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

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: Ford’s Latest Supply-Chain Problem

Ford held some shipments because of a lack of badges.

Ford Motor has delayed deliveries of certain vehicles because it didn’t have the blue oval badges that go on them, in another example of how supply-chain challenges have hit auto makers, reports The Wall Street Journal (Sept. 24-25, 2022). The company has run into supply constraints with the brand-name badges and the nameplates that specify the model. Both parts are affixed to the vehicle’s exterior and are important identifiers for the auto maker’s products.

Ford had considered some workarounds, such as 3-D printing the insignia until the permanent ones could be obtained. But they didn’t feel the printed substitutions would meet the bar on quality.

The company is retrofitting those built without a Ford logo and delivering them to dealers. It now has 40,000 to 45,000 vehicles in inventory that can’t be shipped to dealers because they were awaiting needed parts. Many of these vehicles are high-margin trucks (like the F-150 pickup) and SUVs. The shortages primarily involved parts other than semiconductors.

Tribar Technologies, which has made badges for Ford, had to limit operations last month after disclosing to Michigan regulators it had discharged industrial chemicals into a local sewer system. Ford’s trouble getting nameplates and badges illustrates that even the most basic parts can be hard to come by, resulting in constraints that can have larger repercussions on a company’s ability to fulfill vehicle orders.

The global auto industry has been wrestling with various supply-chain disruptions for more than a year, but most of the shortages have revolved around a lack of semiconductors. That has led car companies to build some vehicles without the needed semiconductors and then park them until they can be finished. This strategy has left tens of thousands of cars and trucks sitting at airport lots and other holding pens near assembly plants in the South and Midwest.

GM had nearly 100,000 incomplete vehicles that it couldn’t sell because they lacked the needed computer chips and other parts to deliver them to dealers. Similarly, EV startup Lucid has cited supply-chain constraints on parts such as glass and carpet as one reason it slashed production targets for 2022.

Classroom discussion questions:

Table 11.3 in your Heizer/Render/Munson text lists ten supply chain risks. Which did Ford face here?
As operations manager, how would you address the multitude of supply chain problems?

OM in the News: Tesla Rewrites Software to Get Around Chip Shortages

Chip shortages have weighed heavily on Tesla’s production, with Elon Musk saying that part constraints were one of the primary reasons the automaker would not release any new vehicles this year. The EV maker has increased its focus on innovation amid what Musk has called “chip drama central.”

Tesla’s strategic use of semiconductors has lowered the number of chips required to produce vehicles, allowing the automaker to maximize production. writes Supply Chain Dive (July 26, 2022). Musk said “the chip shortage has served as a forcing function for us to reduce the number of chips in the car. Yes, turns out we had more chips than we needed.”

Semiconductor constraints have hammered the auto industry, which requires thousands of chips to produce a single vehicle. Electric cars need even more chips — one hybrid electric vehicle, for example, needs 3,500 semiconductors on average. In 2021, semiconductor shortfalls cost automakers an estimated $210 billion in lost revenue or 7.7 million vehicles in lost production.

Tesla procures about 1,600 unique silicon parts from 43 semiconductor companies and finding new uses for chips has allowed the company to save costs and maximize production. Reducing the number of semiconductors used also makes the reliability of the end product better because there is less failure points. Going forward, Tesla will work to “integrate more functionality into fewer chips, like the way that it’s gone with laptops and phones,” said Tesla’s VP.

Still, limited supply of parts has limited Tesla’s ability to keep up with explosive demand. The carmaker is taking control of its own supply chain when it can, heavily investing in battery production and lithium refining to ensure that it can meet future demand. “If our suppliers don’t solve these problems, then we will,” Musk said.

Classroom discussion questions:

What are other auto makers who are short on chips doing to alleviate the problem?
How can an auto maker lower the number of chips used in production?

OM in the News: Why is There a Baby Formula Shortage?

A baby-formula shortage has led to empty store shelves, product restrictions and panic among parents.

Baby formula shortages have left parents scrambling, in some cases driving hours to find stores stocking the particular brands their infants need because of dietary restrictions. Nationwide, 43% of the most popular baby-formula brands were out of stock in the week that began May 1, up from 31% a month earlier. A normal rate is less than 10%.

The products have been in shortage for months partly because of supply-chain issues caused by the pandemic, reports The Wall Street Journal (May 17, 2022). The situation worsened after Abbott, one of the leading formula makers, recalled some products and shut down its plant in Sturgis, Mich., making Similac and other brands.

