In the story of how the modern world was built, Toyota stands as the mastermind of a significant advancement in industrial efficiency. The Japanese automaker pioneered so-called just in time manufacturing, in which parts are delivered to factories in the same way as reducing the need to stock them.
Over the last half century, this approach has attracted global trade in industries far beyond auto. From fashion to food processing to pharmaceuticals, companies have adopted Just in Time to be agile so that they can adapt to the changing market demands while cutting costs.
But the upheaval events of the past year have challenged the virtues of parsing inventories, while some industries have gone too far, leaving them vulnerable to disruption. As the epidemic has disrupted factory operations and sowed chaos Global shipping, Many economies around the world have been affected by the scarcity of a vast range of goods – from electronics to wood to clothing.
Just In Time is running late in a time of extraordinary turmoil in the global economy.
“It’s like a supply chain,” said Willie C. Shih, an international business expert at Harvard Business School. “In the race to get the lowest cost, I have focused on my risk. We are at the logical conclusion of all this. “
The most prominent expression of too much reliance on just in time is found in the industry that invented it: vehicle manufacturers crippled by one Lack of computer chips – Important car components produced mainly in Asia. Without enough chips in hand, auto factories from India to the United States to Brazil have been forced to block assembly lines.
But the breadth and persistence of scarcity shows the extent to which the idea of just in time has come to dominate professional life. This helps explain why Nike and other apparel brands struggle to stock retail stores with their merchandise. This is one of the reasons that construction companies are having trouble purchasing paints and sealants. It was a major contributor to the tragic shortage of personal protective equipment at the onset of the epidemic, which left frontline medical staff without adequate gear.
Just in time is nothing short of a revolution in the business world. By keeping inventory thin, major retailers are able to use more of their space to display a wider range of goods. Just in time has enabled manufacturers to customize their wares. And lean production has cut costs significantly, while allowing companies to move quickly towards new products.
These qualities have added value to companies, fostered innovation and fostered business, ensuring that Just in Time will retain its strength long after the current crisis ends. This approach has enriched shareholders by generating savings that companies have distributed in the form of dividends and share buybacks.
Nevertheless, the shortage raises questions about whether some companies have been too aggressive in harvesting savings by reducing inventories, making them essentially not ready for any troubles that may arise.
“It’s an investment they don’t make,” said William Lezonik, an economist at the University of Massachusetts.
US chipmaker Intel has outlined plans to spend $ 20 billion to set up a new plant in Arizona. But that’s less than the $ 26 billion that Intel spent on share buybacks in 2018 and 2019 – money that the company could use to expand capacity, Mr. Lezonik said.
Some experts believe the crisis will change the way companies work, prompting some to stock more inventory and build relationships with additional suppliers as a hedge against problems. But others are doubtful, believing that – similar to previous crises – the search for cost savings will again trample other ideas.
Chaos on the sea
The decline in the world economy stems from factors beyond the lean list. The proliferation of the Kovid-19 has sidelined port workers and truck drivers, disrupting the unloading and distribution of goods manufactured in factories in Asia and reaching the ship to North America and Europe.
The epidemic has slowed down the operation of the sawmill, causing Shortage of wood Which has accelerated homebuilding in the United States.
Winter storms that shut down petrochemical plants in the Gulf of Mexico have left major products in short supply. Andrew Romano, who runs a sale at a chemical company outside Philadelphia, has grown accustomed to telling customers that he should wait for his orders.
“You have a confluence of forces,” he said. “It just waves through the supply.”
The dramatic increase in demand made pet food scarce and grape-nuts cereals all but disappeared from American store shelves for a time.
Some companies were particularly exposed to such forces, as they were already running thin as the crisis began.
And many businesses have combined their dedication to Just in Time with reliance on suppliers in low-paid countries such as China and India, making any disruption in global shipping an immediate problem. When something goes wrong it increases the damage – such as when lodged in a huge vessel. Suez Canal This year, the closure of the primary channel connecting Europe and Asia.
Mr. Shih, a trade expert at Harvard Business School, said, “People adopted that kind of lean mentality, and then they applied it to supply chains with the assumption that they would have low-cost and reliable shipping.” “Then, you have some setbacks for the system.”
An idea that went ‘too far’
Just in time was an adaptation of the turmoil in itself, as Japan gathered to recover from the devastation of World War II.
Due to the dense population and lack of natural resources, Japan sought to conserve land and limit waste. Toyota abandoned warehousing, while choreographing production with suppliers to ensure parts were delivered when needed.
