“It’s the management theory that controls your life,” writes futurist and journalist Antony Funnell (@antonyjfunnell), “though you’ve probably never heard of it — or given it a moment’s thought.”[1] What is it? According to Funnell, “It’s called Just-In-Time and it’s made some corporations and business moguls very rich. But critics say the toll it’s taken on our economy and society has been too great and we now need an alternative to avoid future shocks.” Noted supply chain expert Yossi Sheffi (@YossiSheffi), Director of the Center for Transportation & Logistics at the Massachusetts Institute of Technology, adds, “Pandemic-related issues such as product shortages have raised questions about the viability of ‘just-in-time’ supply chains and the role lean strategies may play in the strained availability of manufacturing components and consumer goods. The calls for more ‘just-in-case’ planning have grown as additional shortages have flared in the wake of the Omicron variant, and companies are reported to be weighing whether they should keep bigger buffer stock to help manage fluctuations in supply and demand in a highly volatile commercial environment.”[2] Those comments beg the question: Is the Just-In-Time (JIT) Supply Chain’s Time Over?
Maintaining Just-In-Time Principles
Peter Atwater (@Peter_Atwater), President of Financial Insyghts and an Adjunct Professor at William & Mary, writes, “The pandemic era is now raising concerns about the just-in-time supply chain model. The shortage of semiconductors from Taiwan, the stranding of the enormous Ever Given in the Suez Canal, and now the dearth of 40-foot metal containers have sent tsunami-like waves through global production. For want of chips, the highly complex, interdependent system of US car production has been badly disrupted.”[3] Atwater believes the rise of JIT supply chains was tied closely to how corporate funds were being used and stockholder value created. He explains, “Overlooked in today’s discussion is the shared history of securitization and just-in-time supply chain management. Both have their roots in the 1980s pivot towards maximizing shareholder value. Overnight 40 years ago, minimizing capital and the use of one’s own balance sheet (while maximizing efficiency and the use of others’ money) became requirements for banks and businesses alike. … In both models, component parts were aggregated as fast as possible and then dispersed around the globe.”[3]
Atwater fears that tighter monetary policies and Just-In-Case supply chains will encourage inflationary pressures. He explains, “If production strains begin to subside, and input supplies normalize, current fears should abate. Still, the return to a more just-in-case supply chain will be an inflationary headwind ahead. Businesses will feel little choice but to try to pass along the higher costs of lower efficiency to consumers.” Sheffi agrees with Atwater that JIT principles shouldn’t be abandoned simply because the supply chain has experienced an unprecedented series of disruptions.
Sheffi observes, “One argument is that the just-in-time discipline enables companies to cut inventory carrying costs even if that comes at the expense of the integrity of their supply chains. In other words, companies are said to be willing to sacrifice customer service in their pursuit of cost savings. But much of the criticism stems from a misunderstanding of how the business strategy works and the benefits it can deliver in the production of goods.” Sheffi argues that one of the virtues of a JIT supply chain is that it inevitably improves product quality. He explains, “[The aim of JIT] isn’t simply to minimize inventory costs but to improve product quality. A system built around a carefully synchronized supply of components cannot tolerate a high level of defective parts or other quality-related issues. The JIT system, then, highlights quality deficiencies, which are then corrected.”
Sheffi also argues that JIT, done right, strengthens rather than weakens supply chain resiliency. He explains, “Certainly if there is one quality that needs improvement in supply chains, it is that they need to become more resilient. But JIT also reinforces resilience because it strengthens the relationships along the supply chain between companies, their suppliers and customers. Close relationships allow companies to react collaboratively to supply-chain disruptions.” In normal times, it would be difficult to argue with Sheffi’s reasoning; however, these are not normal times and goods are not flowing evenly, despite supposedly strong relationships between stakeholders.
The Way Ahead
As the debates about what a “new normal” will look like continue to rage, supply chain professionals are left to deal with today’s daunting challenges. Despite concerns that Just-In-Case strategies will continue to fuel inflationary tendencies, many companies are desperate to find the resources they need to stay in business. Journalist Timothy Aeppel (@TimAeppel) reports that some businesses are so desperate to find resources they have abandoned any overarching strategy and are simply buying everything they can.[4] One business owner told Aeppel, “Ditching the ‘just-in-time’ inventory model in favor of building up supply to buffer stocks only made sense.” He believes COVID-19’s emergence has upended that model because “many businesses found the system left them stranded when orders that normally took weeks suddenly took months to arrive.”
Sheffi admits, “Companies are learning important lessons about how to manage inventories that might cause them to rethink how they apply JIT.” At the same time, he warns that abandoning JIT principles could have negative long-term consequences. He explains, “For now, companies are building inventories to meet strong consumer demand. Over ordering of parts and finished goods is rife, and the impact is spreading through supply chains. This trend will halt when demand collapses, as it inevitably will, and companies will be saddled with bloated inventories. When this happens, companies will again come under pressure to review their inventory-management practices. They should keep in mind that the benefits of just-in-time remain just as important now as they were before today’s disruptions, and should continue to guide well-designed supply chains in a post-pandemic world.”
Concluding Thoughts
The pandemic has caused supply chain professionals to examine every part of their supply chain, including the overarching strategies that drive their decision-making. The pre-pandemic JIT strategy, which already had some critics, received an excessive amount of criticism when supply chains began to snarl. Phil Ledbetter, Principal Consultant at Toyota Template, believes this criticism is unwarranted. The problem, he believes, is that the JIT strategy is often implemented poorly. He explains, “The pandemic has glaringly exposed the major problem with lean today: the inability to understand and properly implement a Just-In-Time system. It’s widespread. Companies serious about gaining a competitive advantage over their competition will do the work required to properly implement a Just-In-Time system.”[5] Lean operations expert Ken Eakin goes even further. He believes JIT is a hero rather than a villain, even in today’s messed up supply chain world.[6]
Like Ledbetter, he believes JIT has been implemented poorly in most cases. The reason for this, he asserts, is that most organizations look at JIT as a production system, not an end-to-end strategy. He explains, “JIT is about providing end-use consumers with exactly what is needed, when it is needed, with the right level of quality and features, in the right quantity, at the right price. A provisioning system starts with a production process; but it ends with a consumer located far from the factory, encompassing the transportation, distribution, wholesaling and retail aspects of the supply chain as well. Seen from the end consumer’s point of view, our global provisioning system is anything but JIT.” Given this holistic view of JIT, he concludes, “With some creative thinking, our future supply chains can be both more efficient and resilient at the same time.”
Footnotes
[1] Antony Funnell, “The Just-In-Time supply chain theory has conquered the world — but has it gone too far?” ABC Radio National (Australia), 10 August 2020.
[2] Yossi Sheffi, “Commentary: Pandemic Shortages Haven’t Shattered the Case for ‘Just-in-Time’ Supply Chains,” The Wall Street Journal, 30 January 2022.
[3] Peter Atwater, “The troubling parallels between supply chains and securitisation,” Financial Times, 31 August 2021.
[4] Timothy Aeppel, “Just-in-time gives way to ‘buy everything you can’ as U.S. supply disruptions persist,” Reuters, 28 January 2022.
[5] Phil Ledbetter, “Just-in-Time’s Skewering Is Undeserved,” IndustryWeek, 11 June 2021.
[6] Ken Eakin, “Just-in-Time Is the Hero, Not the Villain,” IndustryWeek, 21 April 2021.
