Just-in-case JIT fails!

JIT inventory

Disclaimer: All views expressed in the article are his own and do not represent those of any entity he was, is or will be associated with.

Lord: “Dear Suresh, I am pleased with your tapasya! I grant you 3 wishes”
Suresh: “Oh Lord, my nose is always blocked. Please give me a few more noses so that I can breathe freely.”
Lord: “Tathatsu!” and Suresh gets 5 additional pointy noses on this face.
Suresh now panics, as this arrangement has made him less attractive. So, Suresh hurriedly asks for a ‘Ctrl+Z’ (undo) as his second wish. And, as his third wish he pleads Lord’s advice for his blocked nose.
Lord: “Hey, while your nose is blocked, you can breathe from your mouth. It is I who has designed your body, you see!”
Lord: “Beware…I did not design a backup, just-in-case you have blocked heart arteries.”
Suresh wakes up with a jolt… Was this a forewarning from the Lord? His heart has been pumping each beat just-in-time, every time… At least, thus far.

Thus far, we loved JIT

Taiichi Ohno perfected Just-in-Time (JIT) as part of Toyota Production System in the 1960s. For the uninitiated, I can say that JIT has been a very widely adopted set of techniques to increase productivity, improve quality while reducing costs. JIT is a pull-based system that treats inventory as Evil. Just enough inventory is expected to at any time and place. With such thin inventory, there is little room for error and thus there’s a strong focus on quality. JIT further gained traction in the world of fast fashion, with leading
players like Zara and H&M. JIT helped in speed to market and faster merchandise changeovers.

However, the JIT model works well in a world with limited uncertainties. JIT thrives on the principle of Trust between the sending and receiving nodes (parties).

Losing trust in JIT now

With increased trade across continents over the last decade, supply chains have become ever more complex. We source products from around the globe not only for lower costs but also for innovative ideas and geographic specialization. Fickle customer behavior and fast changing channel GTM dynamics have only added to demand uncertainty and volatility.

Further, the pandemic and geopolitical unrests left the supplies uncontrollable, unpredictable during last two years. ‘Reliable low-cost shipping’ was first to go down with covid induced containers imbalance across geographies; this was aggravated by incidents like Suez Canal obstruction in Mar’21.

With no inventories to cover for such unprecedented disruptions, JIT was loudly adjudicated a culprit. Emotions in the board room and SNOP meetings ran high.

Once bitten, twice shy!

The cornered supply chain planner resorted to holding higher buffer inventories at all nodes in the chain, to be able to continue to service demand just-in-case a repeat disruption is seen. This is now popularly called JIC inventory.

Regular planning for JIC is fraught with errors, understocking at some times and overstocking at other. JIC leads to higher inventories and thus increased logistics costs and working capital. Along comes, the probability of increased obsolescence.

Will the customer be OK to pay extra for supply risk alleviation to fund the higher JIC inventory costs and higher local sourcing cost (vs low-cost country, LCC)? It would definitely not be easy to pass on this additional cost in the already inflationary input costs scenario.

Shareholders too would demand a justification for investment in ‘the supply risk cover initiatives’. It will surely not be a blanket approval to the philosophy of JIC inventory. With future QOQ financial targets to be delivered, in two years’ time, I predict we will shed the extra inventory that has been put on today to cover the risks.

Nevertheless, we must prepare for similar SC shock(s) in future? Investing in increased inventory
(JIC) is one obvious, easy reaction…what more, what else can we do?

New age SC: A wrestler who can sprint too

In March 2011, a huge tsunami hit north-east Japan. Toyota faced significant disruption in parts supplies, affecting its global factories as well. Thereafter, Toyota decided to adopt a hybrid approach for raw material and component supplies. Toyota reviewed all RM parts and classified the critical parts that were allowed higher lead time (versus JIT) and thereby higher inventory. The project involved churning a huge data base of supplies for intelligent insights. This was further complemented with increased visibility of the upstream supply chain for 3-4 tiers of suppliers for critical items. Toyota adopted these lessons and was resilient during the pandemic. In fact, Toyota overtook Volkswagen in 2021 to become the number one car seller for the first time in five years; needless to say, the pandemic had hit Volkswagen supply chain harder.

There were indeed lessons learnt in 2011, but not imbibed or embraced endurably by many companies
around the world. Here are some exhortations in the current macro-economic setup. To make Supply Chains fighting fit (agile & resilient) for future shocks of similar magnitude, you must work on following critical interventions:
a. Enhance visibility
b. Reduce complexity
c. Build analytical muscle for faster, better decisions

Enhance Visibility: Some of the supply shocks that happened recently were in the components/RM where companies had no visibility beyond immediate suppliers.
• You must classify items basis of importance to business and mark their respective supply disruption risk. For such select items, it is prudent to establish visibility beyond tier-1 supplier to tier-n.
• Sharing more data with suppliers will help upstream supply chains to synchronize with your plans.
• Real time ‘Track and trace’ capability for the inventory in transit (especially stocks with long shipping time) is now essential.
• Faster and accurate visibility to demand fluctuations will help reduce response time and avoid the dreaded bull-whip effect.

Reduce Complexity:
• A rather obvious approach would be to source locally and consider working on a China+1 or “existing big supplier+1” disaggregation strategy. However, developing alternative sources would take time and still might not be most economical. Thus, it is fair to infer that we will continue to partner with the big suppliers in revised proportions.
• You should also work on redefining product flow paths (network redesign), inventory norms and safety stocks reset.
• Alternate recipes and BOM could be developed and tested for easy switch-over in the event of supply disruption of a critical RM.
• Prepare and regularly update a Business Continuity Plan (BCP). This must encompass all critical processes, infrastructure and IT systems across the chain, enumerating the steps that should be followed in case of a break-down.

Build data analytical capability: Create a ‘digital twin’ of your supply chain. This will help conduct numerous ‘What-if’ scenarios in a jiffy. While this is a great tool to conduct simulations, one must not end up in an analysis paralysis. The objective remains to facilitate faster & better decision making, providing an unwavering direction and (some) more time for the teams to execute with agility

This article by Shammi Dua, Vice-President, Kearney originally appeared in the SCM Spotlight segment for the August 2022 issue of Logistics Insider magazine. 

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