By the 1980s, companies around the world were following Toyota’s production system. Management experts promoted Just in Time as a way to boost profits.
In business today
“Companies that run successful lean programs not only save money in warehouse operations but enjoy greater flexibility,” McKinsey announced in 2010 Submission For the pharmaceutical industry. It promised savings of up to 50 percent on warehousing if customers adopt a “lean and mean” approach to supply chains.
Such claims have evaporated. Nevertheless, one of the authors of that presentation, a Not Mick, a McKinsey partner based in Germany, now says that the corporate world is more than prudent.
“We went too far,” Mr. Ellick said in an interview. “The way inventory is evaluated will change after the crisis.”
Many companies acted as though manufacturing and shipping were devoid of accidents, Mr. Ellick said, while failing to account for the trouble in their business plans.
“There is no interruption risk word of any kind,” he said.
Experts say the lapse represents a logical response from management to encouragement in sports. Investors reward companies that produce an increase in their return on assets. Limiting goods to warehouses improves that ratio.
City Supply Chain Specialist Manmohan S. of the University of London Business School Sodhi said, “To the extent you can reduce inventory, your books look good.”
According to one, from 1981 to 2000, American companies reduced their inventories by an average of 2 percent annually. Study. These savings helped finance another shareholder-rich trend – the growth of share buybacks.
In the decade leading up to the epidemic, American companies spent more than $ 6 trillion to buy their own shares, nearly tripling their purchases according to one. Study By Bank for International Settlements. Companies in Japan, Britain, France, Canada and China increased their buybacks four times, though their purchases were a fraction of their US counterparts.
Repurchases reduce the number of shares in stock circulation, increasing their value. But the benefit for investors and executives, whose salary package includes a huge allocation of stock, is what the company may have done with its own money – investment to expand capacity, or come at the expense of stocking parts is.
These costs became apparent during the first wave of the epidemic, when major economies, including the United States, found that they lacked the ability to quickly produce ventilators.
“When you need a ventilator, you need a ventilator,” Mr. Sodhi said. “You can’t say, ‘Well, my stock is overpriced.'”
When the epidemic began, car manufacturers reduced chip orders in the hope that demand for cars would decline. By the time he realized that demand was reviving, it was too late: months were needed to increase production of computer chips.
“The impact on production will only worsen before it gets better,” said Jim Farley, Ford’s chief executive, who has long since adopted lean manufacturing. Stock analyst On 28 April. The company said the shortage would probably derail half of its production by June.
The least affected automaker is Toyota. Since the founding of Just in Time, Toyota relied on suppliers clustered close to its base in Japan, making the company less susceptible to distant events.
‘It all cascade’
Conshohocken, Pa. In, Mr. Romano is literally waiting for his ship to arrive.
He is the vice president of sales at Van Horn, Metz & Co., which buys chemicals from suppliers around the world and sells them to factories that make paints, inks and other industrial products.
In general, the company lags behind perhaps 1 percent of its customers filling orders. On a recent morning, it could not fulfill a tenth of its orders as it waited for supplies to arrive.
The company could not secure enough for a particular resin that it sells to manufacturers making construction materials. The American supplier of the resin itself lacked an element that it buys from a petrochemical plant in China.
One of Mr. Romano’s regular customers, a paint manufacturer, was stopping ordering chemicals because he could not adequately locate the metal cans used to ship his finished product.
“It’s all cascade,” Mr. Romano said. “It’s just a mess.”
There was no need for an epidemic to reveal the risks of excessive dependence on Just in Time combined with global supply chains. Experts have warned of its consequences for decades.
In 1999, an earthquake shook Taiwan, stopping computer chip manufacturing. The earthquake and tsunami that shattered Japan in 2011 shut down factories and disrupted shipping, causing a shortage of auto parts and computer chips. In the same year, flooding in Thailand destroyed the production of computer hard drives.
Each disaster prompted the need for companies to promote their inventions and diversify their suppliers.
Multinational companies continued to operate each time.
The same consultants who promoted Lean inventory properties now preach about supply chain flexibility – a discussion of this time.
Simply expanding warehouses may not provide a fix, said Richard Lebovitz, president of LeanDNA, a supply chain consultant based in Austin, Texas. Product lines are increasingly being adapted.
“The ability to predict which inventory you should keep is difficult and difficult,” he said.
Finally, there is a possibility of the business furthering its leanness, for the simple reason that it has made a profit.
Mr. Shih of Harvard Business School said, “The real question is, ‘Will we stop pursuing low cost as the sole criterion for business decision?” “I doubt that. When consumers are not in trouble they won’t pay for flexibility.”