Just In Time Past Its Prime

September 15, 2006
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KALAMAZOO — When the Toyota Production System was popularized in the United States in the 1980s, the world was a vastly different place. Transportation and fuel costs were low, interest rates were high and there was limited offshore sourcing.

"If you look at the business climate now, it is, in fact, exactly the opposite," said Bruce Ferrin, professor of marketing and integrated supply management at WesternMichiganUniversity. "I won't go quite so far as to say that heavy manufacturing industries like automotive are starting to rethink lean production and just-in-time strategies, but I think it's getting close to that."

A foundation of lean philosophy, "just in time," or JIT, is an inventory strategy designed to improve return on investment by reducing in-process inventory and its associated costs. Driven by a series of signals, or Kanban, the system allows manufacturers to purchase and receive components just before they are needed on the assembly line.

First conceived by Henry Ford in the 1920s, its first large-scale implementation was by Toyota Motor Corp. in Japan as part of the Toyota Production System. The scarcity of land and warehouse space drove Toyota's original lean experiments in the 1950s. Eventually, the philosophy spread throughout the entire organization, improving delivery times and profitability by reducing not only warehouse needs, but also overheard costs, retooling and virtually all waste.

Following in the success of Toyota, domestic manufacturers quickly began to adopt their own lean manufacturing processes. Today, those efforts have spread to even the smallest manufacturers, and to a multitude of other industries, as well.

And the majority of these initiatives use JIT in their supply chain, something Ferrin predicts may soon change.

"There are still a lot of advantages associated with running a plant with lean, flexible strategies. The lean stuff still works within the four walls of a specific plant," he said. "But I expect you will start to see certain inventories go up, particularly those that come into production processes from far away and overseas."

As several interrelated trends continue to work their course, supply chain management will become costlier and less predictable. Meanwhile, the cost of warehousing is stagnant, as interest rates remain relatively low and industrial real estate is in high supply.

Although lower in recent weeks, fuel costs are at a historical high — DaimlerChrysler recently announced it had adapted its business model with expectations of gasoline prices over $3 per gallon in perpetuity.

Fuel costs notwithstanding, transportation costs will continue to rise. The post deregulation prices of the 1980s are long since gone, and all modes are seeing capacity issues. Long-running labor shortages in the railroad and trucking industries continue to take their toll, along with rising costs of insurance and health care. Even more so, there is just too much demand to keep up with from "the tidal wave of imports into this country from Asia."

"Even if fuel prices go down, these other factors are going to continue to drive up transportation rates," Ferrin said.

Also, the globalization of the supply chain could do more to destabilize JIT than tax the transportation infrastructure and West Coast ports.

"There really is no such thing as a JIT container," Ferrin said. "If you look back at Toyota, the whole concept was an assembly plant in very close proximity to all of these suppliers that fed materials on to the plant on an hourly basis. Distance and logistics was not a factor — everybody was right across the street."

Nor was there much concern for homeland security. As the burden of securing supply chains shifts to the private sector, companies will have to choose between costly security investments and disruptive searches and seizures. Some companies may opt to simply de-globalize their supply chains.

"JIT gets a lot easier, and lean gets a lot easier, when you de-globalize your supply chain," Ferrin said. "With all of these factors converging, it will be interesting to see how this will play out."    

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