1. Just-in-Time or JIT inventory management is a lean procurement methodology originally invented in Japan. By only ordering what they need, when they need it, companies reduce waste such as obsolete or expired stock, drive efficiency, and reduce holding costs (warehousing). Importantly, JIT frees up operational cash flow.
2. JIT management requires a constant stream of robust data, such as having accurate and frequently updated sales forecasts and knowing your peak demand periods. It also requires a sophisticated inventory system to tell you exactly how much stock you have on-hand in real-time.
3. Unfortunately, JIT only works properly in a seamless, well-oiled supply chain. As we all know, COVID-19 brought this crashing to the ground all over the world. The pandemic caused shipping delays, port congestion, panic buying, and shortages of crucial medical equipment and PPE. Businesses everywhere rapidly ran out of stock and had to scramble for alternative sources of supply, pay higher prices, and wait for the global supply chain to recover.
JUST-IN-TIME SUPPLY CHAINS ARE REGIONAL AND VERTICALLY INTEGRATED
1. JIT supply chains are the epitome of lean and highly coordinated production. Suppliers and customers along the value chain coordinate in such a way that any finished intermediate or final goods are immediately collected and processed further, rather than put on stock. This management paradigm – developed in the 1970s by Japanese car manufacturer Toyota (Ohno 1988) – relies heavily on the exchange of information: only when a downstream customer stage or factory communicates its precise orders to its upstream supplier does the latter commence production.
2. JIT supply chain management is a pervasive practice: even in industries like “wood and products of wood” or “non-metallic mineral products” about 30% of all companies report participation in JIT supply chains. About two thirds of firms in “motor vehicles” production are JIT intensive, which is the highest penetration in the sample. Moreover, JIT firms are substantially bigger and more productive than their more ‘traditional’ counterparts even within narrowly defined industries, which is consistent with the significant overhead costs required to run a JIT supply chain.
3. As a direct consequence of pervasiveness and bias towards large producers, JIT supply chain management practices are economically important in the aggregate. About two thirds of all French manufacturing workers are employed in JIT supply chains and roughly 60% of French international trade volume can be traced to JIT firms.
JIT SUPPLY CHAINS ARE MORE REGIONAL AND MORE VERTICALLY INTEGRATED
1. Using the near universe of international trade transactions, it is possible to locate suppliers and customers for all firms and compare the spatial structure of JIT and non-JIT chains. Figure 1 illustrates the main finding for Europe. First, all countries are grouped according to quintiles in the distance-to-France distribution. Then the JIT vs. non-JIT difference in firm level (log) trade volumes with each group is plotted and darker colours indicate larger differences (for further details, see Pisch 2020).
2. International trade in JIT supply chains is skewed towards proximate suppliers and customers, i.e. such production networks are more spatially concentrated compared to their `traditional’ counterparts. This pattern is economically important: In the sample, trade volumes fall by roughly 3.5 log points between the first and third quintile group of countries. The baseline estimates suggest that JIT supply chains have a distance gradient that is 0.35 log points steeper than that of non-JIT supply chains – a difference of first order magnitude.
3. Finally, data on industrial activities and international intra-firm trade of firms and their affiliates can be used to understand which stages of a value chain are retained within the boundaries of the (multinational) firm. I show that French firms in JIT supply chains – compared to their ‘traditional’ counterparts – are significantly more likely to source any given intermediate in-house, both domestically and abroad. The difference in organisational structure accounts for a substantial share of the overall variation.
4. Consider a segment of a supply chain where a single upstream supplier manufactures an intermediate that is shipped to a downstream buyer firm, which in turn uses it to produce its own output. In an uncertain world, both companies are continually hit by shocks, i.e. unexpected changes in their environments. In a sequential supply setting like this, it is paramount for the two firms to make adaptation decisions in a coordinated way, since otherwise costly inventories are needed to ensure smooth operation.
5. If the supply chain operates under a `traditional’ regime, little or no downstream information is shared with the upstream stages (‘make-to-stock’ paradigm) and the supplier’s ability to coordinate its adaptation decisions with the buyer firm is limited. In JIT supply chains, by contrast, production is predicated on a downstream demand signal, which is shared between the supplier and the customer in real time, and which facilitates a reduction in inventory holding costs.
