Having given it some thought, I think that’s a really good way of looking at it. The pandemic stressed the system and all sort of marginal components broke. Labor supply shrank, supply chains got disrupted, etc. Sort of like having a creaky old beater of a car that’s fine for routine commutes to work and taking it out for an off-road rally race. It’s not a matter of whether something will break, but rather how many things and how fast.
Yea, that’s correct i think intuitively. Basically “repatriating” offshoring is going to come with a pretty huge hit in cost as well as supply, costs which were hidden in labor / material “arbitrage” (not really the right word, but hopefully conveys the right meaning) that is the global economy.
All of this. Plus, from a large company finance perspective, if you have a couple-few billion dollars in inventory and you can reduce that by half a billion dollars without affecting your sales or service (in “normal” times), that’s a relatively easy way to get half a billion dollars to either invest in new projects or (more cynically) pay out to executives/investors/private equity owners. I mention the latter in particular because it’s a very common part of the private equity playbook, but there are rational reasons to do it even without that influence. Cash (flow) is king.
Oh, no, it could only ever be in fast motion as the frailty was not only more and more profitable, but the only way to compete. Much like the previous booms.
Some bearded German might even call it an essential property of the system.
It’s really interesting to hear from somebody who has to deal with this as a manufacturer. I’ve been hit ont he receiving end as a consumer. The glass cooktop on our range cracked. Nobody has the part in stock and it was backordered with no ETA. We wound up buying a new range instead. We just had new garage doors installed. That was a four month wait and chatting with the installer, that has grown to five months. I also noticed that there were cameras on the garage door opener. I did not spend the extra bucks for the model with the camera but its now a free upgrade for us because they ran out of the model that we actually ordered. It’s a bonus for use but its an extra cost for them, a small local business which adds up if they are doing that for a lot of their customers.
Yes, the system is hurting right now, only after a literal once in a hundred year global pandemic shut down factories around the world for various lengths of time.
The problem is also exacerbated by a fiscal policy, which made sure that folks unemployed by the pandemic still had money. In addition, for 1/2 of the population, they were able to work from home meaning their wages remained intact. But the uncertainty of the situation caused many people to delay purchases, (it did for me).
Meanwhile, there was a dramatic decrease in both the demand and supply for almost all services. You can delay buying, shoes, cellphones or cars for 6 months or a year, without dramatically decreasing the total demand for a product. Instead of one pair of shoes, you may buy two, or upgrade the cellphone or car a little quicker next time. Demand for services is perishable, if I don’t go out to eat for a year, you may eat out a bit more next year, but it won’t be twice as much. Same thing is true, for haircuts, doctor visits, massages, and vacations. Imports are up 40% from spring of 2020 and 10-15% higher than the last few years.
The closest parallel we’ve had is right after WWII when the troops came home, and the restriction on build consumers goods, cars, washing machines, nylons were lifted, creating huge shortages.
This was boom for the country, and no reason to expect that the same thing won’t happen now.
However, there is no reason to rant about just-in-time. In addition to all the benefits that @Scrax listed there is also the environmental impact. Nothing is more wasteful to the environment than keeping a 3-month inventory, just in case the supply breaks, and then finding the inventory is obsolete and you have to ship it to a landfill. Since 31% of CO2 emissions are caused by making things we need to be very mindful of this.
I disagree, strongly. Because it is, literally, true that the changes to supply chain management as more companies adopt a lean posture is a significant contributor to the disruptions we see. It is a pursuit of efficiency at the expense of increase brittleness.
That doesn’t mean there isn’t sensible reasons for the developments, and doesn’t imply a value judgement against the practice. But just because it can provide positives for the companies that pursue it, a clearly true proposition evidenced by the adoption, but to ignore the risks it can present is folly.
Too many companies pursue buzzwords, rather than making decisions tailored to their situation. Pushing something because it sells well in the board rooms, or because it worked for another company. ‘Move to cloud’, ‘go lean’, ‘go agile’, etc. These can work and be good ideas, but implemented without understanding can make things worse. But no one is fired in a boardroom for suggesting moving to agile development, because its the trendy thing. If it fails, well, that’s the breaks. Hitch to the next trend. I am certain more than a few of us here have seen this in person.
Supply shocks and demand shocks, both of which we have seen in the last year, can be disastrous for JIT. We see the evidence every day now. Placing a significant portion of the blame of the current situation on JIT approaches is entirely fair.
So imagine that companies held 3 months of inventory instead of 3 weeks. The problem has been going on all year. It seems to me the only difference is that impact to a dramatic increase in supply couple with a dramatic decrease in supply (both caused by Covid) would have been shifting the start of the problem by 2 months and 1 week.
