My friend Greg Hutchins published this article in his newsletter, CERM (R) Risk Insights, this week. Take a look at his website to find out about his company's approach to enterprise risk management.
Back in the early 1980s, manufacturers in America woke up to the fact that Toyota and other Japanese companies were outperforming them on quality and efficiency. They looked across the Pacific and copied the first thing they could see — rapid delivery of parts to the plant. They called it Just-in-Time and mandated it from their suppliers.
JIT’S DIRTY LITTLE SECRETOEMs got their JIT, but the dirty little secret was that suppliers had 40-foot trailers parked around the assembly plant filled with parts. Cash, damage, shrinkage and obsolescence became the supplier’s problem as long as materials didn’t cross the OEM’s threshhold. Suppliers produced to forecast, not actual demand. They couldn’t respond fast enough to changes in their customers’ scheduled production. To avoid ever stopping the OEM’s line, they produced and held large inventories, or ate the cost of premium freight when they couldn’t keep up with unexpected demand peaks or their own production system’s problems caused parts shortages.
Meanwhile, defects remained high, production flow through both OEM’s and suppliers’ plants remained sluggish, changeovers of large and complicated equipment continued to take up to a day or more, and actual production rarely matched forecast or even daily scheduled production. (More instability was added because plant managers still got incentive bonuses for exceeding the plan.) When not addressed, these factors made JIT fail more often than not.
WHAT'S NEEDED TO MAKE JIT SUCCESSFULMeanwhile, JIT spread to other industries. Companies were told it was a business strategy and some still think that’s true. By misunderstanding ideas like JIT and ‘zero inventory,’ companies do set themselves up for trouble. If flow and efficiency levels in their plants are not mature enough, JIT is not going to make any difference. And old supply chain management policies, like beating up suppliers on price to the point where they can’t survive, will leave a supply chain weak and unable to consistently fulfill delivery expectations. With a lack of supply chain communication and partnership or single source procurement, companies are vulnerable to any interruption in the supplier’s ability to fulfill orders.
Under these conditions, JIT will never work. Pursuing a single lean goal without understanding that it is part of a whole management system is like saying you can win a baseball game with a good catcher and eight other people who haven’t played since high school. No matter how talented the catcher is, he’s won’t make up for poor hitting, pitching, or fielding.
WHY JIT WORKS IN TOYOTAWhy does JIT appear to work in companies like Toyota? Their supplier relationships and logistics systems are finely tuned after years of collaboration. The company and its suppliers work closely to match demand and supply. They electronically share forecasts and production schedules, as well as information on inventory at all points in the production and distribution system. They can do so because to them, the company and its supply chain is an extended lean enterprise able to optimize agile and flexible operations throughout.
SUPPLY RISK MANAGEMENTThe successful company also continuously monitors many risk factors for each supplier. It has contingency plans for flood, fire, tornado, strike, and other possible unplanned situations. Yes, the rare 100-year event can occur. When a tsunami plus an earthquake cause a nuclear disaster and a company experiences a supply chain failure, is JIT at fault? Should it tie up unnecessary cash and space in just-in-case inventory because someday something really bad might happen?
So when people say JIT doesn’t work, they are absolutely right. JIT was never meant to be a standalone business strategy. Neither its evangelists or skeptics understand that JIT is only a fragment of a mature lean supply chain and manufacturing management system. The system produces JIT as part of its successful performance. A focus on JIT alone does not produce success.