Monday, May 22, 2006

Just in time for what?

(This post was prompted by this thread on TB2K along with other readings in recent months.)

If you've attended business school in that last 15-20 years, you've almost certainly been exposed to the concept known as "Just In Time" (JIT). JIT has various meanings depending on exactly what is being discussed. In our case, we're going to look at JIT as applied to inventory.

First, some history. Back in days of yore, manufacturers kept large stockpiles of raw materials. This was, in large part, to cushion any unexpected delays in getting fresh supplies. Because communications and transportation were expensive (and we're talking not so long ago--40 years or so), it made economic sense to tie up capital in those stockpiles, because it allowed production to be scheduled in a mostly even flow.

So if you were a manufacturer of the famous business school good known as a "widget", you kept a stockpile of raw materials for making widgets. It was conceivable, depending on how difficult it was to restock the raw materials, that you might keep weeks or even months worth of raw materials.

Widgets were distributed by a chain of distributors. There might be a regional distributor, who bought widgets by the trainload. He in turn sold to in turn sold to a territorial distributor, who bought widgets by the individual boxcar. The territorial distributor sold to the local distributors, who bought by the case. The local distributors sold to the stores, who bought by the box. You and I, as consumers, bought our widgets in ones or twos.

All along this distribution chain, there were warehouses full of widgets. Even if the manufacturer stopped producing widgets, it might be weeks or months before a shortage of widgets was apparent to consumers.

As communications and transportation got faster more universal and cheaper, someone had another bright idea: "Let's cut out the middle man! We can go to the regional distributor directly, or even the manufacturer, negotiate better prices, and sell widgets for less. We'll clean up!"

And so stores like Kmart and Walmart were born, along with the mega-chain grocery stores like Food Lion and Publix. Over a period of years, the distribution chain was dismantled. We got our goods faster and cheaper, and with more variety to boot. I can remember as a kid, lettuce was hard to come by in the grocery stores in winter--it was out of season, which meant unavailable. Today, I can buy lettuce year-round, as well as strawberries, apples and just about any other produce you'd care to name. All relatively cheap, and all delivered from wherever they are in season, just in time for me to buy them.

The arrival of the Internet, along with the concept of "drop shipping" (buy it from us and the manufacturer will ship it directly to you, because we have a deal with them) kicked this idea into high gear. Now the manufacturers are cutting out the retailer, and selling directly to the consumer through the Internet.

Concurrent with this, someone had another bright idea: "Hey, all this inventory costs money. Money to buy, money to warehouse. Let's stop producing for inventory and produce to order. We'll clean up!"

Once again, this idea could work because of cheap communications and cheap transportation. But there's a hidden problem with this system.

By nature, JIT inventory comes in just as you need it. You don't have to warehouse it--it goes straight from the delivery vehicle to the production floor, or in the case of a retailer, straight from the semi to the sales floor. No warehouses, no stock rooms. Money is saved and can be used for other purposes, like opening more stores or paying big bonuses to the geniuses who thought up JIT in the first place. Oh yeah, we need to cut prices a little, too. :-)

But this means that there is no longer a distribution chain full of widgets. Any disruption in the deliveries, no matter whether at the manufacturing end, in transportation or at the retailer, will be felt in days, perhaps weeks at best.

Let's apply this to the retailer everyone loves to hate, Walmart. Walmart is the envy of the retail industry, and it got that way by having the best distribution system out there. They carry inventory efficiency, as we understand it in the JIT world, to new heights.

But that means when the local Walmart runs out of widgets, there are no more to be had in the store--there is no stockroom to check to see if there happens to be an extra case. Sure, the computerized inventory system notifies the distribution warehouse and more is put on a truck to be delivered forthwith, but for some period of time, that Walmart is out of widgets.

Now lets posit a big, system-wide problem. Avian influenza has been big in the news, so let's make use of it. A strain of H5N1 that likes humans and is transmissible through casual contact makes an appearance. With the miracle of modern transportation, it's spread around the world in days. To make it worse, it's a nasty bugger--it kills 10% of everyone infected.

Predictably, people panic. Government is, as normal, helpless to do anything really useful on a large scale. People are getting sick and dying. Many of the ones that aren't are staying home, trying not to get sick. Some run out to Walmart, needing to stock up on widgets to survive.

But the widget shelf is bare.

The government can't send the military to take over the widget warehouses and distribute them to those in need, because there are no widget warehouses--haven't been any in 25 years. The government can't make widgets--no one there has the skills for doing anything except making counter-productive rules. They can't force people to go to the widget factory and make widgets, because the raw materials come from Asia someplace and there are no shipments being delivered.

Now for the word "widget", substitute to phrase "canned goods". Then try the phrase "anti-viral medications." "Batteries". "Fever thermometers". "Aspirin".

For "avian influenza", let's try "terrorist event". "Hurricane". "Social breakdown."

Seems prudent to become your own mini-warehouse, doesn't it?

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