“Wisdom is given equally to everybody. The point is whether one can exercise it.”
– Taiichi Ohno, The “Ten Precepts”
Just-in-time (JIT) inventory management revolutionized the manufacturing industry in the 20th century. It is based on a simple yet powerful concept: produce and deliver goods only as they are needed, minimizing inventory costs and reducing waste. Toyota is often credited with formalizing this approach by strategically locating their factories close to suppliers for faster and more efficient production.
Over time, just-in-time practices (and the associated benefits) spread to global supply chain. No longer were supply partners located close by; the whole point was lean transportation. It worked as long as conditions remained stable, becoming increasingly common and making the whole system more fragile.
Then came 2020, and all the dependability and predictability that enabled the JIT approach flew out the window. Global shortages and supply chain disruption exposed just-in-time’s vulnerabilities. The result? Bare shelves. Exorbitant wait times for items. Price hikes. Out of stock notices. And very frustrated consumers.
Here we go again
A recent WSJ article reported that just-in-time inventory management is on the rise again. I received this news with a bit of shock. It seems like just yesterday that everything was going to be reshored and we were never going to run lean again.
I have to wonder whether we learned anything from the last few years. Will it be different this time or are we allowing ourselves to be lulled back into comfortable but obsolete practices?
While just-in-time is most commonly associated with Toyota’s efficient production systems, its origins trace back to an unexpected place: the American grocery store.
In the 1950s, Taiichi Ohno, an engineer at Toyota Motor, visited the U.S. to learn about manufacturing techniques. During a visit to a Piggly Wiggly, he noticed how the store managed its inventory, restocking products in real-time as customers made purchases. This prevented the shelves from being either bare or overstocked, ensuring a smooth flow of goods.
Ohno took this concept back to Japan, where it became a cornerstone of the Toyota Production System. The approach focused on reducing waste and improving efficiency, principles that would later return to the United States as lean manufacturing.
JIT Had a Good Run
The advantages of just-in-time inventory management are clear and plentiful. Less space, capital, and resources are tied up in inventory management, leading to improved cash on hand.
For large, influential companies, these advantages are compounded. One Wharton Executive Education article described just-in-time as a “power play,” where the most influential companies in each supply chain can leverage their power to enforce strict delivery guidelines and schedules, much like how Amazon and Walmart manage their warehouses today.
Blinded by the Benefits?
As just-in-time expanded globally and beyond manufacturing, some companies adopted its principles – and enjoyed its benefits – but they made the mistake of ignoring the associated risks and responsibilities.
Companies adopted lean inventory methods, but they scrimped on back-up plans and failed to establish critical relationships with alternative suppliers. Rather than facilitating a proactive and thoughtful approach to inventory management, just-in-time mechanized the whole process and put it on autopilot.
Then came COVID-19, which exposed the vulnerabilities of just-in-time systems practically overnight. The supply chain disruptions were global, system-wide, and almost immediate.
Once people realized the lockdowns were going to be long-lasting, they changed their buying habits to adjust to a new lifestyle confined to their homes. Online shopping surged, leading to shortages of durable goods like washing machines and dishwashers, followed by increased demand for home improvement products.
But that would not last forever either.
As restrictions eased and people began venturing out again, consumers shifted their spend to experiences like entertainment, restaurants, travel, and services. While this was great for mental health and social connectivity, this experience-driven spend led to a glut of merchandise… or, at the very least, a misalignment between what retailers had and what consumers wanted.
The oscillations in demand caused by these shifts in spending habits led to a series of adjustments up and down the supply chain, amplifying and distorting as they went along. Companies learned that the cost of empty shelves was higher than that of added inventory, leading to a total reevaluation of inventory management strategies.
JIT’s days were numbered. Right?
Forcing Ourselves to Remember
A look back at articles published between January 2020 and January 2021 – the height of pandemic-induced supply chain disruptions – remind us just how bad things were, and, by extension, the important role just-in-time inventory management played in getting us there.
Just-in-time practices, while efficient in ideal circumstances, leave supply chains unprepared for system-wide shocks like the pandemic. For instance, an average of 21 percent of household paper products were out of stock at U.S. stores as of Aug. 9, 2020, according to research firm IRI. Simple goods were simply unavailable, leaving consumers in shock. But the decisions leading to those bare shelves started decades before.
According to a March 2020 article from the Wall Street Journal, “In the past two decades, producers and grocery stores such as Kroger Co. have gone from keeping months of inventory on hand to holding only a four to six weeks’ supply.” It continued, “By decreasing the capacity of their distribution centers, retailers saved on rent, utilities, and labor. Distributors saved on fuel and wages. Manufacturers cut down on capital locked up in unsold inventory.”
Yossi Sheffi, the Elisha Gray II Professor of Engineering Systems and Director of the Massachusetts Institute of Technology’s Center for Transportation and Logistics, wrote extensively during this period. In one article on the shortages of healthcare equipment and PPE, he advocated for “mandated emergency inventory,” similar to the cash reserves required for banks.
Remembering how things fell apart in 2020 can trigger painful memories, professional and personal, for a lot of people. But, when we remember why we moved away from just-in-time in the first place, it makes an apparent return to it in 2024 all the more shocking.
From Just-in-Time to Just-in-Case
By 2022, companies were shifting en masse from just-in-time to a just-in-case approach, stockpiling merchandise to safeguard against any future disruption or shortage. But this came with its own set of complications.
Bare shelves and shortages forced retailers to act, and they started pulling in everything they could to meet demand. Just as they were starting to catch up, the winds of change swooped in again, and retailers were suddenly stuck with excess merchandise that nobody wanted.
Larger retailers like Target and Walmart, which had invested heavily in stockpiling, were hit especially hard. Ironically, smaller retailers who did not have the cash on hand to stockpile inventory or charter their own ocean freight vessels, were spared much of the pain. As long as they managed to stay in business, they were spared from some of the inventory hassles.
Just When We Thought Things Had Calmed Down…
If the interconnectedness of the global supply chain has taught us anything, it’s that nothing happens in isolation. Economic factors, such as rising gasoline and grocery prices, shifted consumer spending towards essential goods, further complicating inventory management and putting additional pressure on the supply chain.
Part of the slowdown in consumer spending was focused on discretionary goods like TVs and electronics, said Best Buy, as people focused their resources on trying to meet the rising prices of staples like gasoline or groceries.
By the 2022 fall shopping season, the supply chain landscape began stabilizing. Inventory levels finally more closely aligned with consumer demand. We were still feeling the aftershocks of all the disruption, but 2023 whizzed past without knocking everything off kilter again. It seemed like the worst was behind us.
You can’t drive forward while looking in the rearview window, but you can’t forget where you’ve been either.
The news that just-in-time inventory management is making its way back into the supply chain, with several retailers taking us back down that risky road, raises a whole new round of questions.
Have we finally learned how to achieve a balance between lean inventory management and supply chain risk? Has the relative calm of 2022 and 2023 (only 2 years!) lulled us back into complacency? Have we forgotten just how painful the pandemic shortages really were?
Let’s hope we don’t need another global disaster to find out.
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