JIT – The OM Blog by Heizer, Render, & Munson

OM in the News: JIT Makes a Retail Comeback

Retailers are reviving an old playbook to manage their inventory levels after four years of struggling to find the sweet spot of holding enough merchandise but not too much, reports The Wall Street Journal (Jan. 24, 2024). They have worked through the excess inventory that piled up on store shelves and in warehouses over the past 18 months, and are now focusing on replenishing items rather than stocking up on goods to have on hand in case of supply-chain disruptions.

The shift marks a return to the “just-in-time” inventory management strategy (our topic in Chapter 16) that many companies had employed before pandemic-driven product shortages and volatile shifts in consumer demand prompted a switch to a “just-in-case” stockpiling approach. Companies are now better able to predict shopper demand and feel they can hold leaner inventories amid moderating spending growth and fewer supply-chain disruptions. They prefer not to hold large inventories because the excess stock ties up capital, requires more space and people to manage it, and runs the risk of becoming outdated as trends change.

“Retailers have more confidence in the overall supply chain and the logistics network and the environment, and as a result, they’re saying we’re at a point now where we’re safe to go back to JIT,” says Ohio State U. Prof Terry Esper. The SCM head at Tailored Brands adds: “The ability to react to changes in demand means the company has no need for ‘safety stock’ inventory.”

Retailers such as Walmart have rolled out technology aimed at fixing forecasting tools that were broken during the pandemic as they seek to better understand what consumers are buying and more accurately predict demand. The technology is allowing merchants to have smaller, more accurate shipments than they have in the past. “We’re able to better predict lead times, we’re able to better execute review cycles, and as we do that better, we’re able to hit target inventory levels,” says Walmart’s VP for SCM.

Still, new supply-chain disruptions could prompt a different approach and bring in more excess stock. Recent attacks by Houthi rebels in Yemen on containerships have pushed companies to reroute shipments over longer distances to avoid the Suez Canal, and low water levels at the Panama Canal have slowed some deliveries.

Classroom discussion questions:
1. Why the return to JIT?
2. Will there be less volatility in supply chains from this point on?

OM in the News: Did the Pandemic Kill JIT?

Retailers struggle with an inventory glut and overstocked warehouses

Just-in-time supply chains took a lot of heat during the pandemic after empty shelves laid bare the pitfalls of ordering as little inventory as possible in the name of efficiency. But, with retailers now struggling with too much inventory, can the lean model, our topic in Chapter 16, be making a comeback?

Experts are mixed: While some believe that JIT has no place in the supply chains of the future, others say a modified version of the strategy will still be necessary to maintain resilience while keeping costs down. Here are the responses of three SCM experts as reported in Supply Chain Dive (Nov. 29, 2022):

CEO of LMA Consulting. JIT is not dead; however, the days of taking the concept literally and ordering inventory to arrive ‘JIT’ is dead. If ordering strategic inventory from China, you should account for likely demand and supply volatility and stockpile inventory appropriately. But most businesses took JIT literally, assuming the supply chain would continue to support their needs. They did not adjust their inventory profiles and were left empty handed during the pandemic. They are now assessing supply chain risk, reevaluating their supply chain footprint, dual sourcing key products and determining where to locate strategic capacity and inventory.

CEO of Assoc. for SCM. The pandemic blew a fuse, revealing flaws to JIT. JIT promotes efficiency and product quality, but sometimes at the expense of resilience, and therefore isn’t equipped to manage the turbulence of global events, like COVID-19, weather disasters and the Russia-Ukraine conflict. Now, around 64% of companies are pivoting from JIT to just-in-case to circumvent liability. This system depends on extra stock and buffers for high-demand products. A modified version of JIT can help where companies only stockpile certain vulnerable items to avoid fallout from potential disruptions. Consumers still have an expectation of high variety, rapid delivery and reasonable cost that defined JIT supply chains.

