C&B Notes

The Cost of ‘Just-In-Time’

‘Just-in-time’ management techniques have delivered efficiencies and reduced costs on both corporate and personal levels.  But these gains are not without opportunity costs, as has been revealed by natural disasters such as the Japanese tsunami, Thai floods  — recently — Hurricane Sandy.  Lean inventories and supply chains are susceptible to crippling disruptions.

The discipline of just-in-time started with manufacturing.  Companies began to realize that it made sense to keep on hand only the parts that were needed to assemble products on any given day.  Keeping excess inventory around tied up cash, cluttered up factory floors, and imposed storage and management costs. Retailers were the next to catch on.  Information technology and an understanding of consumer habits spurred stores to have only the amount of stock necessary to meet demand.  There was no point in bringing in Christmas goods to stores in July and August; just wait until November.  The mentality applied to people and services as well as goods.  How many times have you waited on a plane for the pilot and flight crew to arrive from another plane?

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It’s all to the good.  But once a link in the chain is broken — or when several links are broken at once — outages, delays, and shortages ensue.  And that causes massive economic inefficiency.

The problem is that once you’ve adapted a just-in-time mentality, it’s very hard to go back.  Sure, we could protect from electricity-supply disruptions by installing generators.  But that’s a very expensive form of insurance.  Some people might be tempted to go off the grid entirely, and live like the Ingalls family in Little House on the Prairie: chop your own wood, grow your own garden, go hunting for meat, make your own clothes.  Adapting a more local lifestyle is appealing.  But it’s hardly a solution.  Factories that relied only on suppliers within a few-mile radius would have difficulty getting everything they need.  I’m a member of a CSA run by a farm 20 miles from my home in Connecticut.  There were no meat and vegetable deliveries this week because of problems with roads and electricity.

Ultimately, the solution lies not in moving away from a just-in-time world.  Rather, we have to understand our reliance on it and act accordingly.  Sandy’s economic damage is going to be magnified precisely because it hit a region and a grouping of businesses and consumers that lead a just-in-time lifestyle.  Buildings can be constructed and fortified in such a way that they are more resistant to earthquakes, floods, and other natural phenomena.  We have to do the same with our commercial infrastructure.