JIT, start to become popular in the late 70s/early 80s and by the 90s was widely adopted. Society has been benefiting from it for 30 years.
It’s going to be interesting how the holiday demand will continue impacting the supply chain (hopefully not catastrophic - but when the stack of cards begins to fall…). New container ships aren’t going to pop out of nowhere.
My industry starts to slow down in Oct. Nov and Dec are shit. Jan and Feb are mediocre, but starts to pick up. However, like I said, our backlog is maximized thru Feb at this point so our level of production will me maximized during a period when we typically slow down. Great for profits I suppose, but the train starts to shake, and I don’t want it to shake off the track.
A lot of companies try to slow down purchasing at year end to artificially make their year end look better - also frees up cash to pay out those coveted Christmas and year end bonuses - but I imagine a lot of manufacturers will continue being balls to the wall. At this rate, we aren’t looking to slow down our normal purchasing level at all.
Eventually things will nornalize, but until then this is the price of it. The question is how many of these shocks do you expect over the next 30 years?
COVID was by far the biggest shock of our lifetimes, similar to a world war. Climate Change may result in shocks as well.
If I was a suit, I’d probably try to ride this tiger out, and not do long-term changes, unless structural changes happen from labor.
I’m not disagreeing but my view is that the benefits came with a cost of increased brittleness, which we are reaping now.
It’s all balancing. Also, I’ve read some accounts that the modern day implementation of JIT has gotten more and more razor edged, more and more brittle. The original Toyota system included maintaining reserves of critical or hard to get parts so it was a mix of efficiency with some cushion. The more modern implementations to me seem to be all efficiency, no shock absorber. I’m well aware that building shock-absorption capacity into the system comes with a cost, but so does going full brittle.
That’s the issue here IMO: not being slaves to short term efficiency but considering the proper balance long term big picture. I feel like we have reached a point of imbalance and it’s screwing us now.
As anyone who has ever managed a project before knows, just a little bit of slack goes a long way to mitigating the impact of resource shortfalls and delays. 3 months supply gives you time to anticipate the shortfall and act in ways that 3 weeks does not.
I understand how these systems work well enough (my background, both professional and educational, cross both computer systems and business sides of product lifecycle management). But the analogy I would be would be comparing it to a buffer solution in chemistry. In a buffer solution adding acid or base to the solution will not change the pH, to a point. Your pH remains unchanged until you reach a tipping point, at which point the solution rapidly changes pH with each new drop.
Supply chains are the same. They are able to withstand some amount of disruption, on the macro scale (individual vendors may be more or less resilient than the system as a whole). But once you exceed those tolerances, the whole thing starts to fall apart, with ripples downstream. And the amount of dependencies are not always immediately obvious. What do wages of truck drivers have to do with shipping logs to a lumber mill by train? Well if the mill ships finished boards by truck to building supply firms, and trucks are in a shortage due to an increase in demand elsewhere in the system, now that mill has excess inventory of lumber and can no longer accept new deliveries. Which now impacts rail cars as now the lumber sits on rail cars and can’t be delivered, which means those rail cars are unavailable for other purposes. It ripples all the way down, and across systems.
Like I said, I understand how this came about. I’ve even taken certifications on things like lean manufacturing, Six Sigma, and Agile development. It’s things I do see and deal with. But that just means that I can see the ripple effects better than most. Because the reality is once you exceed that buffer the effects can be quite spectacular. You can ride up to that line with no ill effects, and things can recover normally, but once you cross that buffer threshold then things start to fall apart in many seemingly disconnected systems.
It’s like those dams that overtopped. They’re fine as long as the water height is <=X “. Once they got to X+1” things went to hell fast.
Exactly. It’s not saying 3 months is some magical number (I don’t care about picking a specific level, as it varies by company, industry, and production method), but each decrease in the on hand supply has a comensurate risk, just as increasing supply can have as well.
If you increase supply of inputs, then the risk is cost of storage, spoilage, obsolecence, etc. It would be insane to suggest, for example, that car manufacturers hold 5 years worth of computer chips for new car manufacture. In practical terms that would completely negate risks of supply disruptions, even a 2 year shock would be easily handled, and inventory built back up over months or years after. But you would also face spoilage risks, and especially risk of foreclosing on technological development. In 5 years how much better could computer components be? Probably quite a bit, and a 5 year inventory would mean you would be unable to take advantage of those gains in a reasonable time.
