Pandemic sheds light on weak links in inventory strategies
Tuesday, May 05, 2020
In the weeks after COVID-19 began sweeping across the United States, the pandemic succeeded in revealing chinks in the country’s retail and manufacturing supply chains.
Some supply chains simply broke. Stores quickly sold out of items like hand sanitizer, antibacterial wipes, toilet paper and paper towels, to the frustration of many anxious consumers. Meanwhile, lockdowns in the industrial city of Wuhan, China, where the virus was first identified, disrupted many American manufacturers’ and other industries’ access to suppliers in the area as shipments of raw materials suffered interruptions and delays.
Many factories and retailers use an inventory system called the just-in-time (JIT) method to save on costs and, in the case of factories, to support lean manufacturing practices. But in light of the recent disruptions to supply chains due to the coronavirus pandemic, some experts say it is time to review current supply chains and inventory processes like JIT.
The JIT management strategy originated in Japan. Those in the auto industry also refer to it as the Toyota Production Model (TPM) after the Japanese carmaker that adopted the system nearly 50 years ago.
With the JIT inventory system, the goal is to keep on-site inventories low. Manufacturers using JIT order supplies and raw materials only as they are needed for production while many retailers use it to keep in stock only the amount of product needed to meet current demand. The JIT method lowers costs, saves on space and increases efficiencies since there is less inventory taking up space.
On the other hand, the traditional “push” inventory management system involves predicting how much product customers will actually buy and then producing and placing the products in inventory to sell later.
JIT, however, comes with drawbacks. One major problem is that if an unexpected event such as a natural disaster, political unrest, or pandemic occurs and disrupts supply chains, it can cut manufacturers’ and retailers’ access to materials or products from suppliers and, therefore, their ability to meet customer demand.
So, should manufactures and retailers start keeping larger inventories? Not so fast, says supply chain management expert and consultant Arthur Koch.
“For non-perishable goods, canned foods and dry goods, the only use of JIT in the retail sector is from the distribution center to the store location,” Koch says. “From manufacturing to distribution centers is traditional ‘push’ manufacturing utilizing highly sophisticated forecasting/demand planning, or JIT inventories.
“When digging deeper into the outages occurring today, the demand variability of these items is extremely low, meaning their demand is highly predictable,” he says. “What we’re experiencing is a once in a 100-year event. No demand planning or forecasting system is capable of predicting this type of event or crisis.” Koch says that, in addition, traditional push systems are not flexible, responsive or agile enough to quickly pivot for sudden demand changes.
So why have stores experienced shortages of toilet paper and paper towels? Koch says that since COVID-19 is a respiratory disease, long-term toilet paper demand will be unchanged. And, with no foreseeable, long-term changes in demand for goods like toilet paper, manufacturers are reluctant to spend, over time, money on already thin profit margin products, only to see in-store demand drop once public fears over the pandemic subside.
“With this false demand, if manufacturers were to make more of these products, technically they would be overproducing at a higher cost, which would cause long-term financial distress,” he says. Koch also points out that many products like antibiotics, cleaning supplies and hand sanitizers come from China, which lengthens the supply chains.
“For many products, the supply chain starts or begins from halfway around the world. When a product is shipped thousands of miles, there is nothing just-in-time about it,” he says.
The longer the supply chain, says Koch, the lower the flexibility and responsiveness to meet consumer changes, and the higher total cost of ownership. What is needed are shorter supply chains and to manufacture more products regionally or locally. "Shorter supply chains,” says Koch, “equate to reduced lead times, increased delivery speed, flexibility and responsiveness, improved quality and total cost of ownership.”
In a report, “COVID-19: Managing Supply Chain Risk and Disruption,” by the consultancy firm Deloitte, it suggests short-term actions to address and prepare for challenges with supply chains during unforeseen events.
For companies with suppliers in China, Deloitte advises identifying and analyzing suppliers’ risks and abilities to meet supply demands and looking for alternative supply sources. In addition, companies should revise their inventory policy and planning parameters since many lack the inventory buffers needed during supply chain disruptions caused by the COVID-19 pandemic.
“All companies need to quickly consider how they will refine their inventory strategy to mitigate the risks of supply shortages, balancing a number of factors such as assessed supply base risk, cash flow, perishability, etc.,” the report says.
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