Wednesday, April 6, 2011

The weakest link in the supply chain

It appears that Toyota will be forced to shut its U.S. plants this month as they run out of parts. The quake has disrupted (to say the very least) Toyota's ability to deliver parts to supply the U.S. plants.

I mention this because it points up an unintended consequence of just-in-time (JIT) inventory management. In the normal course, and managed well, JIT is highly efficient and allows firms to avoid having lots of capital tied up in (particularly) raw materials or work-in-progress inventory. In the event of a supply shock (earthquake, major storm, Teamsters strike, etc.), however, JIT practices can impose component shortages/stock-outs very quickly.

It's a no-win for companies in the developed world, though: run lean and be vulnerable to the next Black Swan that augers in somewhere along the supply chain, or sink capital into higher levels of raw-material or WIP inventory and have the extra added bonus of paying taxes on it.

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