SCM Professor at Michigan State U. What we are seeing is the decision to reevaluate safety inventory levels. Safety inventories are a function of uncertainty of demand as well as uncertainty of supply. COVID-19 has exacerbated both forms of uncertainty, which results in companies holding more safety inventories to achieve the same target service levels. As we see supply chains normalize through 2023, we would expect companies to reduce their levels of safety inventory to correspond to the “new normal” levels of demand and supply uncertainty.

Classroom discussion questions:

Explain the difference between JIT and “just-in-case” inventory.
What was the impact of the pandemic on JIT?

OM in the News: Seven Principles of Supply Chains

The Wall Street Journal (Aug. 1, 2022) headline reads “The Supply Chain, Explained,” and proposes that supply chains can be understood through 7 basic principles:

Supply chains have many moving parts and layers. Some products have lots of parts—3,000 for a smartphone and 30,000 for a car. McKinsey estimates that an auto maker has 250 tier-one suppliers and 18,000 suppliers across all layers. On the product side, companies can run out of parts, and on the distribution side, shipping companies run into bottlenecks due to such factors as labor shortages and congested ports.
Sudden spikes in demand can be easily misread. Consumers signal demand by buying things, and companies in the chain respond by placing orders upstream. But when there are many companies in a chain, the signals can run amok. This is called the “bullwhip effect.”
Because demand is hard to predict, many companies had turned to JIT production. But scheduling deliveries for exactly when needed is complex. Things may fall apart when demand spikes, bottlenecks start disrupting international cargo shipments, and parts stop showing up in time. So more firms adopting a just in case philosophy of carrying more inventory.
Ordering more than you actually need makes shortages worse. Typically, a company only orders as much as they think they can sell or consume until the next cycle begins. But sometimes a hot seller comes along, or they hear a part is going to be in short supply, they decide to order extra—just in case.
The longer the distribution chain, the more susceptible it is to disruption. Shipping a TV set from a factory in China to a store in the Midwest might mean a dozen truck transfers, an ocean leg and a rail leg. Big delays at one or two transfers ripples across the whole chain.
Congestion removes capacity from the system. The more vehicles in the chain, the more backed up things get, and the less stuff gets moved each day. The increase in the number of ships and containers. because of high consumer demand in the U.S.. meant fewer ships per hour made it to the ports because of the increased congestion.
Bottlenecks are hard to spot because so few can see the whole picture. Managers throw money at what they think is the bottleneck only to find that it didn’t help much because the real bottleneck was somewhere else in the system.

Classroom discussion questions:

What are “tier 2” suppliers, and why are they a potential problem in supply chains?
Explain the difference between just-in-time and just-in-case inventory.

OM in the News: The Post-Pandemic Inventory Dilemma

Budweiser brewer AB InBev shared the cost of undrunk beer with its distributors during lockdowns.

From undrunk beer to unfinished forestry equipment, businesses deliberate just-in-time or just-in-case inventories, reports The Wall Street Journal (Nov. 8, 2021). Companies are wrestling with how big their inventories should be, since the pandemic highlighted the dangers of having both too much and too little stored away.

When the pandemic first struck, and demand for many goods dived, some companies were left holding large, costly inventories. But closed borders, strained supply chains and rebounding demand meant bigger stock buffers can prove positive. Now, the question of whether to maintain costly extra stockpiles or risk getting caught out again by disruption has emerged among the host of dilemmas businesses face, from whether to reshore production to how to best transport goods.

Businesses from Nissan to PepsiCo say the decadeslong trend of hyper-efficient supply chains, called JIT manufacturing, could be ending. But many companies say they will likely return inventories to pre-Covid levels when trading conditions normalize. As we point out in Chapter 12, holding large inventories ties up capital, requires extra space and people to manage it and needs to be insured. It is also a problem for companies selling products with a sell-by date. “Cost is still the driver for companies,” said a PwC exec.

Inventories can be problematic going into a demand shock like a pandemic. Companies like car makers and luxury-goods brands were left sitting on stockpiles they couldn’t use when demand collapsed last year. Drinks companies including Guinness maker Diageo and Anheuser-Busch InBev shared the cost of undrunk beer with their distributors to spare bars and restaurants from picking up the tab during lockdowns.

