In the news these days, you hear lots of talk of inventory shortages and supply chain breakdowns related to the Covid-19 pandemic. There are lots of challenges, but in many cases the “news analysts” point to Just In Time (JIT) supply chains as the problem.
This is truly “Fake News”:
Not all inventory problems are caused by the set-up of the supply chains
Supply chains are the same
Most supply chains practice true JIT thinking
Sourcing decisions does not reflect on JIT methods
Let’s examine these issues, and then take a look at how a supply chain set-up with JIT principles is part of the answer, not the problem.
Not all inventory problems are caused by the set-up of the supply chain
Supply chains are set-up to handle the normal business situations and a reasonable set of exceptions. When you have an extremely abnormal situation develop, like the COVID-19 crisis, some supply chains are stressed to the breaking point. Today the demand for ventilators caused by COVID-19 is unique in a couple of different ways. First, the sheer number required for the number of cases that require a ventilator is much higher than normal, well past any typical exception. Second, the amount of time an individual stays on a ventilator (consuming the inventory) is about 7 times longer than the typical non-COVID-19 case. This creates an abnormal demand level well beyond what any reasonable supply chain can handle smoothly. Supply Chains are not designed to handle every possible outcome. When the actual is not inline with the plan, problem solving is triggered to improve the condition.
Supply chains are not the same, even if they distribute similar products
Supply chains in today’s world are highly specialized and optimized to meet the needs of the customers. Not only does this lower cost, it is also required by the customers to meet their specific needs. Food distribution supply chains are a great example of this. Supply chains that serve the grocery stores are very different from ones that supply restaurants and cafeterias. When “the pause” was implemented, and everyone went into lockdown, you had one supply chain (restaurants and cafeterias) that went from normal to near-zero; and one supply chain (grocery) that went from normal to ludicrous speed. People asked, “We are eating the same amount of food, why are we running out?” While the volumes may be the same, we are eating it mostly at home versus at work, school, or restaurants. The change in the point of consumption means a drastic change in the type of product.
Let’s look at a couple examples:
Toilet Paper
Commercial paper tends to be 1-ply, more recycled fiber, in bigger rolls VS.
Home paper tends to be of 2-ply, more “virgin” fiber, in small rolls
Chicken
Bulk / Case Pack with limited USDA labeling for restaurants VS.
Individual / Family Pack with strict USDA labeling for home consumption
The supply chains to deliver these different types of products to different types of business are nearly completely independent and seldom share resources. This drastic shift of the consumer from one point of consumption to the other is not a failing of a JIT Supply Chain. While JIT supply chains are the most flexible and adapt more quickly than other designs, a shock of this scale is impossible to handle seamlessly. In fact, the grocery supply chain has actually proven to be pretty robust, after the initial surge (the run on the stores that first weekend), the supply chain has been able supply the vast majority of our needs. Grocery store supply chains are generally run with a high degree of JIT thinking.
Most supply chains don’t practice true JIT thinking
One the of the big advantages of Just In Time (JIT) thinking is reduced inventory levels, but it’s not the reason you implement a JIT supply chain. Likewise, just because someone tries to cut inventory in the supply chain, doesn’t mean they are implementing JIT thinking.
Just In Time means to deliver the right product in the right quantity, at the right time, at the right cost. When done correctly we will have less inventory, be more responsive, and have more flexibility across the entire supply chain.
Sourcing decisions does not reflect on JIT methods
Over the past 40-50 years the globalization of sourcing to low-cost labor markets in the pursuit of greater profits and lower prices has led to dramatic shift toward offshore operations. The reduced costs have resulted in greater profits, higher stock prices (raising stock markets) and lower prices for consumers. But this has had a devastating impact on the manufacturing capabilities in the higher-cost labor markets. One of the significant hidden cost of these efforts is in the supply chain required to link the offshore manufacturing to the consumers. In addition to the higher costs of the supply chain (transport, increased inventory levels, etc.), there is also the challenge of making such a long supply chain responsive to changes in customer demand. You can see this in the shortage of PPE and testing supplies. While these are significant issues that need to be addressed, they are not caused by a JIT supply chain. In fact, JIT is the only way to effectively run a long-distance supply chain and still have the ability to react to customer demand.
