July 5, 2022 | Business insights
Is just-in-time manufacturing entirely to blame for the shipping crisis and ongoing supply chain issues? Experts seem torn on the matter.
Ailing after World War II, Japan set its sights on rebuilding its industry sector with some help from its friends in the West. For the next 30 years, they experimented with different ways to utilize cash flow, real estate, labor, and resources to maximize profits. Then, Toyota pioneered the first iteration of just-in-time (JIT) manufacturing: the practice of making products to order, instead of managing an unwieldy inventory.
Also sometimes referred to as a “lean” manufacturing system, JIT was highly contagious, becoming the crux of global production for the next fifty years. Now, in the wake of another highly contagious phenomenon, just-in-time manufacturing is taking the blame for the ongoing supply chain crisis. How appropriate is it to blame JIT, and how might the model adapt once as life returns to a semblance of stability?
What is Just-in-Time Manufacturing?
Just-in-time manufacturing is a strategy in which manufacturers produce what is needed rather than stockpiling an inventory. Products are made and shipped to order, arriving just in time to their next destination. The strategy cuts down on stock, ensuring that there’s always a buyer for the product on hand. Since inventory remains at a minimum, the higher turnover ratio—the cost of goods sold (COGS) divided by average inventory—means a company is efficient.
Lowering your inventory also boosts your return on total assets (ROTA) ratio. If you have a stockpile of extra goods and parts that aren’t selling, you’re not getting much of a return on those assets.
Just-in-time manufacturing also saves money by way of labor and raw materials. A company that only orders what they need reduces the amount of raw material wasted at the end of production. Furthermore, fewer labor hours (if any) go towards producing non-profitable items. In the fast-evolving tech world, items can be groundbreaking in 2021 and obsolete by 2022. Just-in-time manufacturing ensures that you’re not sitting on a stockpile of depreciating assets.
However, JIT is not all sunshine and roses. First and foremost—and one of the cruxes of the supply chain crisis—JIT risks running out of stock. When one cog in the global machine jams, the whole system comes to a standstill. In this model, manufacturers rely on specific suppliers, who are dependent on their own specific suppliers, and so on. If one raw material factory in China can’t get their hands on a particular paint chemical, a hardware store in rural Wisconsin can’t get the products they need.
Just-In-Time Manufacturing: The Cause of The Shipping Crisis?
Here we arrive at the key question: is just-in-time manufacturing entirely to blame for the shipping crisis and ongoing supply chain issues? Experts seem torn on the matter. Some blame JIT’s undeniable link to higher profits; others fault the complexity of the supply chain as a whole.
One of the best examples of JIT’s rippling impact on the consumer market is the automobile industry. Cars rely on computer chips and semiconductors that have been in increasingly short supply. Most of the world’s semiconductor supply comes from foundries in Taiwan. When the pandemic hit, the factories shut down, thus halting production. These factories anticipated the decline in demand from foreign auto factories, but what they didn’t see coming was the sudden spike in demand for new cars. Without stockpiles of computer chips to tap into, the automobile industry slowed to a crawl.
Just-in-time manufacturing principles also apply to the supply chain itself. We’ve grown accustomed to quick delivery, made possible by a dedication to infrastructure. Airports build more runways, highways add extra lanes, and seaports expand for bigger ships. However, the faster the machine runs, the more prone to risk it is. Natural disasters, power outages, and global pandemics are JIT’s worst enemy.
Thus, some believe the complexity of the supply chain in general is to blame for current shortages. From the raw material stage to completing your order on Amazon, an item moves through a vast network of mines, factories, manufacturers, ports, fulfillment centers, roadways, and delivery drivers. The odds of something going awry are good enough to bet on. The complexity of the supply chain is the exact opposite of what JIT is meant to do.
The Future of JIT
What does the future hold for just-in-time manufacturing with all that in mind? Is it time to rethink how global business is conducted? Or can we adjust a system that’s worked relatively well thus far to meet a new reality? Toyota, the founder of JIT manufacturing, may have the answer.
In 2011, a devastating earthquake rocked Fukushima to its core. Toyota suppliers could not get components they needed (predominantly semiconductors) and were left rethinking their JIT strategy. In response, Toyota chose to tweak the process, implementing a risk management system to stockpile semiconductors and other essential components in case something like that ever happened again. The move paid dividends then, and it came back around in 2020. Once Toyota sensed another chip shortage was imminent, they pivoted their JIT model to include more hybrid practices. The rest of the auto industry suffered—yet Toyota exceeded sales targets, and even out-sold GM for the first time since 1931.
Some experts believe the JIT manufacturing method works on paper, but modern corporations have pushed it too far in practice. They’ve become so laser-focused on trimming inventory that JIT can only exist in a perfect, hazard-free world. Instead of cutting it so close, they can and should factor more wiggle room into the process. Expanding inventory now could have positive ramifications in the future.
Pivoting To A Just-In-Case Model
It’s worth noting that for this reason, some manufacturers are considering switching to a just-in-CASE model. JIC manufacturing takes the emphasis on speed and efficiency from the JIT model, but applies a standard of diversification and allows space for an increased sitting supply. The Toyota strategy post-Fukushima is a good example. By assessing what items are absolutely integral, they were able to plan a contingency strategy enabling production to carry on even in a crisis.
Similarly, the JIC model hinges on diversification of suppliers. In a highly-specialized supply chain, any one hiccup from the only supplier for one key part will crash the whole system. Just-in-case manufacturing acknowledges the need to balance the just-in-time drive for maximal efficiency with the realization that in a crisis, you need multiple avenues of escape.
Covid-19 aside, an increasingly complex and fractious geopolitical situation necessitates this sort of planning for the worst. Samuel Mathew, global head of documentary trade at Standard Chartered, points out that “Even before the coronavirus pandemic, we saw some supply chain diversification as a result of the US-China trade war, particularly in manufacturing and textiles.” Alternatives such as Cambodia, Vietnam, and Mexico have all caught investors’ eyes widen the options. Whether it’s through reassessing stockpiles or diversifying suppliers, JIC models have proved superior in light of recent global events.
Adapt Your Inventory Margins—and Your Financial Margins As Well
With energy costs rising and shipping expenses at an all-time high, companies must examine their just-in-time manufacturing strategies to survive the new normal. Doing so will likely cause some changes in financial books, making it imperative to consult with their expert financial partners.
If you’re looking to expand your on-hand inventory while doing the least damage to your bottom line, reach out to New Mexico Bank & Trust for financial guidance today. Keeping a knowledgeable financial partner with deep industry experience like New Mexico Bank & Trust by your side will give you the tools you need to confidently navigate this precarious period.