Many pundits and analysts blamed the current supply chain breakdown on the widespread use of lean and just-in-time manufacturing methodologies. Their claim is that they encourage manufacturers to keep extremely low inventory levels of the components and parts they need to make their products, relying on the supply chain to provide them “just in time.”
Certainly, it’s true that many manufacturers developed highly efficient supply chains that, so long as they ran smoothly, enabled them to keep very low inventories. But there’s nothing in the lean and just-in-time methodologies that recommend keeping a bare minimum of parts on hand. In fact, they preach the exact opposite. Lean and just-in-time manufacturing have never advocated for keeping just a bare-bones inventory of parts on hand.
Lean also advocates for a shortened supply chain, with the goal of making it as short as one possibly can, because a shorter supply chain is easier to manage. Outsourcing the key business processes to a far-off land where one has little-to-no control is also not in line with the Lean methodology, because it leads to a lack of control over the supply chain and ultimately the business.
The problem is that lean and just-in-time are very efficient methodologies, which led many companies to keep low inventory levels of parts as a way to take profits. It’s a shortsighted decision not supported by lean, and we’re seeing the consequences now.
But it shouldn’t be a surprise that lean and just-in-time don’t advocate for low inventories of critical parts. After all, these concepts were originally developed at Toyota Motor Corp. specifically to deal with the post-war shortage of raw materials that Japan was experiencing. Lean requires strategic stockholding at critical points in the supply chain, and just-in-time is all about using those resources wisely, only manufacturing products when there is demand for them.
Not coincidentally, Toyota hasn’t had to temporarily shut down production due to parts shortages, unlike other large automakers = even though Toyota is the largest car manufacturer in the world.
Toyota learned this lesson the hard way. Following the 2011 tsunami and subsequent Fukushima Daiichi nuclear disaster, Toyota experienced difficulty getting specific parts, which caused it to slow down production. In fact, it took six months to get production outside of Japan back up to a normal level. As a direct result of this experience, Toyota identified 500 parts that could become scarce in a future natural disaster, and required the entire company to hold a six-month stockpile of them.
What Caused the Crisis
The current supply chain crisis is a very complicated situation, and it didn’t start with the pandemic. The supply chain was already showing signs of strain and weakness before the COVID-19 pandemic. The U.S.-China trade war and the public health emergency put pressure on those weak points, causing the system to crack.
China shut down, pausing manufacturing, and when China opened back up, Europe and the US shut down. Supply and demand got way out of sync. Additionally, over the past 15 years, container ships have become as much as 2.5 times larger, and while it’s more cost efficient to consolidate loads onto one ship, they’re so large that they can’t use the Panama Canal. The fastest and cheapest way to get goods to the East Coast of the U.S. is through West Coast ports and then overland via truck. The alternative is to go around Cape Horn and add hundreds of thousands of dollars to the cost of delivery for a shipload of containers.
As a result, the massive and sudden increase in demand from the U.S. has created a huge bottleneck of container ships waiting as long as two weeks to dock at Long Beach, Los Angeles, Seattle, Tacoma and San Francisco. Add in the significant shortage of truck drivers, there’s got a serious supply chain situation.
But there’s more. In the past, for every 100 containers of imported goods in the U.S. there were 40 containers of export goods to send back. But with Covid, there’s very little export taking place due to the manufacturing slowdown and exacerbated by the U.S.-China trade wars. It doesn’t pay to put empty containers on ships, so now we have containers sitting empty in the U.S. The trucks delivering containers aren’t even fetching the empties. The end result has been a shortage of containers for Asian manufacturers to ship their goods.
In the short term, the best strategy is to gather as much data as possible about customer needs and what the supply chain can provide. Determine what absolutely must be produced and work hard to get information from customers on what they need rather than what they want. ERP platforms designed for manufacturing can be paired with analytics to help do exactly this — determine what a customer likely truly needs based on their past orders. Manufacturers’ customers are suffering from their own supply chain woes, so many will likely order much more than they actually need, to prepare in case the situation gets worse.
Second, manufacturers should adhere to lean principles to get the most value out of every piece of raw material on hand. Lean can help manufacturers best utilize resources carefully, determine where they need to stockpile to mitigate future challenges and gear back up for the comeback. Again, a solid ERP platform with strong inventory and supply chain management capabilities can provide this information in near real-time.
And for the long term, they should invest in technologies that will enable the building and management of a more robust supply chain, with dual sourcing for critical parts and analytics that can predict which vendors will deliver on time and those that will most likely deliver late. Dual sourcing, however, can be very complex to manage — automation is the key to making it work. Stock control now needs to be balanced across all suppliers with potentially different places in the supply chain for strategic stockholding.
The current supply chain crisis is an enormous challenge, but many manufacturers brought it on themselves. Instead of being strategic with the business, they opted to harvest short term profits at the expense of the longer term future. With a proper understanding of lean and just-in-time manufacturing, along with careful investments into technologies that provide deeper supply chain visibility, manufacturers can weather the current storm and position themselves to grow rapidly once the supply chain recovers.
Roger Landman is product operations manager at Syspro.
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