By: Sakthi Prasad -- Content Director
31 October, 2021
(Pic Courtesy: ManMohan S. Sodhi)
The lockdowns imposed by countries across the world to curb the spread of COVID-19 infection -- and the subsequent opening up of the economy once vaccines were approved -- jolted global supply chains.
Supply shortages have become the flavor of the season. The global shortage of semiconductor chips that has upended automobile supply chains is likely to be discussed for years to come -- such is the scale of disruption. Semiconductor chips are one of the several types of goods that are experiencing shortages, while prices of goods such as steel, aluminum, and cotton have touched decade highs.
In this scenario, concepts such as Just-in-Time (JIT) and Lean Manufacturing have been called into question because many suppliers in the supply chain have simply run out of stock.
Beroe spoke to ManMohan S. Sodhi, Professor in Operations and Supply Chain Management at Bayes Business School (formerly known as Cass) at City, University of London, to understand the relevance of JIT in these turbulent times. He has written several papers on the supply chain theme and recently published a paper on how to prepare for future pandemics with optimal inventory and capacity. It was 11 a.m. in London when Prof. Sodhi received Beroe’s video call.
Q. The JIT and lean manufacturing concepts ruled the roost for decades as they helped companies optimize costs. However, the disruption caused by COVID-19 related shutdowns and the shortages triggered by the sudden opening up of the global economy has put a question mark on these concepts. Is it time to rethink JIT?
The COVID-19 pandemic has rattled companies worldwide. However, my opinion has not changed, and let me be upfront about it. We should revisit why Just-in-Time was developed. JIT was conceptualized so that a company’s internal processes and those of the suppliers at tier 1, 2, 3, and so on, could all be coordinated like clockwork, and thus, minimize inventory holding requirements. Such synchronizing entailed improving internal processes, removing internal disruptions at the outset, and extending this upstream into the supply chain. For example, if machines are not maintained, it will lead to disruptions. It is not rocket science to say that machines should be well maintained to ensure that these disruptions do not occur. Needless to say, internal sources of variation and disruption should be removed, starting with the company and then moving upstream. Therefore, things can flow from all tiers of suppliers to your company, just in time, thereby minimizing the need for inventory.
Q. The concept was pioneered by Toyota about 70 years ago and things are fine until a big disruption occurs?
Toyota could manage “just in time” because production quantities are expected to be flat and predictable for the subsequent three months. In other words, the number of cars produced per day will be flat for the next several weeks. As an OEM, if your production is likely to be flat, then your suppliers’ production will also be flat. When production is being done on a “flat or predictable” basis for a certain period, then you can plan things better -- for example, when should the truck pick up your stuff and where should they deliver. Therefore, everything runs like clockwork, which makes the system the most efficient, and hence, JIT is very attractive.
Q. How about external disruptions such as COVID-19, Thailand floods, Japanese earthquake, and Fukushima disaster?
Currently, Just-in-Time does not account for disruptions outside the system. Its main idea is to manage all sources of disruptions inside the supply chain but it is not designed for completely unanticipated external disruptions. Therefore, if you have a Fukushima-type disaster or a pandemic of the scale of COVID-19, you would have shutdowns and the resulting disruption.
In JIT, the assumption is somebody somewhere upstream in the supply chain must hold inventory. Thus, when things restart, then that inventory will flow down to the OEMs from wherever it is upstream. For example, it might be iron ore, which is inside the ground, while the steel manufacturer produces steel, followed by rolling of the steel. The supplier will ship rolled steel to Toyota, which then manufactures the car.
Of course, each time a big disruption, such as the current pandemic occurs, JIT is called into question. You ask, how do I recover, and how do I revert to JIT, if that is so great? However, conditions for efficient production and supply chain management currently do not exist. You do not accurately know either the demand level or the supply situation. Therefore, everybody tends to guess what they should do. However, this is a temporary period, a rather long temporary period, but still temporary. Once it is over, we will return to a situation where the most efficient way of production is “just in time” and one way or other, we would be back to where we were.
Q. At the end of the day, someone must hold the inventory, and OEMs would rather prefer someone upstream to hold the inventory because it optimizes cost?
