In the 1970s, the Japanese automotive giant Toyota gave the world an efficient and cost-saving management strategy named Just in Time (JIT) inventory. Like the name suggests, the company ordered parts only when it received new car orders. To give a clearer picture, the inventory management system, developed by Taiichi Ohno, a Toyota industrial engineer, was aimed at aligning production, eliminating waste and help producers forecast demand accurately.
Within no time, the JIT model revolutionised the business world and was quickly adapted by many small and big enterprises in the world, including Dell, Harley Davidson and McDonalds. The JIT strategy saved huge amounts of expenditure cost with low inventory costs, high quality production and low wastage. The two environments where it worked best were manufacturing and retail.
Unfortunately, the JIT inventory caused Toyota’s operations to nearly come to a halt after a fire in 1997 at the company’s automotive parts supplier, Asinin, severely impacted its capacity to produce certain parts. Toyota lost 160 billion yen as a consequence of the fire.
The incident was a stark reminder that even though the JIT strategy can be very effective, there is no room for error and a small blockage in the supply chain can cause rippling effects. Today, the struggling supply chain, less demand and negligible production due to the ongoing pandemic is once again serving as a reminder and testing the viability of the JIT model during a crisis.
The lockdown imposed in China severely affected the manufacturing chains around the world, causing trouble for companies employing the JIT model. In India, many pharmaceutical companies bore the brunt of the supply chain disruptions of Active Pharmaceutical Ingredients (APIs), a key item for pharmaceutical products primarily manufactured in China.
From here onwards, it appears that companies are now trying to be less risk tolerant. Harsha Razdan, Partner and Head, Consumer Markets and Internet Business, KPMG India, told ET Digital, “Retailers (especially grocery and essential foods) are dealing with significant out-of-stock situations as consumers are hoarding products. Hence, businesses now need to look at reviewing their forecast assumptions and demand projections, not only for their own categories but also for categories that compete for the customer share of wallet.”
He added that for critical items, there is a strong need to look at single vendor / single country + 1 strategy to manage business risk. According to a KPMG India analysis, during the first four weeks after Day-Zero of Unlock 1.0, organisations making a robust Day-Zero plan stand to achieve more than 35% higher profitability than those without a Day-Zero plan .
“Companies that can stabilise their supply chains and position themselves to assess future disruption by providing structured responses to their risk and exposure will be in a position to withstand the current supply chain disruption. Those organisations that manage their supply chain and demand issues reactively will not be very successful over a longer period. In this environment, it is those with the most agile, efficient and resilient supply chains that will survive and win in the market,” he said.
What about post Covid?
While Razdan believes the ‘just in case’ model will work better during the current scenario as supply chain disruptions are likely to continue for a while, he also feels that post-Covid or when the environment moves to BAU (Business As Usual) scenario, the JIT model will soon kick in.
“In a BAU scenario, players who are able to capitalise on their just-in-time strategies will be able to leverage on their competitive edge. That said, organisations could choose to balance between the strategies depending on consumer demand and predictability changes from time to time,” he said.
Agreeing with the sentiment, Ashish Nanda, EY India Supply Chain Leader, told ET Digital that while there are many constraints in the Covid period, he sees no reason for companies to move away from JIT in a steady state scenario.
“I think the ‘just in case’ model will work only for a short period, just to overcome the current supply chain and infrastructure constraints. Even if you look at these early periods, from the lockdown versus where we are now, I think a significant amount of constraints that were imposed such as logistic inference have improved. So, ‘just a case’ made sense here. But, I don’t think it is a sustainable strategy otherwise,” he said.
Nanda highlighted that with many small and big enterprises adopting technology, the disruptions caused in the supply chain and distribution sector will be dealt with easily and will give rise to a better JIT system.
“People should be looking to move to more digital technologies, getting complete end-to-end visibility of the supply chain, driving a lot more efficiency and moving to a leaner and a much more responsive structure rather than overstock things,” he said.
When asked how companies employing the JIT model should cope with unprecedented situations with lots of uncertainties, for e.g- parts of Beijing are undergoing lockdown again, he said that companies need to build capabilities to react to dynamic changes on an ongoing basis.
“It would help if they relook at parts of their supply chains which are vulnerable and plan for alternates/ backups with a view to building a bit more resilience into their planning,” he said.
An ET report had earlier suggested that the auto industry is divided over employing the JIT model with the manufacturing side wanting to end the practice and dealers urging OEMs to adopt the strategy post-Covid. Due to the economic slowdown in the past 18 months, the sales of vehicles have plummeted by 20% and the inventory has ballooned. The JIT model will enable a continuous flow of products and in turn reduce the pile up.
Vinkesh Gulati, Vice President, Federation of Automobile Dealers Association, told ET Digital that a mix of ‘just in case’ and ‘just in time’ model can also work effectively post Covid.
“We have been holding a 21-day inventory at the dealerships for the last one year. But in the post- Covid world, we are asking that considering the costs and overhead coming in due to the pile up of inventory, the OEMs should come forward to support the dealers and make a reasonable arrangement. For example, the dealers can keep 10 days stock and the OEMs keep another 10 day stock at regional outlets to support us. So it can be a mixture of both just in time and just in case strategies,” he said.
In the meantime, he pointed out that with the just in time model, the investment in inventory can be controlled, which in turn will reduce the interest cost and the turnover ratio will improve. This will also maintain a better balance sheet. He added that the aging of inventory will also come down with this.
“Covid-19 is something that comes once in a hundred years, so planning strategies and business models just based on that will not be able to retain your margin,” he said.
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