When Winter Storm Uri1 hit Texas in February of 2021, it crashed all the state’s systems. It did grave damage to the state’s unusual power grid, but it also stressed manufacturers, retailers, and customers. It did so in part because American business has for some time relied on what is called just-in-time (JIT) logistics.
What have crises taught us about the utility and the limitations of JIT logistics? What needs to be changed to retain the virtues of the method? How can organizations insure themselves against JIT’s drawbacks? According to logistics experts, the key is to understand what JIT really means.
Disasters, Damned Disasters, and Supply Chain Disasters
The approach that grew into JIT was pioneered by the Japanese car company Toyota2 in 1938, so it’s not new. JIT prescribes, in essence, that you eliminate waste. Your warehouses should contain what you need now, not everything you could ever need. Understanding your company’s needs, what must arrive, when and from where is integral. Sounds great. So what could be the problem?
The problem is what happens when decision-makers want the simplest possible guiding concept and ignore the fact that no aspect of life is easy, and no part of what we do is accomplished with the snap of a finger, Avengers notwithstanding.
So if decision-makers prioritized short-term gains over sustainability, they paid the price when, among other things, the COVID-19 pandemic struck. Few will forget the panic that ensued when toilet paper, hand sanitizer, personal protective equipment and ventilators, chicken and other foods, and even lumber went missing. This problem extended to the vaccines when they were finally rolled out.
The shortages were so extreme that U.S. President Joe Biden eventually evoked the Defense Production Act to, in the words of Shayan Karbassi of Lawfare,3 “bolster vaccine production, boost the availability of at-home and point-of-care virus tests, and increase the supply of critical shortages in personnel protective equipment such as masks, shields and gloves.”
It wasn’t just the pandemic and Uri that brought us face-to-face with the limitations of JIT. Any emergency, from Western wildfires4 to hurricanes5 in the Southeast, creates supply chain problems. Despite the persistence of fantasies to the contrary, these disasters are not the same things that have always happened. They have been increasing for years and will continue to increase for years to come. As the planet’s climate continues to warm, scientists expect ongoing increases6 in both the frequency and severity of environmental disasters.
A Recipe for Disaster
Supply chain disasters have two elements.
First, there is the disaster itself. Second, there is a misinterpretation of what JIT means. JIT specifies that you do not store materials just because you can. Instead, store what you need and order the rest as the occasion demands. But JIT often gets misinterpreted to mean “retain only the supplies you need in a given moment,” which is shortsighted.
“There should always be a balance in maintaining your supply chain,” said Rosemary Hua, Global Head of Retail and CPG at Snowflake: “Just-in-time versus just-in-case.”
JIT, in other words, should incorporate significant amounts of realistic contingency planning, and for that planning to make sense inventory cannot be simplistically bare-bones, in sole service to an imagined quarterly bottom line. It has to allow for the effects of ever-more-common disruptions. After all, when is a company that provides anything from clothes to food to medicine more important than during a crisis?
“What is needed is a re-education of the real meaning of just-in-time, and that’s what has surfaced here,” said Glenn Steinberg,7 EY Global and EY Americas Supply Chain Leader for Ernst & Young. According to Steinberg, prior to the intersection of the pandemic and climate crises, “Companies always operated just-in-time with mostly zero inventory. That term was taken literally. It’s actually figurative and zero doesn’t mean no inventory; it actually means operating with zero excess inventory over safety stock levels. So, those that suffered are the ones who only relied on just-in-time without having the right level of resiliency built into their supply chains.”
“The minority of clients that are proactive were using just-in-time principles, but in a way that works during the pandemic,” said Lisa Anderson, President of the LMA Consulting Group.8 “As a decision-maker, I need to have a certain amount of safety stock, but I will replenish that as we take orders, and we’ll replenish those reserves just in time. But 80% of the companies out there are definitely in a world of hurt.”
In addition to this fundamentalist application of JIT, another problem companies struggle with is monopoly supply. If you go with the cheapest supplier, for instance, your ledgers might look good, initially at least. China has made a national practice of providing manufacturing cheaply. But the pandemic began in China and with it, the shutdowns. Any business that relied on companies in the region for its parts and did not have alternative sources for those parts ground to a halt.
“Even once China came back online, could we get our supplies across the water and unloaded?” asked Anderson. There were backups in trucking, in the outgoing ports, at the receiving ports, and in the warehouse deliveries stateside. So reliance on one company, one country, or even one region for supply can cause problems.
Understanding the Full Costs of Cheap Contracts
If there is cheap labor or cheap parts in one place, you get a pat on the back for negotiating supply from that country. However cheap does not always mean inexpensive. It’s similar to looking at the carbon cost of cars: Just because an electric car does not need gasoline does not mean it does not have an effect on the environment. To compare electric cars to nonelectric cars, you need to add manufacturing costs, fuel costs (if any), maintenance costs, and the cost of reusing or disposing of waste elements.
Similarly, companies that lack a full understanding of their real costs are likely to make errant supply chain decisions. And those calculations have to shift as the environment changes.
“Historically, procurement folks were focused on negotiating cost per widget,” said Steinberg. “They then began to realize they needed to focus on total landed cost given the global nature of extended supply chains. Leading companies are now also focused on resiliency and sustainability with suppliers playing a major role in the effort. Critical topics such as sustainable and diverse sourcing, visibility into the Tier-n supply base and traceability have come to the forefront.”
Logistics professionals have to balance risk management and risk mitigation.
According to Steinberg, “With risk mitigation, you invest and alter your supply chain to ensure your supply chain will be fine if a certain disruption happens. You make yourself fool-proof, you eliminate the risk, and this costs money. With risk management, you manage the risk when the disruption occurs. You are still at risk of disruption but when it happens, you work around it. Perhaps take a hit but you invest less here.”
The question, according to Steinberg, is, “Do you want to spend lots of money to eliminate a risk if the odds of it happening are very low? There needs to be a conscious effort to determine whether risk management is more affordable than risk mitigation.”
A combination of bottlenecks, political risk, and ethical concerns will drive decision-makers in the logistics area to reconsider the notion that the cheapest bid equals the best decision.
“I think what’s going to happen is that we are going to re-shore or near-shore, meaning we’re going to move production closer to the customer demands, wherever that is,” said Anderson.
In addition to the solutions outlined above, there are also technologies that can help logistics professionals capture and analyze data to make JIT work. Artificial intelligence and edge computing technology, in particular, can assist in bringing “real-time” into the real world.
According to Steinberg, such technologies allow supply chain experts to “leverage more functionality because they allow visibility into the supply chain, something that is extremely problematic right now with all these disruptions.”
So, did the pandemic prove that JIT logistics is a bust? The answer is as simple as JIT should be. It showed the fractures this philosophy suffers when put under strain, while on the whole reaffirming its value as a practice.
If you practice JIT as a balance of just-in-time and just-in-case, you’re on the right track. If you examine your supply line regularly for bottlenecks and take measures to remove them, you’ll have a good chance of surviving our increasingly crises-fraught economy. If you fight against the cognitive bias that makes you persistently return to old solutions for extinct problems, you’ll have a good chance at embracing the kind of change that makes the future a place less of fear and more of opportunity.