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Just in Time and International Trade
As the name would imply, the heart of a JIT operation lies in the ability to deliver raw materials to the point of production at the exact time they are needed and in the precise quantities desired. What it does not imply, however, is that suppliers farther up the chain hold stock to create the illusion that the manufacturer is not carrying inventories. This has been the case in many instances, with the manufacturer technically not having raw materials inventories on its books but with inventories in the supply chain nonetheless.Following the lean mentality, if a supplier holds inventory, the carrying costs of those goods eventually find their way into the selling price to the manufacturer. If not, the business becomes financially unviable for the vendor, which will either have to raise prices or, in a more dramatic play, seek other more profitable business opportunities. Thus, whereas the manufacturer may make up some ground by reducing assets on the balance sheet, the income statement suffers due to an increase in cost of goods sold. Looking again to the need to balance profitability with asset utilization, the exercise boils down to a case of "six of one and half a dozen of the other."It is for this reason that the sharing of demand information with suppliers has become such an integral part of the JIT model. Perhaps a forerunner of collaborative planning, forecasting and manufacturing, this component of JIT is really the starting point of the entire operation. If a tier I supplier does not have visibility into future requirements, it is impossible to begin planning its own JIT operations with tier II and tier III vendors. Without this requisite line of sight, the cascading effect ripples up the supply chain, creating stocks of raw materials inventories along the way. This defeats the purpose of JIT and only hides the already nebulous costs of having inventory scattered among multiple suppliers.A common misconception of JIT operations is that companies do not use a forecast, substituting actual demand for guesswork. This is not exactly the case. JIT operations begin with a forecast (they have to start somewhere) that is expressed on the basis of daily consumption. Production planning is not fixed under JIT, but is adjusted to reflect real demand to within a day or even hours of actual manufacturing. The adjustment process continues between manufacturer and supplier until final amounts are agreed upon, produced and delivered to the production line. This is a major departure from the MRP philosophy that locks in production planning well ahead of manufacturing dates, thus creating the inventories intrinsic to the model.Domestic operations have been successful in executing on the JIT model due to the closeness of suppliers to manufacturing sites, better visibility and less variation in supply chain processes. In fact, if one were to seek the reason for the success of domestic JIT operations, an argument could be made for the geographic structuring of supplier/manufacturer relationships. Specifically, most domestic JIT scenarios are characterized by operations where the supplier is a reasonable distance by truck from the client's facilities or, in some cases, even within view of the plant.With electronic data interchange (EDI) or Web-based connectivity, it is feasible to place an order with a supplier and have the material sequenced to the production line in a matter of hours. When that same supplier moves operations to China and attempts to achieve the same level of JIT perfection, this nirvana becomes a fiasco that can take weeks to resolve.In the section on globalization, it was stated that the World Trade Organization and free trade agreements have heavily influenced the growth of industrial campuses. These agreements are the primary way in which governments influence the structure of global supply chains. From an operational perspective, the need for JIT operations to have suppliers close to their manufacturing sites has also been a major impetus in the formation of these campuses. There are hundreds of industrial complexes around the world, and as long as globalization and operational exigencies dictate supply chain anatomy, they will continue to proliferate. Thus, the combination of governmental incentives and tactical necessity has created a structure that is complementary to the JIT model. As industry and government endeavor to work together, these complexes will continue to play a prominent role in supply chain structuring, creating both opportunity and challenges for management teams around the world.Even though the advent of industrial campuses complements the JIT model, not all raw materials can be sourced domestically. While companies attempt to purchase materials locally, there are many factors that require organizations to procure materials offshore. As governments work to attract industry, the business community needs time to ramp those industries up to world standards. Specifically, as governments offer incentives for local content and labor, entrepreneurs must find financing, build plants, train personnel and get processes running.Once operational, there are still variables such as product quality, production capacity, manufacturing lead times and cost that must be weighed against competitive imports. Businesspeople must recognize that this process is evolutionary in nature, and while JIT operations prefer local sourcing, it takes time to get newly formed domestic industries up to snuff. This transition from international to domestic purchasing is another factor that supply chain managers must consider as their processes evolve and change.The combination of governmental incentives and operational necessity will continue to promulgate the growth of supply chain frameworks that support JIT operations. One must be cognizant of the fact that although operations can be improved through local sourcing, variances will still exist between planned and actual results. With this reality in mind, it would be wise for businesspeople to revisit the benefits of MRP systems and perhaps seek a middle ground that combines the best of JIT and MRP. This hybrid approach, which is already being done by many companies, offers the benefit of reduced inventory levels while assuring that product is available in the right place, quantity and time.
