store inventory certainly cost money to build and maintain, but industrial land tends to be cheap. The new chaos in supply chains has everyone clamoring for storage space to keep contingency inventory—in other words, the reverse of JIT. As with most things now, shortages of labor and construction materials mean the new buildings will cost much more and take longer to erect than in the past. The new mania is for JIC (“just in case”). Welcome to the 1970s.
The JIT fear about inventory obsolescence makes sense. Disposing of components no longer needed does take a hit on the bottom line. Still, isn’t balancing supply and demand what logistics people are paid to do?
The fundamental weakness of outsourcing production (all outsourcing, not just JIT) starts with purchasing management. More often than not, purchasing manager evaluations are based on piece price, which excludes shipping costs. Even when an enormous portion of imported supplies are sitting in oceanic traffic jams or overcrowded rail yards rather than factories, transportation costs can be ruinous. A glitch at a foreign supplier (an earthquake, a fire, an epidemic, the collapse of a shoddy factory building) means really expensive air delivery rather than a cheap trans-Pacific container trip. These days, however, even the proverbial slow boat from China isn’t cheap; the cost to ship a 40-foot container by sea has increased by 122 percent compared with what it was before COVID—and that applies only if a container and a ship are even available.
Even the supply of goods we have always regarded as absolutely secure is now iffy. In mid-February, four crucial border crossings from Canada to the U.S. were closed because of unprecedentedly un-Canadian behavior. Demonstrators have used cars, semitrailers and even farm equipment to block border crossings at Windsor, Ontario; Emerson, Manitoba; Coutts, Alberta; and Surrey, British Columbia. The protests were sparked by truckers who oppose Canada’s new rule requiring them to be fully vaccinated when crossing the Canadian-U.S. border or face a two-week quarantine. Their protests have since drawn supporters resisting other COVID-19 preventative measures, including mask mandates, lockdowns and restrictions on gatherings. (The Ontario Trucking Association condemned the actions. Funding for the blockades seem to be provided by interests outside Canada.)
Be that as it may, the protests underscore how a small number of people can expose the weaknesses of JIT. And yet, hard-core JIT advocates point to COVID as a unique and short-term problem that is, in some instances, not a problem at all. For manufacturers with market power verging on monopolies, shortages are actually turning out to be profitable; every outfit that can is taking advantage of shortages to jack up prices. By and large, big consumer goods companies are enjoying record profits. Smaller manufacturers are in a different boat (so to speak).
We can hope that COVID will wane as a massively disruptive factor, though the virus keeps surprising us. Some have deemed the COVID pandemic a “black swan” event. But how rare are black swan events? The 2002-04 SARS epidemic should have taught lessons that clearly weren’t learned. That outbreak infected more than 8,000 people from 29 different countries and territories, and resulted in 811 deaths worldwide. Those numbers are paltry compared with COVID, and yet the SARS epidemic nevertheless caused considerable disruption to trans-Pacific trade. Tsunamis, typhoons, earthquakes and any number of other natural catastrophes have the potential to throw supply chains into disarray again. So would armed conflicts, such as occupation of Taiwan or naval battles in the South China Sea. None of those events are highly probable, but they’re not impossible.
Ultimately, the only question that really matters is, were the savings worth the upheaval? Does JIT primarily benefit top executives paid on the basis of short-term performance or is it a solid long-term strategy? My own feeling is that JIT has been overrated because of defective cost accounting and failure to consider social and financial changes over the past 40 years. The results have probably been a mixed bag: great in some cases, seriously painful in others.
Management consultants thrive on change. Has any multinational management consultancy ever told a client to “stay the course”? Consultants drove implementation of JIT and global supply chains, but that’s now a mature model. They need a new model. Just-in-case strikes me as perfect for their purposes.
The global supply chain wasn’t created in a day, nor was JIT. And they won’t be unwound overnight. But it has never been more clear that rigid JIT is ill-suited to new global conditions. The time is right for more emphasis on JIC.
Editor’s note: Jim Smith began work in electronics assembly in 1965 and founded Electronics Manufacturing Sciences in 1981 to teach soldering as a unified science. Thousands of engineers, technicians and managers worldwide have attended his "Science of Soldering" classes. Jim’s articles have appeared in more than 100 publications worldwide. His "Unconventional Wisdom" column appeared monthly in ASSEMBLY Magazine for more than 10 years and he remains a regular contributor to the magazine. For more information, visit www.emsciences.com.
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