Just in Time?
JIT was not an academic’s stroke of genius but was born on the factory floors of post‑war Japan. Toyota, short on capital and space, could not afford the US model of sprawling warehouses stuffed full of stock in mid-century ‘bigger is best’ Detroit. The Toyota Production System, flipped things so that parts would arrive at stages of the assembly line only when needed. The system reduced waste, freed up capital, and created a culture of precision. By the seventies, Toyota’s productivity gains were so dramatic that Western manufacturers scrambled to copy the model (if you have heard of lean manufacturing principles – well that’s where they came from).
Businesses embraced JIT because being lean above the line, fattened profit below the line. The benefits being:
· Reduced working capital tied up in inventory.
· Reduced storage and handling costs.
· Less waste as stock obsolescence, theft and quality deterioration are not possible if there is no stock on hand.
JIT added fuel to the post war globalisation rocket. Initially, having suppliers situated nearby made sense for JIT – freight is a waste after all. However, as supply chains themselves became more efficient and sophisticated, so did the pursuit of the cheapest producers of inputs. All suppliers needed was 60 days’ notice and the global supply chain operated like a single, extended factory. A tractor assembled in China might contain chips from Taiwan, an engine from Germany, tyres from India, and design inputs from the US – all arriving in synchronised flows (with questionably translated instructions).
The system had an obvious flaw, however, it removed buffers. Warehouses, once a shock absorber, were replaced by distribution centres – more akin to a mailbox, emptied as quickly as they are filled. Should something go wrong, JIT could result in a string of domino - like failures. The trade chose not to think about that though, and kept chasing the Golden Snitch of efficiency by shrinking inventory levels even further.
For many decades, JIT trade ran with the precision of a Swiss watch seen advertised on the wrist of an F1 driver. As supporting systems channelled the Jetsons and became the future, JIT became even more precise (case in point being the ability to approve an order via a cloud- linked smart watch -take that Switzerland!)
It didn’t last though. The first big whack to JIT’s chops was COVID‑19 in 2020. Lockdowns, port closures, and container shortages exposed how little slack existed in global logistics. From toilet paper to sandpaper, there was no shortage of shortages.
Then, in 2021, a single ship stuck in the Suez Canal delayed billions in trade. It was only six days but that ship became the most infamous stranding since the Costa Concordia.
In 2022 the Russian invasion of Ukraine heavily impacted energy flows into Europe (continuing to this day) and temporarily stopped large volumes of Black Sea trade, including grain, –pumping prices to record levels.
Next there were attacks on shipping through the Red Sea in 2023, forcing sea traffic to go the long way round.
Despite this, supply chains were stubbornly in denial. The shocks were all explained away as temporary glitches. JIT kept on keeping on.
The attack on Iran has become the latest, and perhaps most the consequential, impact to trade flows. With the Strait of Hormuz shut, the global supply chain is finding that there is a limit to bloody mindedness and JIT is getting looked at long and hard (hello gate, this is the horse, I’ve bolted).
But let's be clear here, customers drove JIT, not suppliers. The clear market signal is lowest price wins and JIT was a very good way to reduce cost. Take urea. Which farmer is paying a supplier $50pt more in good times on the promise that they will maintain cheap buffer stock in case there is a war in Iran? That’s right – none. Farmers aren’t buying fertiliser futures; they’re buying the cheapest fertiliser ‘nows’ they can.
That doesn’t mean that the risk isn’t there though - it just hasn’t been priced into the system. It’s a game of pass the parcel where someone is left carrying the consequence when the risk crystalises (heads up agriculture, it’s almost always the farmer).
Not all countries are raw dogging it with supply chain risk though. For example, it is estimated that China maintains well over 100 million tonnes of grain in storage as a buffer (perhaps double that – you can see the storages via satellite, but who knows what is inside). They do the same for other key commodities such as fuel. Sounds great for Chinese businesses – except the price of protected commodities is controlled and set at higher levels than they would pay in an open market like we have in Australia. If the Australian Government instituted similar buffers, then we could also expect higher costs somewhere down the line. It could be fuel levies, taxes, reduced fuel rebates, higher registration fees and so on – but ‘insurance’ demands a premium.
Another approach is for farmers to self-insure, holding their own just-in-case stock. Build an extra shed and keep a year’s worth of fert on hand. Have additional storage tanks full of diesel. Warehouse spare parts for every part of your Kenworth that could break. Multiply all that across Australia’s agricultural regions and that will mean a LOT of tied up (and costly) capital, obsolescence, spoilage, theft, etc …. and suddenly JIT starts looking like a hot single at the pub late on a Friday night.
Like everything, managing inventory is a balance of risk and return. Maybe the approach should be only holding buffer stock when global powers overtly state they are going to make themselves great again (ahem)? Regardless, those that manage risk the best will be more successful over the long term (noting that being lucky in the past is no determinant of how the dice will roll in the future).
