02 May 2020

Just-In-Time Swept by COVID-19?

By Xavier Perrin (xperrin@xp-consulting.fr)

The sanitary and economic crisis we are living for several months have tremendous effects on supply chains worldwide: disruptions in supply, insolvencies, stockouts of strategic supplies (protective masks, respirators, hydroalcoholic gel, etc.). Entire sectors of economy are jeopardized and will probably never recover the conditions prior the crisis, as in the case for the aeronautic industry. One would hope that these disruptions will raise new virtuous behaviors in favor of Environment, which will also have consequences on supply chains. Articles and posts raise quickly about this issue. As often in such circumstances, some authors point fingers at past choices and practices and tell us that they only could lead to current difficulties. Repeatedly in recent weeks, I read that the Just-in-Time approach shows its weaknesses and could only weaken supply chains. This is a recurring speech each time we are facing a major crisis like the crisis which followed September 11th in 2001, or more recently the disaster of Fukushima in 2011.

Even if the Just-in-Time approach has been described for almost 40 years, it is too often associated with the idea of systematically eliminating inventories. Besides, Zero Inventories is the title of a book of Robert Hall published in 1986 and which describes how to implement the Just-in-Time principles of the Japanese automotive industry. This book shook up conventional thinking in showing, for example, that the traditional Economic Order Quantity formula just hid the costs of setups, and that we can produce efficiently with considerably limited amounts of inventory. Unfortunately, the title Zero Inventories, which was probably a choice of the editor rather than of the author, possibly attracted more readers, but also created awkward misunderstandings from the people who did not read the book (And commentators do not always take time to do it!).

In fact, Just-in-Time, which is one of the pillars of the lean approach, do not consider the elimination of all kind of stocks, but of unnecessary stocks. Thus, this suggests that some stocks are useful. I often compare inventories with cholesterol, as it is said that there is good and bad cholesterol. Cholesterol is essential for health, but when in excess bad cholesterol can result in serious diseases. Similarly, inventories are essential for the smooth functioning of factories and supply chains. This is the case for inventories which protect against variations we cannot control. For example, consequences of variability of customer demand, which can be measured but not controlled, can be buffered by safety stocks. In the same way, consequences of yield variability of some sophisticated processes (As some manufacturing processes for semiconductor products) can also be buffered by safety stocks. On the other hand, the Covid-19 crisis showed the consequences of missing hedge inventories, those stocks which are built for protecting against unknown events like the occurrence of a pandemic. The fact of not providing such inventories is a strategic choice that cannot be guided by a Just-in-Time strategy. Even if safety stocks and hedge inventories are necessary in the sense that eliminating them would weaken supply chains, some other stocks are useless in the sense that they weaken supply chains. Such inventories lengthen lead times, decrease cash flow, and hide problems. Such as lot-size inventories which result from the choice (or rather from no-choice!) to favor overproduction rather than reducing setup times. Transit inventories result from the choice of favoring reduced purchasing costs, which, even if they compensate transportation costs, do not consider the cost of increased inventories and the consequences on lead times and their variability.

Thus, lean production and Just-In-Time, by focusing on reducing unnecessary inventories, contribute to the financing of necessary inventories. It is still necessary to make the choice of investing in such inventories, in particular in hedge inventories. And that choice has nothing to do with the adoption of Just-In-Time.

Another point should be reminded about Just-In-Time: when we push for reducing unnecessary inventories, we push in the same time for not seeking high utilization of equipment in order to keep extra capacity which allows to compensate for variability. Reducing inventories while saturating capacities in the same time only weaken supply chains, and even more as so unpredictable is the environment.

Finally, the lean approach allows to create agile processes, for producing goods as well as for designing, developing, and marketing them. And agility is also a necessary condition for resilient and adaptative supply chains we will need ever more after this crisis.

In conclusion, even if the current crisis shows that it is obviously necessary to reconsider current approaches for designing and controlling supply chains, previous approaches should not be systematically set aside, if not denigrated. In particular, Just-in-Time, which is wrongly associated to zero inventories, is more than ever necessary for creating conditions of supply chain resilience by allowing to invest in "good inventories". It also creates conditions for more agile processes for adapting supply chains quickly to unpredictable changes of their environment.

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