Other companies say they will likely go back to normalized inventory levels, but will change how they manage them. For instance, some multinationals plan to decentralize stocks to place them closer to customers, giving them localized stockpiles to dip into during supply-chain strain. Swiss drug giant Novartis is working to ensure each country it sells to has a second supply point for key products. “One thing we learned last year was to have strategic inventory in more places…decreasing the dependency on single locations,” said Novartis’ OM head.

Classroom discussion questions:

What are the strengths and weaknesses of JIT? (Hint: see Chapter 16 of your Heizer/Render/Munson text)
Why will many companies return to pre-Covid inventory policies?

OM in the News: Putting the Brakes on JIT

Toyota is stockpiling 4 months of some parts. Volkswagen is building 6 factories so it can get its own batteries. And Tesla is trying to lock up access to raw materials.

The hyperefficient auto supply chain symbolized by “just in time” is undergoing its biggest transformation in half a century, accelerated by the troubles car makers have suffered during the pandemic, reports The Wall Street Journal (May 4, 2021). After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic assumption that they could always get the parts they needed when they needed them.

“The JIT model is designed for supply-chain efficiencies and economies of scale,” says Nissan’s CEO. “The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.”

Ford F150 — *New Ford F-150 pickup trucks–unable to be sold because of the global shortage of semiconductor chips*

The basic idea of JIT, as we explain in Chapter 16, is avoiding waste. By having suppliers deliver parts to the assembly line shortly before they go into a vehicle, auto makers don’t pay for what they don’t use. They save on warehouses and the people to manage them. But as supply chains get more global the system has grown brittle. The crises are more frequent.

Auto makers don’t want to replace JIT entirely, because the savings are too great. But they are moving to undo it to some degree, focusing on areas of greatest vulnerability such as irreplaceable semiconductors. Ironically, Toyota now asks its suppliers to stockpile parts, the antithesis of JIT. After the 2011 earthquake in Japan hit many Toyota suppliers, the company pushed them to disclose who sells them their components. Over time, Toyota built a database that covers 400,000 items and reaches as far as 10 tiers down.

A sister idea to JIT was the use of single suppliers for many parts. These suppliers could master the daily dance of deliveries, cut costs through volume and service the global factory networks that the top car makers operate. Chrysler buys about 400,000 parts for the 100 models in its lineup of brands– and 95% of those parts come from a single source.

Classroom discussion questions:

What are the advantages and disadvantages of JIT in the auto industry?
Why did Toyota develop such a deep-tiered database of suppliers?

OM in the News: Auto Makers and the Global Chip Shortage

Auto manufacturers have spent decades streamlining their supply chains, using their muscle over parts makers to reduce their own costs by carrying little inventory and relying on suppliers to deliver components “just in time.” But car makers are finding they can’t dictate terms in the same way to the chip industry with its far-broader customer base, particularly now that chip demand is booming globally among a swath of industries. Car makers blame the shortage on tier-one parts suppliers, which generally do most of the chip buying. The shortage will drive the global auto industry to produce nearly 700,000 fewer cars than planned for the first three months of 2021. Auto makers including VW, Ford and GM, have furloughed tens of thousands of workers.

Ford has slashed production of America’s top-selling vehicle, the F-150 pickup, because of chip shortages

The car-chip pain is partly a self-inflicted wound that traces to the pandemic’s early days, writes The Wall Street Journal (Feb. 13-14, 2021). When the global economy went into stasis, preparations for future car production halted. Auto-parts suppliers reduced orders for electronics, betting that large volumes wouldn’t be needed well into the future.

Chip makers chose not to stockpile parts and wait for car makers’ orders—a decision made easier by surging demand from sales of laptops, servers, smartphones, video game consoles, 5G networks, and other electronics. The harsh reality is that these other products have have a much, much higher rate of return than making chips for cars. Plus only one chipmaker, Taiwanese TSMC, produces about 70% of the units used in the world’s autos.

Still, the car industry largely operated as if electronics suppliers were at its mercy. Normally, when they are calling on their suppliers, everyone is excited about the large volumes. But it must be compared to the billions of smartphones and PCs that are being sold. Unlike with some other parts, said a chip maker exec, referring to the auto makers, “They don’t know how the sausage gets made at the bottom.”

