Has COVID-19 Killed “Just in Time” Manufacturing and Procurement?
COVID-19 was the straw that broke the camel’s back in the case of many global supply chains. The cause of the shortages and delays we have been witnessing in markets is a fundamental structural vulnerability in the way the world’s supply chains work.
The History of “Just in Time” Manufacturing:
80 years ago after World War 2, Toyota had a problem. At the time, US car manufacturers had an overwhelming cost advantage over their Japanese competitors. Due to the size of US car manufacturers, they were able to leverage incredible economies of scale which allowed for rapid batch construction of cars [1].
By comparison, Toyota’s manufacturing lines were slow and complex, the Japanese Economy was still in recovery from the War and the domestic car market demanded variety in vehicle types. This meant they could not achieve the scale to make batch manufacturing effective, which translated to inflated prices when compared to their American counterparts.
In order to compete, they created the Toyota Production System which revolutionised the way companies perceived procurement and their supply chains [2]. The centrepiece of this strategy was what we call today “Just in Time” manufacturing. Essentially, all that this strategy dictated was that “Each step in the manufacturing process should end when the next one is ready to start”.
For example, the polyvinyl butyral resin should only leave the chemicals plant when the laminated safety glass production facility is ready to start making windshields, and the production facility should only start making windshields when all the pieces of the vehicle are ready to assemble the completed vehicle. The complete vehicle should only be assembled when the vehicle dealerships are ready to put more vehicles in their stores.
In the view of “Just in Time” manufacturing; excess inventory is waste because holding inventory costs money without making money. Elimination of inventory is elimination of waste and the associated costs. This leads to increased efficiency.
Toyota cut down on excess inventory, with components and spares only ordered when needed and kept in low numbers within the factories. The result was efficiency savings, which when combined with other techniques, helped to erode the American car companies dominance and propel Toyota to become one of the world’s premier corporations.
The lesson seemed clear. Get rid of waste. Order only what was absolutely necessary. Enforce strict quality controls. Keep upstream suppliers on short notice to produce inventory as needed and watch the profits grow.
The benefits of the system transformed Toyota from a company on the verge of bankruptcy in the 1950s to not only surpassing their American counterparts but into the largest car manufacturer in the world today [3].
Indeed it was so successful that “Just in Time” manufacturing is no longer an innovation, it is the norm.
The benefits of this system are clear. Aside from the elimination of unnecessary cost, the process allows for significant flexibility. Consider this example; if there are six steps in a manufacturing process and each holds two months of inventory, it would take a year to pivot to the production of a new product. The modern demands of product lifecycles make this unacceptable [4].
The advantages of “Just in Time” manufacturing are obvious. The issue is, many companies have enacted this strategy incorrectly.
Manufacturers globally saw the headline – elimination of inventory leads to massive efficiency gains – and enacted this without determining what actually made this strategy so successful for Toyota.
They ignored that Japan’s small geographical size made for short domestic supply chains that are less vulnerable to disruption
They ignored Toyota’s production levelling strategy – finding the average daily demand and producing that, regardless of short term changes in demand
They ignored the fact that eliminating excess inventory is different from eliminating all inventory
The result of which is that whilst manufacturers globally created efficient supply chains, they did not create resilient ones [5].
COVID-19 has Highlighted this Point in the Case of Semiconductors
Lead times for many semiconductors are currently one year, and these devices are in just about everything we use. Business and financial media have detailed how the shortage of semiconductors has caused production cutbacks in the automotive industry: Ford, Nissan, VW, and Fiat Chrysler Automobiles are among global carmakers that have scaled back production. Other carmakers have announced they’ll likely miss their 2021 manufacturing targets. And it’s not just carmakers that are in trouble. The chip shortages are expected to cause widespread shortages of everything, from electronics to medical devices to technology and networking equipment.
The reasons for these shortages are numerous. In July 2020, a fire at a Japanese factory cut off supplies of special fibreglass used for printed circuit boards. Then in October 2020, a fire at a Japanese plant belonging to Asahi Kasei Microdevices took advanced sensing devices used in automotive and other industries out of circulation. As of June 2021, the plant was still only operating at 88% capacity [6].
