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Even in a topsy-turvy world, just-in-time supply works

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Daniel T. Jones, left, is a professor at Cardiff Business School at Cardiff University in Cardiff, Wales. James P. Womack, right, is founder and president of the Lean Enterprise Institute in Brookline, Mass. They are co-authors of ''Lean Thinking.''

Since the terrible events of Sept. 11, we have seen many statements in the American media of the impracticality of just-in-time supply of parts and calls for massive inventories to buffer extended supply chains. That advice is wrong.

Let’s think the situation through:

In recent years, manufacturers worldwide have been disintegrating their “value streams” (that is, all the steps required to bring each product family from raw material to the customer) in the search for low labor costs.

The most typical outcome is to retain capital-intensive fabrication steps in high-cost areas (the United States, Western Europe and Japan) and to farm out labor-intensive assembly tasks to low-cost areas (Mexico, Eastern Europe, China).

The final assembly step may be retained in high-cost areas, or finished units may be imported into distribution channels.

In either case, a number of border crossings are required for every part in every product.

The problem with that approach from the standpoint of the lean thinker is that the “connectivity costs” — the costs of managing the complexity and time lags inherent in that geographically diffused approach to manufacturing — are never counted.

One of those costs is the delay in crossing borders, and the sudden

increase in those delay costs — because of the need for careful inspection of every shipment to thwart terrorism — now has set everyone thinking.

Many managers’ first thought is to add inventories at every step and to ship infrequently in large batches so inspection cost per item can be reduced — the classic mass-production approach.

But that raises costs by increas-

ing throughput times, disguising quality problems, reducing the respon-siveness of every value stream and effectively moving suppliers farther apart.

Short term, long term

For the short term, the correct response is to create a safety stock proportional to the size of the new instability in delivery from a foreign source but to keep that stock out of the way of normal production and to continue to ship frequently in small lots.

Then, as the capability and capacity of inspection processes improve, the safety stock can be reduced. But just-in-time delivery can and must continue as before.

For the longer term, a much better response is to compress extended value streams by locating as many of the manufacturing steps as possible in close proximity. (Henry Ford did that in Detroit and Toyota did it in Toyota City.)

It can reduce expensive, time-consuming border crossings perma-

nently and make the whole production system more responsive to the customer.

Let the product dictate

Unfortunately, when we present that simple idea, reasoning often becomes clouded once more.

For example, managers and workers in the highest cost areas often jump to the conclusion that all production ought to be brought home.

The reality is more complex. Here’s how we think about it:

  • For mature products that are price sensitive with significant touch labor and customers who are tolerant of some wait time, locate the entire sequence of fabrication, subassembly and final assembly steps in a low-cost area.

    We believe that when connectivity costs are counted properly, this will be a low-cost area within the region of sale — Mexico for the United States, Southeast Asia for Japan, Eastern Europe for Western Europe. Delivery to end customers will be possible within a few days rather than the weeks required for ocean shipping between regions.

  • For new products, usually with new technologies, where the customer is looking for performance more than price and demand is hard to predict, locate the entire sequence of manufacturing activities near the engineers developing the new technologies, often near headquarters in high labor cost areas.

  • And for products that are price sensitive but with customers who also want variety and immediate availability, make a careful study of manufacturing costs, being careful to count connectivity costs fully. Then locate production at a site that provides the best trade-off between cost and market response.

    But — and this is the point — in every case try to locate all the manufacturing steps for each product family in close proximity so a maximum of one border crossing is required.

    By following that simple advice we can create something positive out of the recent horrors.

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