Just two weeks ago the news media was filled with pictures of a gigantic container ship that ran aground and blocked the entire width of the Suez Canal for almost a week, delaying nearly $10 billion in cargo a day. This vulnerability in the world’s supply chain prompted the New York Times to proclaim that we have an “excessive reliance on just-in-time manufacturing.” This overreliance on JIT, the Times went on to say, is also the cause of global shortages of protective medical equipment during the first wave of the Covid-19 pandemic.
Unfortunately, over the past year we have experienced no shortage of shortages. Initially it was masks, ventilators, and toilet paper; more recently it has been vaccines, semiconductor chips, and many other goods, from puppies to bicycles to lumber.
And with each retail stockout the popular press has jumped to the same erroneous conclusion: the shortage is caused by “low inventories.” Further, these low inventories are somehow caused by “JIT manufacturing.” So pervasive is this vilification of JIT that last summer LEI wrote a rebuttal to a Wall Street Journal article blaming JIT for the shortage of paper towels.
All of these misconceptions share a common misunderstanding. It’s important to note that JIT is not only a production As cost-effective as JIT production might be, it is entirely insufficient as a provisioning system because it stops at the factory.system, but what Womack and Jones have called a provisioning system. In other words, 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.
The Joys of JIT
When done well, JIT or lean manufacturing is a wonderful thing that can bring many benefits to workers, owners, and direct customers (distributors and wholesalers). It creates cost savings by organizing operations to require less inventory. It asks suppliers to deliver small batches of materials and parts more frequently so that the factory does not need to carry excess raw materials. JIT balances and coordinates its production lines to minimize its work in process. And it ships finished goods to customers frequently in small batches as well.
But as cost-effective as JIT production might be, it is entirely insufficient as a provisioning system because it stops at the factory. Since the majority of the goods we consume in developed countries are produced halfway around the world, we’re not only reliant on the capacity of factories (JIT or otherwise), but also on a giant global transportation and logistics network to provide us with the things we need in a timely way.
Unfortunately, the popular press has focused on the more visible “low inventory” aspect of JIT production and assumed that all stages of the supply chain are in on the act. The popular narrative (found, for instance, here and here) is that private firms have for too long been pursuing low-cost strategies through cheap overseas labor and maintaining “lean” inventories. This pursuit of efficiency is, the story goes, causing our supply chains to become “fragile” and vulnerable to disruptive events such as a pandemic. Companies should choose instead to be more “resilient” and hold more inventory for emergency events.
One of the problems with this argument is that global inventories are not low. Looking at the Ever Given stuck in the Suez Canal, it is hard to overlook the fact that the ship is as long as the Empire State Building is tall and can carry nearly 20,000 TEUs (twenty-foot equivalent units). That’s a lot of inventory.
The Ever Given’s size is typical for container ships on the Asia to Europe and transpacific (Asia to North America) routes. Global container shipping capacity has increased by 2500% since 1980, growing in lockstep with the offshoring of manufacturing. It’s estimated that 80% of the world’s goods now travel by ocean. The ratio of inventory to sales for US businesses has been rising steadily since 2010, and is currently back to the same level it was in 2000. Inventories are no lower than before; they’ve just been increasingly transferred to floating warehouses.
Seeking More Plausible Causes for Shortages
A more plausible reason for shortages is simply the long and complex nature of our global supply chains. Just as JIT production prefers suppliers to be physically nearby, so too do our factories need to be geographically closer to consumers if they want to deliver the right thing at the right time on a reliable basis. When products have to move from a distant overseas factory to your house by way of a long network of handoffs between ports, ships, trucks, trains, depots and warehouses, all run by different companies with different capacities and prioritization systems, the probability that something, somewhere, will be delayed is very high, especially during times of high demand when the system is under intense strain.
We’re seeing this play out in the rolling bottlenecks seen in the news: one day it is a port labor shortage, the next it is a production capacity issue; after that it’s a shortage of ocean containers, and then a shortage of onshore warehouse space. More often than not, the right thing is not arriving at the right time. The press is correct to call our supply chains fragile, but it is wrong to attribute this to low inventories or any sort of JIT strategy. It’s due to long and complex supply chains—the exact opposite of JIT.
We should stop thinking about JIT as an inventory management strategy and start thinking about it as a system to increase customer satisfaction through shorter lead times.If we keep seeing the issue as one of JIT “low inventories” then, it seems, all we have to do is stockpile goods around the globe and we’ll be fine. Given the fact that globalization has already created more floating stock than ever before, asking private companies to take on even more landside inventory “just in case” might have some problems associated with it. As Jim Womack wrote back in 2006 (at the time of the avian flu scare), “thinking that companies on their own will maintain a buffer stock of finished units adequate for a true emergency is…naïve. They would go bankrupt if they tried.” He counters with a proposal for governments to keep emergency stocks of the most vital supplies as a sort of social insurance program for occasional but highly disruptive events. For less essential goods, JIT can be used as an effective way to improve manufacturing capacity, flexibility and responsiveness to fluctuations in consumer demand.
Similarly, Tjorben Netland argues that we should stop thinking about JIT or lean as an inventory management strategy and start thinking about it as a system to increase customer satisfaction through shorter lead times. Lean is not part of the problem, Netland argues, but should be part of the solution.
Lean Should Be Part of the Solution
Of course, one of the most direct ways to increase customer satisfaction and shorten lead times is to shorten the length of the supply chain itself. Pandemic shortages have sparked renewed discussions around the ideas of re-shoring, insourcing, lean-shoring, near-shoring or right-shoring manufacturing. Higher labor costs can be offset by lowering the amount of floating inventory, decreasing lead times, and taking advantage of all the cost savings resulting from a lean management system.
Doing some lean math—that is, calculating the total system costs, including the cost of long and unreliable lead times, rather than just calculating the per-piece production costs in isolation—can make domestic or regional production viable in many circumstances. Include carbon emissions, human health, and national security considerations as part of this math, and it makes even more sense to bring some manufacturing—especially for essential emergency supplies—closer to the end-consumer.
JIT production may not be the problem, but, on its own, it cannot be the solution either. Only once it is combined with a shorter and equally JIT transportation network can we create a truly consumer-focused provisioning system. With some creative thinking, our future supply chains can be both more efficient and resilient at the same time.