The FDA said it found a germ called cronobacter, which can be deadly in infants, in the Sturgis plant. Abbott said there isn’t evidence linking its formula products to illnesses resulting in the hospitalizations of 4 infants, including 2 deaths. The CDC also said the strains of bacteria at the plant didn’t match those involved in cases.

Federal prosecutors allege Abbott didn’t comply with conditions and practices designed to ensure the quality and safety of baby store formula, including steps to protect against contamination by bacteria such as cronobacter. Abbott agreed to hire an outside expert to help bring the plant into compliance with FDA rules, and said it could begin formula production again at its Sturgis plant within 2 weeks of the FDA signing off on the facility’s reopening. It would then take 6-8 weeks for products to be available on store shelves.

Meanwhile, rival Enfamil products experienced delays in shipments and transportation earlier in the year as the pandemic continued to disrupt the food supply chains. (The 2 firms are responsible for 80% of U.S. infant formula sales). Many retail chains are continuing to ration supplies by placing strict limits on orders, while others are trying to find substitutes with little success. Abbott said it is bringing products from its factory in Ireland to the U.S. but added that it will take weeks before the Irish plant’s products are on store shelves.

Meanwhile, everyone from frustrated parents to lawmakers on Capitol Hill have called for inquiries into why shortages have been difficult to resolve.

Classroom discussion questions:

What other products are seeing inventory shortages?
How do they differ from the baby formula issues?

OM in the News: Chips and Chip-Making

Wolfspeed’s recently opened factory in Marcy, N.Y. faces long wait times for materials.

The drought in chip availability that has hit auto production, raised electronics prices and stoked supply-chain worries in capitals around the globe has a new pain point: a lack of chips needed for the machines that make chips.

The wait time it takes to get machinery for chip-making—one of the world’s most complex and delicate kinds of manufacturing—has extended over recent months. Early in the pandemic it took months from placing an order to receiving the equipment. That time frame has stretched to 2 or 3 years in some cases. Deliveries of previously placed orders are also coming in late.

As a result, hopes of quickly overcoming the global chip shortage are dimming as it stretches into its third year, writes The Wall Street Journal (May 4, 2022). What began as a pandemic-era aberration of supercharged demand for laptops and other chip-hungry gadgets has spiraled into a structural problem for the industry. Now many chip executives say the problem will persist into 2023 and 2024, or even longer.

Tools aren’t the only headache. There is the challenge of hiring people to work in new factories, supply-chain hiccups in essential chemicals and a shortage of “substrates” that connect chips to circuit boards.

Meanwhile, demand is showing little sign of ebbing. Chip-industry sales topped $500 billion for the first time last year and should roughly double by the end of the decade.

Lead times for chip deliveries remain at historic highs. In April they averaged more than 6 months, almost double where they stood at the height of the last boom period. More than 90 chip factories are expected to start production globally between 2020 and 2024—a huge number in an industry where a single manufacturing tool can cost tens of millions of dollars. Even with the supply issues, global equipment sales this year are expected to be more than $100 billion.

Although the demand peaks during the pandemic have eased and higher inflation is weighing on consumer spending, long-term market shifts such as the switch to electric vehicles, growing industrial automation and the ubiquity of smart devices are keeping factories booked up and prolonging the chip shortage.

Classroom discussion questions:

What industries will be impacted by this shortage?
What are the 9 technologies described in Chapter 7 of your Heizer/Render/Munson text and how is each related to this issue?

OM in the News: Inventory Shortages Can Lead to Overproduction

In the throes of the sticker shock Americans have been experiencing lately, it is hard to remember an oft-repeated lesson: Shortages can suddenly turn into gluts. The combination of bottlenecks and robust demand has pushed prices for all kinds of things higher, but some of the most eye-popping increases have been in the prices of manufactured goods that rely on global supply chains, writes The Wall Street Journal (Nov. 23, 2021). Prices for washers and dryers were up 30% from the pandemic’s start, with prices for furniture up 12% and prices for new cars and trucks up 11%.

Further, shortages of some manufactured items are creating inflation elsewhere. The dearth of new vehicles has made it hard for rental-car companies to restock their fleets, which is a big part of why it cost 49% more to rent a car than before the pandemic. Fewer new car purchases by rental companies in particular has led to fewer available used cars, and used car and truck prices have risen 44%. With inventories low and what appears to be a lot of unsated demand out there, it is easy to imagine prices continuing to go up.