As if all these disruptions weren’t enough, there have also been constraints in the global transportation system. According to Clear Metal, which monitors over 90% of ocean freight, nearly 7% of ocean freight did not make it out of Chinese ports in the first quarter of 2021 [7]. Shortages of shipping containers resulted in companies having to pay premiums for shipping and drove demand towards airfreight. However, the airfreight system has been experiencing higher demand due to global shipments of the COVID-19 vaccine even as its capacity has been reduced due to the pandemic-related drop in passenger travel. This has meant that there are fewer passenger planes available to carry freight. In fact, global air-cargo capacity in the first quarter of 2021 was 25% less than last year [8].
No one likes to hear “I told you so,” but organisations could have done a better job planning for these shortages. Instead, poor decision-making prevailed. For example, aggressively lean “Just in Time” inventory practices left many manufacturers vulnerable. As vehicle sales began to rebound in the third quarter of 2020, automakers were slow to order more semiconductors and then lost out to more nimble electronics manufacturers that had visibility of the bigger picture and longstanding relationships with semiconductor manufacturers. The electronics manufacturers planned accordingly and secured their supply lines prior to November 2020 [9].
The reasons for the semiconductor shortage highlights a key point: Not all supply chains are created equal. Plastic resin, which is used to create the interior furnishings of cars, has plenty of manufacturers globally creating easily substitutable alternatives. This is a simple manufacturing process and multiple suppliers make the supply chain resilient. Semiconductors, in comparison, require expensive modern manufacturing centres that take years to construct, making the supply chain vulnerable.
This vulnerability is compounded by the fact that “Just in Time” manufacturing means many global manufacturers did not have any excess inventory of semiconductors.
This resulted in whole manufacturing processes shutting down as everything but the semiconductors were ready. There are examples of £80,000 SUV’s sitting unfinished in manufacturing plants waiting for a semiconductor chip that costs £2 [10].
In essence: Plastic resin supply chains can handle disruption. Semiconductors cannot. Supply chain disruption is inevitable. Therefore, semiconductor inventory is not excess and cannot be treated as such due to the fragility of the supply chain.
Running as close as possible to the edge is the most efficient manner to manufacture - until it isn’t.
One company that did identify the vulnerability in the semiconductor supply chain was Toyota, the very company that pioneered “Just in Time” manufacturing. In 2011 Japan was hit by a 9.0 magnitude earthquake, the fourth strongest ever recorded. As the country recovered from this natural disaster, Toyota identified that it took many months for its semiconductor supply chain to return to operational status.
Therefore, as disruption to supply chains is inevitable over time, a very fragile supply chain, such as the one for semiconductors, needs excess built into the system to allow for disruption. Recognising this, Toyota since that point has built up and maintained a stockpile of inventory of two to six months’ worth of semiconductors.
For this reason alone, Toyota is the only major vehicle manufacturer unfazed by the semiconductor shortage. In comparison, Suzuki, Chrysler, Fiat, Ford, General Motors, Honda and Nissan all have had to enforce manufacturing stoppages due to the semiconductor shortages [11]. The semiconductor shortage is just one example of the impact that the COVID-19 pandemic has had on supply chains, but it demonstrates the type of structural weakness that can exist in many manufacturing processes. Not all supply chains are created equal and organisations need to identify structural weaknesses and build resilience as Toyota has done.
The COVID-19 crisis has highlighted that while companies have been thinking of “Just in Time”, they also need to be thinking about “Just in Case”.
Get in touch to find out how Deecon Consulting can both help your organisation identify structural weaknesses in your supply chain and help to prepare for “Just in Case” scenarios.
Words by Vladimir Crasneanscki
References:
[1] http://www.strategosinc.com/just_in_time.htm
[2] https://kanbanzone.com/resources/lean/toyota-production-system/
[4] https://www.knowledgehut.com/tutorials/project-management/ just-in-time-jit-manufacturing
[5] https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world
[8] https://www.accenture.com/gb-en/ insights/travel/coronavirus-air-cargo-capacity
[10] https://www.theverge.com/2021/5/7/22423479/semiconductor-shortage-new-car-truck-prices-sales