Yes, someone must hold the inventory upstream in the supply chain for JIT to work at a plant downstream, where the manufacturer aims to produce most efficiently. One way to ensure this is for the manufacturer to have the ability to wield power. Indeed, auto OEMs have considerable power and if you have the power, then why would you want to hold inventory? Let somebody else, your suppliers, hold inventory for you. Therefore, whether it is your supplier or your suppliers’ supplier, somebody must hold the inventory for JIT to work.
For instance, in the vendor managed inventory concept, suppliers manage the inventory on your behalf. The question of where to hold inventory in the supply chain boils down to buyer power and cost optimization, which is a very strong incentive for all the players in the supply chain.
In other words, Just-in-Time starts from the point where the inventory is held. If I can explain by way of an analogy, the water must be stored in a tank and flows in a pipe. JIT is the pipe but the water must be stored in the tank. The storage point can be right next to you or a mile up the road, it does not matter as you will keep getting it through the JIT pipe as and when you need it.
Q. As per Beroe’s internal study, the S&P 1200 constituent companies, which capture about 70 percent of global market capitalization, have a stable inventory-to-sales ratio of between 11 and 12 percent over the past four years or so. In the long run, what is the alternative to “stocking up” to manage disruptions?
Besides external disruptions, any company’s supply chain faces several internal disruptions, irrespective of which company you consider. Therefore, you need what is called “just-in-case” inventory. Suppose my supplier is slightly late; I would then contemplate holding a three-day inventory. This just-in-case approach creates costs and inefficiencies everywhere.
JIT preempts just-in-case by ensuring that no other “case” except for the smooth running of production occurs.
True, the problems of a pandemic, floods, or earthquakes exist, which is not planned for and is not in any company’s control. Hence, we need different solutions, perhaps a stockpile or alternate suppliers -- some redundancy in the system for resilience. The idea is once we work things out, we will revert to a stable system and back to JIT.
Even at this time of disruption, companies will eventually ascertain that instead of having inventory three tiers away, they may ensure that it is held one tier or two tiers away until the situation stabilizes.
Q. Can you please elaborate a bit more about the stockpile?
We must distinguish inventory from stockpiles. A stockpile is something you use during an emergency, as opposed to inventory, which you use on an ongoing basis.
Toyota’s efforts to stockpile enough semiconductor chips helped the company overcome supply disruptions caused by the shortage, but eventually, they too were adversely affected because, in the face of a massive disruption, stockpiles have their limitations. Stockpiles cannot be maintained for years together. In the early days of the COVID-19 pandemic, fingers were pointed at the U.S. Strategic National Stockpile as supplies were not enough to meet the demand for personal protective equipment, ventilators, and other materials needed to battle the pandemic and save lives.
For the scale and rarity of pandemic-level public health crises, no national reserve can reliably provide the materials needed from inventory alone. However, for recovery, it is not surprising that Toyota is building a stockpile of chips to ride out the current shortages.
The stockpile is a redundant source of supply, similar to alternative suppliers or alternative modes of shipments. Many companies will perceive the need for stockpiles because of current disruptions, such as chip and labor shortages. Once the disruption ends, the stockpile will not be needed, as cost pressures force you to return to JIT manufacturing.
Q. We earlier spoke about how JIT has been around for seven decades or so, and companies have embraced it because it cuts down inventory and optimizes cost. Besides these two reasons, is there any other strong reason for JIT’s relevance even in the current scenario?
The JIT concept gained prominence in the 70s and 80s because the mass production of consumer goods became quite prominent. This was the era when the standard of living of many people across the world began to improve. I remember when I was a kid, when we purchased our first TV or refrigerator, it was a very big deal. Now, anybody can buy a refrigerator -- thanks to mass production, which cuts down prices for consumers.
If you produce two cars a year, I mean, it does not matter whether you want to produce JIT or not. Mass production is closely linked to Just-in-Time: you could even say that they are two sides of the same coin. Mass production is not going away anytime soon, and thus, Just-in-Time (JIT) is here to stay.