Is It Time to Say Goodbye to the Just-in-Time Supply Chain?
April 21, 2022 |
The C2FO Team
In a time of disruption, more people are questioning the wisdom of just-in-time strategy. But it’s not dead yet.
COVID-19 has upended how we live, work, play — and shop. The pandemic has snarled the global supply chain, leading to some empty shelves in stores, limited inventory of must-have items and ultimately higher costs for end users.
Some of these supply chain problems can be attributed to the widely popular “just-in-time” strategy, in which goods and materials are shipped to factories or stores right when they’re needed, reducing the need to store inventory.
This is a management philosophy that has generated profits for many industrial sectors across the world, but could it be time to rethink just-in-time? Do we need to reinvent our supply chain strategy as the world still reels from a global pandemic, armed conflicts in Europe and Russia, and trade wars between major economies?
The origin of just-in-time supply chains
While US automakers engaged in early use of just-in-time shipping, Toyota arguably elevated the strategy to its highest form. The main impetus behind Toyota’s unique approach to just-in-time was Taiichi Ohno, a longtime Toyota worker who climbed from the factory floor to the C-suite offices. After World War II, Toyota was struggling as a company against competitors and almost went bankrupt. The business was dealing with an inefficient manufacturing process — specifically the waste that came with the high cost of storing parts and raw materials.
To solve this problem, Ohno examined how supermarkets dealt with their inventory. For example, when customers buy almost all the red bell peppers in the store, managers quickly restock that item. Items that customers hardly buy, such as gourmet fig jam, are restocked at a lower frequency. Hence, the demand rate of an item is related to the resupply rate.
Ohno decided to implement this method to the car production process, giving rise to the famous Toyota Production System, a unique management philosophy and practice that had at its heart a just-in-time process. Parts were made only when they were required, then sent to the production line shortly before they were used.
Factory workers used cards (also known as kanban) to keep track of the production process and to trigger certain actions, such as replenishing materials or parts.
Ohno was so successful that he eventually was promoted to executive vice president in 1975. His books on manufacturing — “The Toyota Production System” (1978), “Workplace Management” (1984) and “Just-in-Time for Today and Tomorrow” (1988) — became essential reads to supply chain gurus.
People have taken enormous inspiration from Ohno and Toyota by implementing just-in-time in many sectors. Knowledge workers have also taken the concept of kanban and applied it to personal and professional time management.
Pros of just-in-time
Supply chain managers have found that just-in-time offers several benefits compared to other approaches:
- Reducing storage inventory of parts and materials to just what’s required at any given time reduces storage fees. As a result, a business might be able to reduce the number of warehouses it rents or owns — or even eliminate them altogether.
- Reducing storage inventory also prompts businesses to devote more space to other uses instead, like manufacturing, thereby increasing production. Instead of stocking up and managing inventory, more of the workforce can focus on making goods or helping customers.
- Under just-in-time, manufacturers can have enhanced control over the production process and be more responsive to customer demands. For example, a company operating under just-in-time can quickly ramp up production of a suddenly popular toy. Just-in-time also allows manufacturers to make custom products or have a more varied product line.
- A more efficient production and supply process operating under just-in-time reduces costs overall. These cost savings can be passed on to the consumer. This makes a company’s products more affordable, hence increasing market share against competitors.
- When just-in-time is coupled with sourcing materials or parts from lower-cost countries such as China, Vietnam or India, this can further lower costs to end users and generate more profit for the business at the same time.
Cons of just-in-time
In a time of upheaval, the cons of a just-in-time strategy become obvious, but even during stable times, it can be a challenge to manage:
- Manufacturers must accurately forecast consumer demand for their products.
- If converting to a just-in-time method, managers need to rethink their whole production and supply chain process — from receiving raw materials to production to finished product. And this requires time, money and buy-in from workers to implement this strategy.
- Along the supply chain, managers may need to negotiate new terms with suppliers because just-in-time requires raw materials to be provided with minimal notice.
- Under a just-in-time regime, business managers may need a smaller amount of materials from suppliers. A smaller amount of raw materials or parts may require vendors to enact a minimum order requirement. And a smaller order would have a higher cost per item versus a larger order.
- The just-in-time process is vulnerable to outside disruptions such as fires, equipment breakdown, labor issues and, of course, a pandemic. If you source materials or parts from another country where a major incident happens, this may snarl your supply chain.
The viability of just-in-time in today’s world
After the pandemic and the Russia-Ukraine war led to a run of supply chain disruptions, some business experts are saying the age of globalization is over, and just-in-time, which has benefited from globalization, will need a serious rethink or retrench.
The changes may require some businesses to maintain a larger supply of inventory and materials on hand. Others might need to cultivate relationships with a wider, more diverse pool of suppliers. This is already happening with some semiconductor manufacturers building factories outside of Taiwan, a major chip producer.
Some experts argue that too many businesses leaned too heavily on just-in-time, building it into every link of their supply chains and assuming that low-cost and reliable shipping would always be available.
This was too optimistic. Knut Alicke, a McKinsey & Co. partner based in Germany, told The New York Times that businesses should have known that there would be “mishaps” in the manufacturing and shipping process and baked the potential disruption into their business plans.
After the last few years of disruptions, some supply chain experts and managers are looking at strategies to make the supply chain more resilient. These include automation technologies, micro-fulfillment centers, scenario planning, enhanced risk assessment, built-in redundancies and other solutions, Reuters reports.
The future of just-in-time
Even though just-in-time has suffered a hit to its reputation in recent years, many experts doubt it will go away anytime soon.
Maybe there will be some movement away from lean inventory and an increase in “near shoring” or “reshoring,” according to Reuters, but these changes will take decades. It’s just too hard to restructure supply chains overnight.
Investors and shareholders also love the profits from the savings generated from just-in-time practices. Over the long run, they argue, just-in-time will beat other models in terms of overall costs.
Also, customers expect variety and custom products, something that just-in-time models excel at compared to other management processes. It’s just too good to abandon.
The bottom line
The pandemic exposed some of the weaknesses of just-in-time supply chains, which could lead more businesses to hedge their bets and maintain greater supplies of inventory. Increasing your levels of working capital — something that C2FO can assist with — can equip your business with the funding you need to increase your level of investment.
But there’s a reason why just-in-time has been a winning strategy for nearly a century. Experts think it’ll be with us — in some form — for a while longer.