Classroom discussion questions:
1. What is meant by the quote at the end of the blog?

2. Table 11.3 (page 450) in your Heizer/Render/Munson text lists 10 supply chain risks. Which, if any, apply in this case?

OM in the News: The Brexit Bottleneck

The U.K. faces a logistics nightmare that could bring delays and shortages in essential goods after the country completes its exit from the European Union, reports The Wall Street Journal (Nov. 30, 2020). On Jan. 1, the free movement of goods across the English Channel is due to end for the first time in half a century. The change has sparked fears of severe bottlenecks at British ports and highways, where customs officers will inspect trucks amid an acute lack of staff that could rattle supply chains.

Some 10,000 trucks cross the channel on ferries each day, moving about half of all goods between the U.K. and the continent while dozens of daily sailings move freight mainly between Dover on the British side and the French ports of Calais and Dunkirk. The Port of Dover estimates that for every 2 minutes of delay each truck has to spend at the crossing, a 17-mile traffic jam will be created on the M20 highway heading to the port.

Hundreds of trucks held up on the M20 highway heading to the Port of Dover

British supermarket chains that built distribution schemes on the assumption that products would go straight from trucks to store shelves are short of refrigerated warehousing, prompting fears that much of the cargo could spoil.

Bottlenecks could affect more than 30 car makers, including Honda, Toyota and Jaguar—companies that produce around 1.8 million cars every year in the U.K. The manufacturers depend heavily on JIT parts from the EU that go straight to assembly lines to produce many vehicles exported to the continent. Some manufacturers are looking at airfreight to replace trucks, a solution that would bring big new logistics costs on top of EU tariffs that could substantially raise the price of British-made vehicles sold in Europe.

Classroom discussion questions:

Which of the 10 OM decisions described in your Heizer/Render/Munson text are affected by capacity issues like this one?
There are 6 tactics for matching capacity to demand listed on page 312 in Supp. 7. Will all, or some of them, apply here?

OM in the News: Why Are There Still Not Enough Paper Towels?

A shopper finds paper-products shelves mostly bare at this Costco in Teterboro, N.J.

An average of 21% of household paper products were out of stock in U.S. stores this month, reports The Wall Street Journal (Aug. 22-23, 2020). Why? Because of lean manufacturing and the efficiency of the industry. The competitiveness of the paper industry is such that firms must run near capacity with extremely high effective capacity (see Table S7.1 in your Heizer/Render/Munson OM text). The result is very little slack in the system. And the situation isn’t likely to abate soon, because producers have no plans to build new manufacturing capacity. The central piece of the machinery needed to make paper towels takes years to assemble.

The paper product scarcity is rooted in a decadeslong quest (known as lean manufacturing or JIT inventory) by businesses to eke out more profit by operating with almost no slack. Make only what you can sell quickly. Order only enough materials to keep production lines going. Have only enough railcars for a day’s worth of output. Stock only enough items on a shelf to last till the next batch arrives.

But mammoth paper machines require substantial support facilities on both the incoming side– where expensive digesters grind and mix the pulp to the proper consistency and on the outgoing side where huge machinery is required to move the 6,000 lbs. rolls for further processing. We discuss the options for adjusting capacity in Figure S7.1 on page 308. The paper industry has increased capacity by 25% using the options noted in that figure for short range increases. But the industry is also obviously reluctant to move to the more expensive intermediate and long-term options for what we all hope is a short-term problem.

Classroom discussion questions:
1. As manager of a paper company would you be willing to invest your company’s money on the long-term increased in the demand for paper towels?
2. In addition to added capacity, what other option can you suggest?

OM in the News: Solving the Health-Care Equipment Supply Shortage

“As we struggle to come to terms with the scale of the Covid-19 pandemic, one of the most frustrating sights is witnessing front-line health-care workers begging for more masks, protective gowns, testing kits, ventilators and intensive-care beds,” writes MIT Prof. Yossi Sheffi in The Wall Street Journal (April 10, 2020).