The Solution - JIT
JIT translates to Right Product, Right Quantity, Right Time, Right Place. This is the mission of any supply chain. True JIT includes the concepts of Level and Balanced, Continuous Flow, and Pull based connections. The ideal state of a JIT supply chain is where high frequency replenishment matches high frequency ordering carried out at the pace (Takt) determined by consumers’ consumption / purchases – regardless of the distance between the links in the supply chain. Let’s review a few key techniques:
Frequent Order / Frequent Delivery – Dramatically increasing the flow of demand information through the supply chain allows for improvements in the quality of information and removes distorting effects. It’s not uncommon to see demand information flows, consumer-to-supplier, reduced from >50 days to <3 days.
Sell 1 / Buy 1 – Small lot processing through every level of the supply chain removes the Bullwhip Effect and simplifies forecasting and ordering algorithms. The bullwhip effect happens when each level of the supply chain holds and distorts the real demand data. At each level the distortion gets worse and worse until the actual demand is unidentifiable. The distortion of the demand occurs through regular, well intended, business practices like forecasted ordering, min-max ordering, sales pushes, transportation discounts, volume discount programs, etc. Each of these either create a “dam” in the flow of information or shift the demand to achieve arbitrary targets.
Optimum Inventory Level (OIL) – OIL is the target inventory for all stock including On Hand, On Order, and In Transit. OIL is calculated using average daily demand, order cycle days, lead time days, and safety stock days. OIL is maintained daily by ordering a new minimum order unit every time the total inventory within the supply chain drops below the OIL. As the minimum order unit becomes 1, the effect of selling 1 unit will be buying 1 unit. Each sale pulls an additional unit into the supply chain.
Using these JIT tactics, the supply chain only moves material where and when it is needed. Safety stocks can be kept at strategic points in the supply chain to allow maximum flexibility, cover for variations between links, ensure supply-ability, and account for acceptable risk.
The solution in action:
Let’s apply JIT concepts to our inventory problem of PPE and testing supplies to fight COVID-19.
Establish a strategic emergency reserve of stock at the national level. Asking individual hospitals and laboratories to hold stocking levels just in case there is a 100-year pandemic is unreasonable
Set OIL per SKU at each level of the supply chain. This allows actual demand to move from consumer to supplier quickly and accurately and results in a more responsive, effective, and robust supply chain
Use Sell 1 / Buy 1 to distribute based on pull from the various sources. This eliminates the need for each state and hospital to order based on their “forecast need”, which at times like these is impossible to predict and results in forecasting for the worst case (hoarding)
An additional factor:
We have not considered a key part of the supply chain – your supplier capabilities. Your supply chain decisions must to occur in concert with you suppliers and reflect a high level of collaboration and development to ensure their preparedness and capacities are in line with yours. Establishing OIL across the supply chain is an important step in this partnership. This is a key topic that will be covered in more detail in a separate Blog.
Questions
As a result of this pandemic, supply chains (JIT or not) have been tested beyond capacities and have gotten a bit of a black eye in the news.
Are you adding (or planning to add) more safety stock in your system?
What strategy are you taking with frequency of ordering and replenishment?
Are your current operations ready to operate in the “new normal”?
When the pandemic is over, and things begin to return to “normal”,
Will your inventory levels be under control?
Will the new safety stock be a strategic reserve or a cushion to cover up problems with the supply chain set-up?
Are you considering strategic changes to your supply chain? Will these changes include JIT thinking to reduce your costs and maximize the effectiveness?
What can you do now that will help you come out more competitive in the future?
Stay tuned, the next blog will include a reading list and how Lean techniques can be used to create a safer work environment as you develop you return to work plans.
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