But decreasing supply poses huge risks as well. If you have day of delivery, meaning those chips only arrive in the plant at the precise moment of their installation, you have no warehousing risks. No loss of potential for advancement, but are extremely suceptable to any disruption in supply. Something as simple as having an accident on the road to your factory can delay production and put your systems on hold.
@Scrax it sounds like you work in printing. I spent 12 years doing packaging engineering in print. And there were times where emergency orders were put in for paper due to changes. And if the job was hot enough the presses would be put on hold. But that has a huge opportunity cost. If we didn’t have the paper to print a job those presses would sit idle, and that cost $3-500 per hour in costs even if doing nothing. So waiting for paper to be delivered would literally cost money.
So it is a balance. Each time you reduce inventory you are having to weigh risk. Its a similar calculation to what you see in flood management. Each lot is assigned a relative risk of flooding*, and this is weighed against development. A lot rated 1 in 100 year may be granted a build when 1 in 5 year is not. Maybe moving from 3 month inventory to 3 week inventory carries only a risk chance change from 1% to 3% per year. In which case perhaps that is worth it. But maybe moving from 3 week to 2 weeks moves it from 3% to 20%. At that point further efforts to reduce are not just inadvisable, but counterproductive. You need to weigh the cost savings against the cost of disruption and the likelihood of such a disruption at the proposed level change.
And, unfortunately, there are a lot of companies who, in the pursuit of efficiency, did not make this calculation or factor it properly. And that leads to the breakdowns we see today. Nobody thinks about shipping containers normally. Nobody really cares. Until, suddenly, the system starts to break down. And now this invisible part of the global supply system is a really big deal.
*ignore how some places lie or manipulate these ratings to justify developments that should not be LOOKING AT YOU HOUSTON
Isn’t part of the problem here that companies, seeing a disruption to supply of inputs, are now trying to buy ahead and build up back to larger stockpile levels? Except, everyone is trying to do that at once, and lack of supply means they can’t buy all their inputs up to the same level. So they hoard and intensify the supply disruption for other companies using the same inputs, but aren’t able to get ahead on whatever their current limiting input is.
Basically the same panic that led to empty shelves where the toilet paper used to be, except all inputs, everywhere.
You got it! We are a 24/7 shop too, so the goal is to never stop running the presses except for maintenance. We estimate jobs based off of expected hourly rates and essentially sell press time by the hour. “Throughput”, etc.
This thread is basically a recreation of every time my Purchasing Manager and I butt heads. We are both right, and have the best interest of the company in mind, but we have opposing interests as far as purchasing/inventory go. I was being a dick during the summer when he started overbuying, but he was at the tip of the spear so to speak and started making defensive moves as soon as he started getting signals from his suppliers. He’s winning for now :).
Yes.5
Oh absolutely!
Once the system breaks down in any way, then any future deviations from the norm will continue to ensure the system never recovers. The current buying pattern may well have been able to be absorbed in 2019. It may not even have been noticeable. But as the system was already under strain then the ability to absorb any change is compromised. It’s a buffer solution that has reached the saturation point. Even one teeny tiny drop causes trouble.
Yeah, your talk of cardboard and slow season tipped me off. Granted the shop I was at was balls to the wall until about Thanksgiving, and only was slow until about Valentines day, but that was because we were deep into marketing print for Leo Burnett and others. So we’d be running late mailers and stuff for Christmas in November, as well as running Valentines Day and Easter stuff until early December. Then the lull.
But September and October were our busiest months, by far.
Just want to say “Thanks” to y’all for the inside scoop on how this stuff is manifesting. This is fascinating. Logistics are hard.
For those gamers here, the JIT thing is why Electronics Boutique pushed pre-orders so hard back in the later 90’s/early '00s. If you could gauge demand better through $5 down on everything you were going to sell, then you wouldn’t get stuck with excess inventory. Since new games have much lower margins, the better you could estimate what you actually needed, the better you’d do both in margin there and then in used games because you ran out of the new ones at the right time.
That stuff doesn’t work so well for things like groceries and daily consumables, but we all know that wasn’t going to stop all retail from trying really hard to be on that ragged edge. Now we all pay for it.
I would never have guessed printing, but rather I now realize a lot of industries have that same timeline. I work for a heavy equipment manufacturing company. It’s the same timelines. Construction/mining/etc all slow down as things get colder in the northern hemisphere. Then start ramping back up in spring, etc. We also have a backlog of production and cannot keep up right now. We’ll be lucky to even catch up over that slow cycle break. And just like you mentioned, it’s both a blessing and a curse.
On the flip side, it sure sounds like I need to get Christmas shopping done ASAP.