But imagining that supply-demand imbalances will persist, and then finding that they won’t, is a common occurrence. Pig breeders and cattle ranchers have regularly responded to high prices with production increases that initially aggravate shortages but then lead to gluts in the so-called hog and cattle cycles that drive huge swings in pork and beef prices. A similar dynamic occurs in shipping costs, and ship prices. And back in May, when prices were surging, it didn’t seem as if framing-lumber prices were going to fall by more than half—but then they did.

In the year ahead, even slight relief of some supply-chain issues could have significant effects. For example, there are a lot of partially built vehicles that car makers have parked around the country which will be rolling into dealerships once necessary chips are installed. Earlier this fall, many retailers were imploring consumers to get their holiday shopping done early, lest supplies run out, yet last week Walmart, Target and TJX all said they are well stocked for Black Friday. Lower Covid-19 risks would also help alleviate some supply-chain snarls, especially in countries outside the U.S. that are major sources of manufactured goods.

Classroom discussion questions:

Why can inventory shortages turn into gluts?
What is the relationship between shortages and inflation?

OM in the News: What’s Really Behind all the Empty Shelves?

Pictures of more than 70 container ships anchored near the government-owned ports of Los Angeles and Long Beach, which process 40% of all containers of goods entering the U.S., are all over the news. Thousands upon thousands of containers are onboard, full of everything from car parts to baby diapers. New ships arriving there are facing 3-week delays in unloading and processing. The system is in crisis mode, writes The Daily Signal (Oct. 29, 2021).

Meanwhile, Americans are facing shortages. Schools are having a hard time sourcing food for lunch programs. Food producers are missing inputs for packaging, while small businesses are facing shortages of bulk items like utensils, cups and to-go boxes. The government attributes these delays and shortages to worldwide factory disruptions during the pandemic and increased consumer demand. While these play a role, that is not the whole story.

What led to this crisis is a system of government-imposed regulations and red tape that seemed innocuous when the economy was healthy. A series of barriers in California, and at the federal level, prevented the market from responding efficiently to the demand at the ports. First and foremost, union hour rules for longshoremen and truckers have resulted in port operations not matching the influx of ships. The Port of LA has been operating at only 60%- 70% of capacity, closed evenings and Sundays. While Long Beach promised months ago to go 24/7, it’s still only running 4 days per week.

At the same time, California law is restricting independent contractors, which includes many truckers, from stepping in. And that state’s new emissions mandates limit the number of trucks able to even operate there. Amid such rules, California now has half the trucker density as states such as Texas, Pennsylvania and Ohio. To add insult to injury, these 2 ports just announced a new fine system for containers that remain at the ports too long, even though there aren’t enough trucks on the road to transport the containers. An impending vaccine mandate could worsen the ports’ labor shortage.

Classroom discussion questions:

What are the the solutions?
What other factors (besides the ports) are creating these supply chain problems?

OM in the News: Popeyes Runs Out of Chicken?

Popeyes sparked the so-called chicken wars between restaurants this summer when it launched a crispy sandwich– the first time the 47-year-old chain had rolled out a chicken sandwich nationally. The sandwich features filets from small-breasted birds, which tend to be favored by retailers and are in tighter supply than large-size birds. But supplies are low and producers have pre-existing commitments with competitors.

It turns out the chicken-sandwich sales far exceeded the Popeyes’ expectations, reports The Wall Street Journal (Oct. 28, 2019). A viral social-media campaign fueled by snarky exchanges between Popeyes and competitors led to lines out the door at many of its 2,400 U.S. locations. Customers who couldn’t get a sandwich grew angry and desperate. Many owners initially hoped to sell more than 60 sandwiches a day, but some went through 1,000 instead. Popeyes announced at the end of August that it had run out of the sandwich. The company went through a supply intended for 3 months in 14 days!

So Popeyes has spent much of the past 2 months securing suppliers that could meet its specifications for quantity and small-breast size of the item’s poultry. The lengthy amount of time Popeyes is taking in bringing the sandwich back highlights the supply-chain high-wire acts that can go on behind the scenes as restaurants try to move quickly to meet consumer tastes, and how forecasting and reality can diverge wildly even after 2 years of testing a new product. Competitors, hoping to satisfy the craving, have stepped in, with McDonald’s testing a new spicy chicken sandwich last month. Getting ready for its relaunch next month, Popeyes franchises have been hiring staff.

Supply crunches have hit other chains testing new menu items. Chipotle warned last week that it would likely run out of its new carne asada steak offering as early as next month after demand exceeded expectations.

Classroom discussion questions:

What supply chain mistakes did Popeyes make?
What forecasting techniques (see Ch. 4) could Popeyes have used for this new product?