The crisis has focused attention on just-in-time inventory principles. The discipline and mantra that “inventory is waste” was built out of the Toyota Production System (see Chapter 16 in your Heizer/Render/Munson text) that has become iconic in supply chain around the world.

The JIT philosophy calls for lean inventories and tight connections between companies and their suppliers. It reduces manufacturing and supply chain costs, as well as response times along the supply chain. All sorts of industries have applied its principles, including health care. When hospital JIT supply chains run as advertised, the savings in those costly and high-stakes systems can be substantial.

However, supply chains built on precise and timely deliveries are vulnerable to unexpected and large-scale disruptions. The fallout can become acute when supplies aren’t available when demand spikes. This is one of the main reasons the coronavirus pandemic has crippled health-care supply chains. Clearly, JIT systems haven’t been up to the challenge, and there have been suggestions that medical supply chains should build more “just-in-case” inventory to ensure they are prepared for such outbreaks. Yet the benefits of JIT are just too significant to forgo. Organizations that rely on large inventories won’t be able to compete with facilities that remain lean, and that is true for hospitals.

Instead, says Sheffi, the U.S. must keep a very large, centrally-managed inventory of health-care supplies in several locations around the country to supplement the inventory maintained at each hospital. The parallel here is the strategic oil reserves. We prepare for shortages of oil and weapons in times of crisis. Medical supplies are just as critical.

Classroom discussion questions:

What are the three main principles of Lean/Toyota Production Systems discussed in Ch. 16?
Sheffi’s plan is future-based. What can be done today to help the shortages?

OM in the News: The End of Just-in-Time?

After a brief recession in the early 1990s, the grocery industry came under pressure to improve profit margins. Companies settled on just in time that aimed to produce, ship and stock as few goods as possible to meet demand. By decreasing the capacity of their distribution centers, retailers saved on rent, utilities and labor. Distributors saved on fuel and wages. Manufacturers cut down on unsold inventory. In the past 2 decades, producers and grocery stores such as Kroger have gone from keeping months of inventory on hand to holding only a few weeks’ supply.

Other industries did the same, from auto making to health care. This finely balanced system works well while goods are flowing steadily. But the coronovirus black swan event blew it to pieces. For many items, supplies sold out in days, exposing the downside of the push to hold less stock in warehouses and operate fewer, fuller trucks.

Now abruptly, manufacturers, distributors and retailers have thrown that strategy into reverse, writes The Wall Street Journal (March 24, 2020). They are making as much food as they can, delivering it as fast as possible and adding staff, all to restock denuded shelves.

General Mills is trying to skip steps in a carefully calibrated process. It is delivering truckloads of Cheerios, flour and pasta straight to stores’ warehouses, instead of first sending products to its own warehouses, to eliminate a link in the supply chain. Retailers, meanwhile, are overriding the sophisticated algorithms that say how much of what products they should buy, after seeing how those models failed to account for the demand surge. Instead, retailers are talking directly to manufacturers and making decisions in real time. “JIT purchasing has been thrown out the window,” said one CEO.

Yet manufacturers run the risk of throttling up production too high if the crush in demand for some products proves to be temporary.

Classroom discussion questions;

Relate this article to the discussion of supplier partnerships in Ch. 16 of your Heizer/Render/Munson OM text.
How does this “black swan” event impact the bullwhip effect discussed in Supplement 11?

OM in the News: GM’s Strike and the Auto Supply Chain

Companies that supply parts to General Motors are being forced to idle plants and lay off workers, as a result of the national strike called by the United Auto Workers. Nearly 46,000 GM workers walked off the job last week after the UAW and GM were unable to agree on a new 4-year labor agreement. The strike is now the longest nationwide strike against GM since the 1970s.

By stopping all production at GM’s U.S. plants, the strike is also beginning to affect the web of manufacturers that produce parts that go into the company’s cars. With no vehicles being made, those companies can do little but wait until the strike ends. Every automotive assembly job impacts between 5 and 8 other jobs, reports The Wall Street Journal (Sept. 20, 2019). The companies most affected so far are those that operate on a “just-in-time” basis, delivering difficult-to-ship parts like seats and door panels to GM’s assembly plants from factories located nearby.