6. This positive effect of JIT is stronger whenever the two plants are close to each other. Otherwise, shipping intermediates takes too long and demand conditions have changed when the input arrives. Moreover, vertically integrated production networks benefit disproportionally as well, since the supplier has strong incentives to make efficient use of demand information and thus maximise profits of the entire supply chain. The empirical findings outlines above are therefore rationalised by means of organisational complementarities: JIT is more effective for regional and multinational production.
JUST-IN-CASE INVENTORY MANAGEMENT
1. A Just-in-Case supply chain and inventory management strategy involves buying and holding more than you need as a hedge against possible disruptive events. This risk management technique helps ensure business continuity to keep sales moving or keep production running.
2. It doesn’t take a global pandemic to disrupt supply. Supply can be interrupted by cyberattacks, political or economic instability, or simply by bad weather. Companies can run out of goods due to an unexpected surge in customer demand or may be unwilling to source goods if prices are unreasonably high.
3. JIC management doesn’t mean trying to hoard enough goods and materials to maintain business continuity forever. It involves calculating how long a potential disruption could last and having enough on-hand to keep going until the disruption is sorted out. Supply chain managers, assisted by cognitive technology, are becoming increasingly expert at predicting how long it will take for a supply shortage to return to normal levels.
HOLDING COSTS
1. The primary challenge of a just-in-case supply chain is the cost of warehousing, along with the extra space needed to store larger volumes of goods. Increased holding costs must be measured against the potential cost of production halts or lost business due to running out of goods or materials. The shift to JIC, along with the surge in e-commerce, led to a warehouse building boom in 2020 that continues to this day.
2. Organizations using the JIC approach need to keep a careful eye on the rising cost of warehousing, which could one day reach a point where JIC strategies no longer make business sense.
3. An additional risk is that nothing lasts forever, which is why product life must be taken into account when considering a JIC approach. If the potential disruption or surge in demand never eventuates, companies may find themselves having to dispose of thousands of units of obsolete, unsold goods.
CONCLUSION
1. Just-in-Case is a form of business insurance. It adds extra costs, but in the event of disruption it will pay off by enabling you to maintain production and business continuity, retain customers, and gain a major advantage over your competitors who have been brought to a standstill.
2. Just-in-Time is efficient, affordable, and Lean, but it is based on several assumptions: a smoothly-running supply chain, no major disruptions, excellent sales and demand projections, and a robust inventory system. JIT can be a nail-biting experience in a global environment but is a much less risky prospect if you source predominately from local supply chains.
3. What can we learn about the long-term impact of Covid-19 on global supply chains? A potential impact of the crisis is a change in the distribution of (perceived) uncertainty. Covid-19 may by itself be – or hopefully is – a black swan event, but it highlights that pandemic events are ever more likely to happen in a globalised world. Moreover, by its disruptive nature, the crisis has drawn attention to other types of shocks associated with, for example, climate change.
4. The conceptual framework predicts that all supply networks, regardless of their organisational structure or management, will see an increase in inventory holdings to cushion a larger number of, and more intense blows. Crucially, however, the additional costs created are in fact lower – rather than higher – for JIT supply chains. The reason is that with diligent information sharing and coordination along the value chain managing those additional inventories is cheaper. Contrary to popular perception perhaps (and in accordance with a recent column by Miroudot (2020)), highly coordinated JIT supply networks are not predicted to recede, on the contrary.
5. This realisation has important implications for international trade and capital flows. Since there is a complementarity between spatial proximity of business partners and JIT supply chain management, international trade may experience a force pushing towards more regionalisation.2 This effect is driven by resilience and robustness considerations in supply chains, however, which are entirely disconnected from a protectionist stance. Moreover, since multinational production facilitates JIT supply chains, any increase in uncertainty benefits large, multinational conglomerates at the expense of smaller companies. At least in the manufacturing sector, therefore, FDI flows may be less negatively impacted by restrictions on international capital flows that have been put in place in the (recent) past.
Source:
https://una.com/resources/article/moving-from-a-just-in-time-to-a-just-in-case-supply-chain-after-covid-19/
https://cepr.org/voxeu/columns/just-time-supply-chains-after-covid-19-crisis
