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JIT, OEMs and the Pandemic

Achal Saran Pande

Manufacturing companies all over the world have to deal with inventory. Usually, they end up with too much of it or too little of it – never seem to get the right amount at the right place at the right time. JIT or ‘just in time’ was developed way back in the 1970s by Taiichi Ohno to manage inventory at the Toyota Manufacturing Plant. When the automotive company Toyota became wildly successful, JIT and the rest of Toyota Production System (TPS) was duly credited for this success. Subsequently, over the years, JIT became the most popular technique for managing material flow and inventory, especially among automobile companies.

The concept of JIT itself is beautifully simple. Consider implementing JIT in your day to day activities, e.g. yourself arriving for a meeting. The main focus of implementing JIT would be to remove wastages (in this case time) and reduce the difference between your arrival and the start of the meeting to as close to zero as possible. So, conceptually there is no problem – i.e. JIT would make you extremely efficient if you can exactly align your activities in your day. However, we all know how difficult this is to ensure in reality! Automobile companies, and all manufacturing companies, for that matter) are also finding out that this is not a simple task.

So how does JIT work in manufacturing and automobile companies?

Manufacturing companies have implemented this approach for managing material flow by producing at just the right time so that it reaches the retailer through the entire supply chain to be sold to the customer at just the right time. Suppliers and customers along the value chain are expected to co-ordinate in such a way that any finished, intermediate or final goods are immediately collected and processed further, rather than put on stock. Within a manufacturing plant also material is re-filled or scheduled to arrive exactly when needed for manufacturing. Any movement of inventory before the actual need for it can generate excess inventory, and any movement later will create shortages. In the JIT methodology, this movement or flow of material is controlled through the Kanban system (a material ‘pull’ mechanism) that provides the necessary need/ demand triggers. In order for manufacturing/ automobile company to avail the benefits of the JIT system, there should be optimum synchronization between all the nodes in the supply chain. Actions such as standardization, quality initiatives, set up time reduction, etc., are taken to reduce variability in the system and improve synchronization.

However, even in the best of times, this synchronization is difficult to get right. The current pandemic put a major spoke in the wheels of JIT in manufacturing or automobile companies. So, in this article, I would like to discuss the basic assumptions of this concept and why the pandemic affected it so badly.

Why did JIT fail during the COVID

JIT was introduced to enhance speed to market and to reduce operational costs. The underlying assumption is that if the material flow in the supply chain of the manufacturing/ automotive company increased, the desired objectives of the company (better inventory turns, sales, etc.) would be achieved. Also, since increased material flow would bring down the material waiting periods, it would eventually bring down inventory. Hence, JIT is also seen as a great tool for inventory reduction!

However, in practice, the flow concept of JIT improved material flow only for the OEMs or original equipment manufacturers (within their factory), and, in fact, led to deterioration of material flow of the entire supply chain if you include the suppliers and dealerships in this value chain. A close examination of the supply chain of manufacturing companies will show that this methodology, instead of reducing overall inventory, manifested itself as a mechanism for inventory relocation within the supply chain in favor of the OEMs. Let me explain.

Let us visualize the supply chain of any manufacturing/ automobile company as having three major entities – Suppliers, the OEM and Dealerships.

Typically, when the OEM implements JIT principles to keep itself “lean”, it pushes out inventories on either side (Raw Materials [RM] at Suppliers and Finished Goods [FG] to Distributors). So, while the OEMs may run lean operations, their suppliers and dealerships almost always struggle with high inventories. Since the power equations are skewed in favour of the OEMs (especially in automobile companies) , they are able to ensure reliable supplies by insisting that the suppliers maintain enough material in their FG to support their production shifts. The actual amount of FG that the supplier maintains depends on the supplier’s degree of reliability. In my experience, this can vary anywhere from three days to 10 days of FG inventory across suppliers. (This is in addition to the WIP and RM inventory they carry for their operations).

Downstream in the supply chain are the dealers. Each dealership maintains at least a month’s worth of inventory (this is a conservative estimate). During the pandemic, this has gone up to 3-4 months inventory and even more in some cases.

Who bears the cost of inventory?

The inventory they carry is naturally at a cost to both the automotive suppliers and dealerships. It is not only the inventory holding cost but also the associated costs of space, manpower and equipment that falls on them. What’s more, the money locked in inventory blocks working capital of both the entities. It is often a huge financial burden on them.

If I have to put it in simple words, it is as if the OEMs have passed on their inventory and costs to their partners. So essentially this means that JIT has served not only as a mechanism for relocation of inventory but a relocation of costs as well! So, while the OEMs may operate with reduced inventory/ costs at their end, the rest of the automotive supply chain does not experience this benefit, and, may at times be running at pretty high inventory levels. So, as far as the suppliers and dealerships in the automotive/manufacturing companies’ supply chain were concerned, it was already an unequal paying field when COVID-19 hit.

Impact of JIT on OEM’s supply chain

The impact of this pandemic on the supply chain was on two fronts – Operational and Financial.

Operational – Most OEMs who have implemented JIT tend to have critical suppliers located near or inside their premises. However, many of their non-critical suppliers may be located in other parts of the country. During the pandemic, many OEMs found themselves located in areas that were open and operational, but some of their suppliers were under complete lockdown. The consequent disruption of supplies may have been mostly from some non-critical suppliers. But the problem with this is that OEMs are assembly plants. Assembly plants are where many parts come together to produce a vehicle. This means that even if a single part is missing (critical or otherwise) the assembly/ vehicle cannot be made. Moreover, since the OEMs have implemented JIT, it would be operationally very lean. It will have very low inventories in RM, WIP and FG. So, even if the suppliers were holding a lot of inventory (for their OEMs) and this inventory is badly required by the OEMs (remember relocation of inventory), there would be a delay in supplies, and the production of the OEMs would suffer.