At least three companies around Lansing, Mich., have shut down their plants that supply the two GM assembly plants nearby. Already there are signs that the work stoppage is rippling beyond just those nearby plants and into the broader automotive supply chain. A typical finished vehicle is made from roughly 30,000 individual parts manufactured by hundreds of different companies, and companies that provide products to GM will themselves have networks of suppliers.

The strike is having cross-border implications as well. GM laid off 1,200 workers at an assembly plant in Oshawa, Ontario, on account of a shortage of necessary parts that would come from the company’s U.S. plants. In the U.S., given the importance of the automotive supply chain to the country’s Midwest, a prolonged strike of more than a month could have serious implications for the region’s economy.

Classroom discussion questions:

What are the OM implications of a long strike?
Which suppliers are most affected?

OM in the News: Earthquakes in Japan Expose Supply Chain Fraility

Toyota is halting vehicle assembly across Japan due to earthquake disruptions at an auto-parts supplier, a move that recalls prior supply-chain interruptions — Toyota is halting vehicle assembly across Japan due to earthquake disruptions at an auto-parts supplier

“The vulnerabilities of the tight production supply chains at Japanese companies including Toyota, are back in the spotlight after earthquakes in Japan forced several to curtail output this week”, writes The Wall Street Journal (April 19, 2016). Toyota’s decision to shut 26 car assembly lines this week nationwide due to production halts by a supplier shows how the auto maker’s lean manufacturing system, often viewed as a model of efficiency, can be impacted by disasters. The latest shutdowns drew parallels to the aftermath of Japan’s 2011 earthquake and tsunami.

This is the second time in 3 months that Toyota has had to stop production in its Japanese plants after supplier troubles. The earthquake-affected supplier, Aisin Seiki, made door and engine components, and Toyota has yet to decide when it would resume operations. In February, Toyota lost production of 80,000-90,000 vehicles over a week-long halt after an explosion at a steel supplier. That shutdown weighed on Japan’s industrial output, which fell 6.2% that month.

Shutdowns occur largely because of Toyota’s JIT inventory system, a philosophy at the core of its efficient production method. By keeping as little inventory on site as possible, storage costs can be cut and component quality can be consistent. Toyota plants hold several hours worth of inventory for many parts, relying on a steady feed from suppliers. If suppliers suffer a disaster, Toyota can quickly run out of components.

After 2011, Toyota ensured that multiple suppliers are manufacturing each component. To assess risks, it built a database on suppliers, including on companies down the supplier chain. It also pushed suppliers to diversify production, and compiled scenarios on how parts production could be shifted to different locations in case of emergency.

Classroom discussion questions:

What are the advantages and disadvantages of Toyota’s JIT system?
Do U.S. firms face the same challenges? How?

OM in the News: The Case for “Just-in-Case” Inventory

An interesting article in The New York Times (Feb. 13, 2013) proposes that major storms, like Hurricane Sandy, and longshoreman strikes are causing companies to rethink the popular JIT business model, in which only small amounts of inventory are kept on hand, to fashion just-in-case inventory management. The shift has led retailers and logistics companies to alter supply chains by adding distribution hubs. Just-in-case inventory helps retailers keep merchandise on store shelves in the event a supply chain disruption affects one of the major distribution markets.

Since the 1990s, JIT has made sense for companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production. The model also reduced transportation costs, because goods would be shipped only as necessary. Now, more companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things.”

For example, Houston’s Ranger Steel, a massive steel plate distributor, recently expanded its network of distribution centers. Until the late 1990s, Ranger regularly trucked its products directly from Houston to customers throughout the US. “For a long time that concept worked like a charm,” said the company’s VP. “Then you started to see the spike in fuel pricing, and new governmental rules that made truck transportation very expensive.” So like many retailers and wholesale suppliers, Ranger has added 7 distribution centers to its network, cutting delivery times to 24 hours by moving its inventory closer to customers. Multiple, well-placed distribution centers minimize the time and distance spent on the final leg of delivery, when trucks are often nearly empty while transporting individual items. “The final mile is the most expensive cost per pound or cost per piece,” writes The Times.

