JIT is taking plenty of punches. At recent conferences I have heard speakers accuse “Just in Time” of causing shortages of canned soup, diesel fuel, and baby formula.
A recent survey of 400 business decisionmakers by SAP found that almost two-thirds are moving from “just in time” supply chains to “just in case” supply chains featuring more stored inventory. An SAP executive explained, “Over the last couple of decades, the ‘just in time’ approach traded resiliency for efficiency and lower costs, which in turn made the supply chain fragile. The pandemic and the snowball effect of related disruptions exposed this fragility, which has organizations refocused on resiliency.”
Listening to those who blame JIT, I mostly hear complaints that contemporary supply chains have gone too far in reducing inventories. We need more stock in various back rooms they claim. This angle is especially emphasized by those pushing the so-called “Just In Case” approach.
There is evidence for reduced inventories. According to US Census Bureau surveys (see chart below) prior to 2002 the ratio of retail inventory to sales was usually above 1.6 to one. Between 2002 and 2008 the ratio declined to about 1.5. After an inventory surge — also-known-as demand destruction — early in the Great Recession, the ratio fell below 1.4 before recovering to about 1.5 for most of 2015-2019.
Clearly these aggregated data can obscure significant product-specific variations (and tell us next to nothing about upstream stocks). But if you perceive (as I do) that JIT has been an increasingly common characteristic (aspiration) of contemporary supply chains, these data suggest that for the last two decades JIT has been roughly predisposed toward a 1.5 to 1.0 retail inventory to sales ratio. In other words, for every three units expected to be consumed there is a well-demonstrated tendency for two more units to be on the shelf or in the “back room” (and more are supposed to regularly arrive).
Not enough? Too much? If not enough, how much more should be stored just-in-case? Just in case of what? A sudden demand for one-fifth more than ever before (as some products experienced in March 2020). Losing one-fifth of production capacity (as with refining capacity between 2019 and 2021). A weeks-long loss of Mississippi River barge flows or Suez Canal container flows or a long-term rail strike or… name your threat. We have also seen that increased inventories increase financial and operational vulnerabilities in case of lost demand… as many US retailers have recently learned.
Just-In-Time is not — should not be — an inventory minimization strategy. That is a misleading goal and risky measure. JIT inventory management is one element in a whole-system process to better calibrate supply with demand. JIT is part of a flow optimization strategy — involving production, procurement, distribution, inventory, sales, consumption, and more — to better ensure delivery of what is needed, where it is needed, when it is needed, at a price that consumers can afford, and at a cost consistent with sustainable capacity.
The interplay of these variables can be treacherous. Failure to deliver what is needed when and where it is needed suppresses potential financial outcomes — and opens opportunities for competitors. Consistent failure to deliver what is needed will threaten the survival of the enterprise. Depending on the product, failure to deliver what is needed can threaten lives. Regularly delivering more than is needed wastes resources, increases overall costs, reduces potential financial margins, and diverts constrained assets — human, financial, operational, and more — that could be used to more effectively fulfill higher priority needs.
It is wasteful — and in many cases, practically impossible — to establish buffer stocks sufficient to fulfill high volume, high velocity demand in the aftermath of worst-case events (more). Blaming insufficient buffer stocks for pandemic-related supply chain challenges is analogous to blaming too few dining room chairs for problems in the kitchen (or grocery store or garden) or the arrival of sixty unexpected guests. The prescription is not to abandon JIT, but to ensure that whole-system planning and development deploy JIT disciplines to mitigate worst case risk. How this is done depends a great deal on the nature of each product and patterns of demand. There are, though, three strategic factors that — so far — I have found to be universally applicable.
Diversity of players and places across demand and supply networks enhances structural resilience. Avoid single points-of-failure. Instead of concentrating production or distribution or other throughputs in one place, invest in portfolios of critical capacity (more and more). Control related marginal costs through active management including strategic specifications, standardization, and interchangeability.
Distance is directly relevant to potential costs and time. Capacity closer to dense demand can mitigate possible delays and enhance supply velocity. But diversification still applies. Having all our eggs in any single henhouse (seismic zone or hurricane alley) amplifies the potential threat of the most unlikely fox.
Demand matters most. Too many supply chain decisionmakers watched demand crash between March and May 2020 and apparently could not see around the corner. Demand shifted dramatically, but did not disappear (see second chart below). The most successful firms understood their consumers (and suppliers) well enough to adapt to these shifts (and ongoing volatility). In many cases inventory ratios were suppressed by accelerated demand and higher sales. This is a happy problem.
Diversification of supply chain capacity will almost always involve marginal costs compared with maximized concentration. Proximity to diverse demand clusters will involve variable costs and some increased marginal costs related to labor rates, real estate, and other local conditions. Deep understanding of and creative engagement with demand emerges from sustained investments.
Non-resilience is also costly. In 2020 research by the McKinsey Global Institute found:
A single prolonged disruption can destroy half—or almost all—of a company’s yearly profits, depending on the industry. Based on those results and the probability of actual occurrences, we estimate that, on average, companies can expect disruptions to erase almost 45 percent of one year’s profits over the course of a decade. These are not distant future risks; they are current and ongoing patterns. On top of those losses comes the additional cost of rebuilding damaged physical assets, not to mention the risk of permanently losing market share to competitors that are able to sustain operations, recover faster, or seize on a crisis to innovate successfully.
Just In Time is a rational tactic that for seventy plus years has reduced wasted time and physical resources even as it has facilitated speedy, affordable fulfillment. As with any tactic JIT can be deployed strategically or stupidly. Stupid is as stupid does — too often the result of myopic management measures. Smart strategy requires an expansive sense of space, time, and behaviors. Trite but true (even if Sun-Tzu did not say it): Strategy without tactics is the slowest route to victory, tactics without strategy is the noise before defeat.