This is not a one-time story of a few suppliers. Since OEMs tend to have 500 or more suppliers, the pandemic would randomly disrupt supplies from different suppliers at different points in time. This precipitated a nightmare for the OEM buyers!! I cannot imagine how they are coping.

Financial – Now let us discuss the financial aspect. As I mentioned previously, the significant part of the suppliers’ and dealerships’ working capital is as it is blocked by the inventory they carry. With the pandemic and the resultant lockdown, capital rotation also stopped. So, even after the lockdown lifted, many of them found themselves without the capital to restart operations. The inventory they carry is like a ticking time bomb for some dealerships – it will eventually explode, and many dealerships may have to close shop under the pressure of debt. Many suppliers may also close unable to survive this business stagnation (particularly tier 2 and 3 suppliers). If suppliers close down, this will again disrupt supplies to the OEMs.

Even if these suppliers survive, because of these capital problems, the supplies from different suppliers will ramp up differently. Financially strong suppliers will ramp up fast. The weaker ones will ramp up very slowly. This implies that with suppliers at different stages of ramp up, component availability in Full Kit for assembly will continue to be a challenge.

Impact of JIT on manufacturing operations of OEMs

The manufacturing companies with JIT processes took a hit not only in their supply chain but also have to face consequences in their operations as well. JIT advocates the concept of a balanced line. This essentially implies that all the work centres in a particular line all have the same capacity or balanced capacity. If you can operate with a balanced capacity line, no particular work centre is a bottleneck. The entire line is the bottleneck because the capacity of the line is defined by the capacity of its work centres, which is all equal. The problem with operating with a balanced line is that to get the expected output, all the work centres must operate with very high efficiencies. In such a line having numerous work centres, if even one person is absent or one work centre slows down, there is a significant risk of output from the line falling drastically or stopping altogether. Since the pandemic brought along with it severe resource crunch, particularly of manpower (either due to lack of availability or due to social distancing mandates), production managers of OEMs practicing JIT would have had a tough time managing the shop floor!

Conceptual lacuna or implementation issues?

With so many issues during the pandemic, there was an uproar by some in the industry about the conceptual standing of JIT. At the same time, many argued that these problems were really not due to a conceptual weakness but the result of poor implementation. I would argue that it is a bit of both. Let me explain.

If we look at the automotive industry, it will be observed that it has been going through a major churn, even before the pandemic. The environment has become increasingly uncertain. Four major factors are contributing to this uncertainty – Competition, Technology Changes, Vehicle Norms/ Regulations and natural calamities. Competition is increasing and therefore the time to introduce new models is reducing. These days on an average, across segments, a new model or its variant gets launched every 2-3 years. This time between launches is expected to reduce even further in future. This implies that the OEMs portfolio of products is going to increase, and the churn of the entire portfolio will also be very high. In addition, technology is changing fast, and new vehicle norms are being introduced at a rapid pace. Also, the world is experiencing more natural calamities leading to disruptions in the entire supply chain. These calamities are not only increasing in terms of variety but also in terms of frequency. While implementing JIT involves actions to continuously reduce variability in the supply chain from supplier to plant, JIT’s Achilles heel is high environmental uncertainty and demand volatility – small disturbances can create a ripple effect. During the pandemic, there were severe uncertainty both on the demand side (spike, fall, spike, depending on intermittent lockdowns) and the supply side (labour shortage, production capacity shortage, container shortage, warehouse space shortage, etc.). JIT is just not designed for so much uncertainty – without any redundancy in the system, many supply chains fell apart.

Now, let us examine the problem with its implementation. In India, across most OEMs (both automotive and manufacturing companies), the JIT principles are only deployed at the OEMs premises. They are not extended to Dealerships or Suppliers. For instance, a Kanban system is not extended to dealerships or deployed across tier I, II and III suppliers. Therefore, there are two separate worlds created within the supply chain – a JIT world of OEMs and the non-JIT world of its partners. This demarcation creates the problems for the supply chain. If implementation of JIT is not restricted thus, but also includes just in time manufacturing, then the agility of these companies to respond to vagaries and black swans will be much better. Some firms who have done both just in time manufacturing and supply , have been able to respond to this pandemic much better than others.

Having said that, I believe JIT, in its current form, is not a robust concept / methodology / management philosophy for the future. Environmental uncertainties are on an increase. The need of the emerging VUCA (Volatile, Uncertain, Complex and Ambiguous) world is a supply chain methodology that ensures short lead times and agility, while also offering reasonable protection from uncertainty and volatility. For this, JIT’s objective of near zero inventory has to be re-thought. Zero inventory thinking is focused on the assumption that all variability in a system can be reduced and controlled. While good quality practices, standardization of components, etc. can bring many operational variables under control, uncertainty of the environment over which manufacturing/ automobile companies have very little sway cannot be disregarded. Severe price fluctuations of raw materials such as steel, change in regulations, semi-conductor chip shortage, geo-political issues, floods, etc. are just a few of the large number of events global supply chains have been recently subject to, even if we were to designate the pandemic as a black swan event. JIT conceptually ignores these uncertainties and hence it is a misfit.

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