When I trained as an accountant in the early 1980’s Just In Time (JIT) was put forward as the efficient way of doing things. Get what you needed delivered as you needed it and not a moment earlier. This cut down on inventory and all the associated costs and freed up cash for other things. It was a great idea forty years ago when products were simpler and your suppliers were usually just a short drive away. In fact, one of the requirements that we were taught for JIT was that all of your suppliers should be no more than one hour away. Today, the world has moved on and yet so many supply chain “experts”, lean advisers and finance people are still living in the 1980’s. Let’s look at why Just In Time is no longer effective.
There is a simple rule that cannot be broken. In order to sell something, it must be complete. It doesn’t matter how small the component (as we are currently seeing with the microchip trauma) if it’s not there, then you can’t sell the finished goods. Supply chains may be complex, but the problems associated with them are very simple and fall into one (or several) of the following three areas:
Transportation – the good or service is available, but you can’t get it. The further your supplier is from you then the more likely this is to happen. Problems fall into highly predictable ones like the war in Ukraine to unpredictable ones such as the tsunami in Japan. Either way you know that JIT will fail and so you need to hold inventory to cover the longest possible period when you will be unable to get the goods or services. Not efficient but effective.
Production- the good or service is unavailable as the producer is unable or unwilling to make it. Once again, the further the supplier is from you, the more likely you are to have a problem and the more stock you must hold. The loss of the supplier’s factory or service centre is a very real possibility and if you are going to go down the cheap goods and services route you need to employ a more expensive inventory policy.
Competition – the good or service is available but competition from other areas makes it unavailable to you. The current microchip problem is an example of this where the chips are used in a diverse range of goods. If you are going to fill your product with technology, it’s advisable to make sure you can actually get it. By the way. The microchip shortage was totally predictable. It happened when Apple launched the iPod and sucked up the production of chips, making them unavailable for USB sticks. Few things are new.
For decades now the supply chain industry has had it relatively easy. Goods and services have been quickly and easily available from all around the world. There has been little or no reason to hold inventory especially if you have a short-term view. We have had few big natural disasters, few wars that have affected the West and global production has been on the increase.
Now is the time to wake up and smell the coffee. Climate change and political instability make the ideas of the 1980’s irrelevant. Too much of our business and personal life relies on good supply chains and covid (another predictable event) revealed how poor supply chains are for so many essential areas.
It’s time to stop the nonsense of supply chain policies that we have seen over the last thirty odd years, stop the supply chain industry which has seen whole businesses, university departments and consultants built around the theories that have let us down so badly and realise that change is required. The financial community is just as bad. I have lost track of the number of times that finance and lean practitioners have talked about inventory as if it were the work of the devil. The trouble is, holding the right stock level requires a really good understanding of the business and not just looking at the numbers.
When shortages happen, it’s not those who have a JIT policy that survive but those who hold the correct level of inventory. Government needs to encourage the banks and other financial institutions to provide finance to businesses that want to protect against these future problems. Unfortunately, that involves really understanding the business and the required inventory levels. Understanding a specific business is something that external advisers (especially banks) are notoriously bad at. Systems and AI can’t help here, what you need are people who really understand, and they are few and far between. JIT is efficient and productive but in the modern world it is not effective.
This is the first of the supply chain issues we must address and fast.
If you run your own business think on. There is an opportunity here which most of the big businesses will ignore. I am speaking with a number of businesses that have identified possible areas of shortage and are protecting themselves hoping that their competitors don’t.
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