Is there really a crisis in global supply chains?

09 Jan 2022

By Eric Huang.       Photo by Laura Ockel 

Toyota pioneered the so-called "Just In Time Manufacturing" theory that has been used by nearly all companies for the past half century to keep their inventories agile, allowing them to adapt changing market demands while reducing costs. But shipping conditions over the past one and a half years have been completely unreliable, making it a serious challenge to the benefits of reducing inventories in the past.

Since the epidemic, the most common news we hear is "out of stock". Due to the obstruction of air and sea transportation by the epidemic, the global supply chain is broken, lacking chips, raw materials, auto parts, and even Christmas gifts. These phenomena raise the question of whether the global shortages of many commodities are really due to the disruption caused by the pandemic or the decades-old policies of many large companies to limit inventories?

In the history of the modern world economy, Toyota is the mastermind behind tremendous advances in industrial efficiency. The Japanese automaker pioneered what it calls "Just In Time Manufacturing", where parts are delivered to factories on the schedule they need, minimizing the need for inventory. Over the past half century, this approach has attracted not only all automakers, but other industries around the world as well. From the fashion industry to the food processing industry to the pharmaceutical industry, just-in-time manufacturing is used by nearly every company to keep inventories agile, allowing them to adapt to changing market demands while reducing costs. 

But shipping conditions over the past one and a half years have been completely unreliable, making it a serious challenge to the benefits of reducing inventories in the past. Economies around the world, from electronics to lumber to clothing, have been plagued by massive commodity shortages as the pandemic hampered factory operations and caused chaos in global shipping.

Willy C. Shih, an international trade expert at Harvard Business School, sees it as a bit of a runaway supply chain, with producers pooling his risk in the race for the lowest cost. The most prominent manifestation of the overreliance on Just In Time is the auto industry that invented it: Automakers have been crippled by a shortage of computer chips, vital auto parts made mostly in Asia. Auto factories from India to the U.S. to Brazil have been forced to stop assembly lines without enough chips in hand.

But the breadth and persistence of the shortages reveal how much just-in-time manufacturing has dominated business activities. This helps explain why NIKE and other apparel brands have difficulty getting stock into their retail stores. This is also the main reason for the severe shortage of personal protective equipment in the early stage of the pandemic, resulting in lack of protection for frontline medical staffs.

Just In Time is nothing less than a revolution in the business world. By keeping less inventory, larger retailers are able to use more space to display more diverse merchandise. Just In Time enables manufacturers to customize their merchandise. Precision production significantly reduces costs while allowing companies to quickly move production lines to new products.

Many businesses combine "just-in-time manufacturing" with their reliance on suppliers in low-wage countries such as China and India, making any disruption to global shipping a pressing concern. When there is a problem, this will magnify the loss - such as last year, a mega containership of EMC ran aground in the Suez Canal, which immediately disrupted the main waterway connecting Europe and Asia, affecting the flow of global goods.

Each disaster has sparked discussions about the need for companies to increase inventory and diversify suppliers. But every time multinational corporations continue so-called precision production. Consultant firms who once preached the virtues of accurate inventory are now promoting so-called supply chain resilience—the new buzzword of the day. Simply expanding inventory may not solve the problem, said Richard Lebovitz, president of LeanDNA, a supply chain consultant in Austin, Texas. Product lines are becoming more and more customized. Our ability to predict what level of inventory should be retained is increasingly difficult, and eventually, companies may embrace precision production even further, simply because it already generates profits.

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