Discussion questions:

1. Why is “just-in-case” being proposed as a JIT alternative at this time?

2. Is the concept of JIT fading?

OM in the News: “Thin Strands” Supply Chains

Today’s New York Times (March 20,2011) article opens: “Tony Prophet, a senior VP for operations at H-P, was awakened at 3:30am in California and told an earthquake and tsunami had struck Japan. Soon after, Mr. Prophet had set up a virtual ‘situation room’, so managers in Japan, Taiwan, and America could instantly share information. Mr. Prophet oversees all hardware purchasing for H-P’s $65 billion-a-year global supply chain, which feeds its huge manufacturing engine. The company’s factories churn out 2 PCs a second, 2 printers a second and one data-center computer every 15 seconds. ‘It’s like being in an emergency room, doing triage’ “, he says.

Today’s global supply chains indeed mirror complex biological systems like the human body. At times they can be quite vulnerable to a seemingly small weakness; it’s like a tiny tear in a crucial artery causing a heart attack. But the disaster in Japan (see our blogs on March 14 and 16) presents a first-of-a-kind challenge. Plants around the world, some not even knowing their 3rd tier suppliers were in Japan, are starting to close (eg., the GM truck plant in Louisiana).

The buying and shipping of supplies has been transformed in the past 20 years. Manufacturing is outsourced around the world, with each component made in locations chosen for expertise and low costs. That means supply lines are longer and more complex—called the thin strands phenomenon— or the difficulty and cost of seeing deeper into the supply chain. “Major companies have constant communications and deep knowledge of primary suppliers”, says Harvard Prof. David Joffe. “It’s the secondary layer of suppliers where the greater risk is”.

“Lacking some part (and the new Apple iPad2 has 5 from Japanese suppliers), even if it costs just dimes, can mean shutting a factory,”‘ says a former Apple exec. Will the Japan quake prompt companies to re-evaluate risk in their supply chains? Will there be a shift from JIT to a “just-in-case” mentality? This is a great article to share with your class.

Discussion questions:

1. How has the production of electronic components evolved in the past decades?

2. Why does Apple treat its supply chain as a trade secret?

3. What is the role of “smart technology” in solving the “thin strand” problem?

OM in the News: Earthquakes, Japan, and the Global Supply Chain

It is much too early to predict how soon Japan will recover from the terrible devastation of last week’s earthquakes and tsunami. Your students, though, are aware of the situation on the ground and the implications for global commerce and manufacturing, so this is a topic worth discussing in class.

Various newspapers have taken differing views on how the devastation will affect the global economy. Today’s Wall Street Journal (March 14, 2011) comes right out and asks the question: “Are global supply chains so taut that a disruption in the world’s No. 3 economy will be felt around the world?” Their answer: Japan’s factories play an out-size role in global production , ranging from a fifth of the world’s semiconductors to advanced machine tools. The result could be shortages of key components around the world. For eaxample, Reneses Electronics is the world’s largest maker of micro controllers for cars and other equipment. In suffering major damage, it places customers at risk. Its chips are key ingredients and its inventory is not stockpiled nor readily replaced, employing the JIT concept. And most auto makers use only 1-2 suppliers for parts.

Likewise, today’s New York Times writes: “Most high-tech goods these days are produced through carefully orchestrated procurement and manufacturing networks that combine parts from around the globe, often shipped on tight daily production schedules. Even temporary shortages can drive up prices sharply.”

Forty percent of chips for smartphones and tablet computers and most LCDs for appliances are also made in Japan. Further, Sony’s Blu-ray disc and magnetic tape factories were flooded. And with rolling blackouts twice a day to conserve power, most manufacturers are unable to operate expensive machinery that requires stable energy. Toyota, Nissan, and Honda are not even sure the logistics are available to get their cars to ports for shipping.

Discussion questions:

1. Discuss the importance of having manufacturing facilities around the world?

2. How are Japanese automakers impacted with respect to US sales?