The importance of managing risk through the supply chain has become painfully evident as a result of natural disasters which have occurred in recent months and years. Despite the obvious human cost and tragedy that ensued, catastrophes caused by the earthquakes, tsunamis, flooding, factory explosions and volcanic eruptions have all impacted enterprises who source globally, and who have embraced Lean/JIT practices at least to some degree.
The supply chain effects of these catastrophes have lead to a JIT rethink, but it is clear that many companies have failed to put in place back-up plans to cope with emergencies like the Japanese catastrophe. They were content to place all their eggs in one basket like Japan or China owing to low production costs while ignoring the obvious risks of natural disasters. But even where companies had a disaster-recovery plan in place, room for maneuver depends largely on the nature of the industry.
The production philosophy born on the factory floors of Japanese car companies is a global management practice and has saved companies billions of dollars. The idea behind JIT, or lean manufacturing, is to have the supplies a firm needs at the exact moment that they are needed. Most of the companies, with production systems based on just-in-time inventory management, understand keeping minimum inventory has its risks.
The problem for many global corporations is that they are mesmerized by cheap production costs in disaster-prone countries. They know the natural disaster risks but feel that their infrequent occurrences on a major scale justify the risks. Nature is not the only threat to the supply chain; there are also significant political risks to be considered in many politically unstable countries.
The rising production costs in China will favor a shift of production back to countries concerned to have a more secure source of supply unaffected by natural disasters. There are, however, other reasons favoring a production shift back to regions close to their markets, like flexibility to react to market changes more responsively.
There are number of avenues open to risk mitigation strategies to deal with large scale disruptions of supply chains, including:
– Challenge suppliers to develop disaster plans so that they can make provisions to move to alternate sites for production, in the event that they are unable to produce product at their main plant.
– Eliminate sole-source suppliers, and developing the capabilities of additional companies. Having one supplier is probably too few, but having five suppliers is too many in terms of achieving economies of scale.
– Analyze where suppliers are located, and limiting the number of critical component suppliers that are geographically situated in a risky area.
– Review insurance policies and consider taking-out contingent business interruption insurance that protects against losses relating to the inability of suppliers to deliver.
Experts have been recommending for years that manufacturers diversify their supply base. After all, recent history is full of examples of widespread supply chain disruptions and their consequences for manufacturers reliant on too few sources, such examples are: attacks to WTC and Hurricane Katrina in USA, flooding in Thailand, factory explosions in Germany, volcanic ash from Iceland and earthquake and tsunami in Japan.
Japanese Earthquake-Tsunami Show Flaws In Just-In-Time
Reducing Risk in The Automotive Supply Chain
Japan’s earthquake must force JIT supply changes
Auto companies relook at just-in-time mantra
Japan One Year Later: What Did Supply Chain Practitioners Learn from the Tsunami?
4 thoughts on “JIT – Just-in-Time or Just-in-Trouble?”
While JIT systems are good for the bottom line, they do put a lot of burden on the supplier. As you point out, the tradeoff is that it leaves a company vulnerable to anything that disrupts the flow of parts and supplies to their manufacturing floor. This can be anything ranging from natural disasters to terrorism to financial problems, but ultimately it can be catastrophic.It’s interesting to see companies step back now from the JIT system to consider carrying at least some inventory and moving towards multiple suppliers or at least to have backups in different geographic locations.
Another interesting effect is that, between the supplier disruptions, quality issues, and transportation costs and environmental concerns, there is more drive for “localization” – which is, seeking suppliers once again for products made in the same country or geographic region as the manufacturing company.
Yes, JIT systems put a huge burden on the supplier, but the suppliers are essentially the ones unprepared for the natural disasters. I think all of the risk mitigation strategies you listed out are good avenues that all businesses dependent on the supply chain can consider (especially #1).
I think you neglected to mention the biggest loser in this situation, the consumer. Thai floods sent hard drive prices soaring in late 2011, and the industry leaders don’t expect to lower prices until 2014. Some have combated increased prices by lowering warranty periods, but in the end prices have still gone up, and will continue to rise, to upwards of 30% over their pre-flood averages. This is worrying news for personal computer manufacturers as well as consumers who not only purchase from these manufacturers, but who also build their own computers, or replace their own hard drives in the various computers, media boxes, and video games systems they own.
I wonder why many companies have not diversified their suppliers along with their geographic location. After all of these natural disasters, I would think that companies have started thinking about relocating their supply locations or manufacturing plants to different locations where they are protected from these disasters. They can eliminate a lot of problems and costs in advanced by having back ups. I believe JIT systems are good for these companies but many will still back down because of costs for having the back ups. Diversification is still the best option in my opinion.
I agree, the greatest impact JIT systems have are on the suppliers. After a natural disaster they may not have the necessary resources to get back up on their feet. Insurance companies are helpful in that you know you will be compensated for the loss the company incurs, however that’s only in the more developed countries. In countries like India, if your a small supplier they usually don’t buy insurance because it tends to get costly (especially, if your a small family owned factory). So in that context insurance doesn’t really matter. I think the bigger companies (or the ones better off) then have a responsibility to give them money in advance so they can resume operations.