Thursday, 5 August 2010

Recession exposes Just-in-Time failings

Just-in-Time (JIT) supply chain practices have done much to make manufacturing leaner and financially fitter and although the problems of and solutions to JIT interruptions have been well documented from the outset there is, perhaps, one aspect no experts have warned about. This is the impact of a sudden, global recession on suppliers and the lack of support for them from leading manufacturers. Such a scenario is now unfolding as suppliers are unable to meet the demands of leading manufacturers experiencing an upturn, and thus threatening to delay the nascent global recovery. Ultimately, there can only be one solution to this problem -- the elimination of violent, cyclical swings in the global economy through better governance to excise the casino-style mentality that the financial industries and acquiescent governments have wrought upon the world in recent years.

It has been said that JIT mainly benefits the leading manufacturers, who have effectively offloaded their costly stock holding problems onto their suppliers. This is not entirely true as some leading producers have helped their suppliers to become leaner through better logistics practices but there is some justification for the accusation, though less so for Japanese producers whose Keiretsu arrangements protect suppliers.

In the current downturn, leading companies were quick to turn off the tap, which caused suppliers to cut back sharply on capacity or go out of business altogether. Now that demand is picking up again, leading manufacturers are plagued with shortages of parts, particularly from the electronic component makers. The problem is worse than in previous recessions since many large companies have outsourced their parts supply, putting the onus on suppliers to raise deliveries more so than in the past. A good example of how this can trip up manufacturers is the recent strikes in China which disrupted supplies and output at Honda & Toyota's Chinese plants.

There is, however, another problem holding back suppliers. This is the apparent reluctance of banks to lend to manufacturers at acceptable interest rates. American small businesses, for example, are having to pay more to borrow relative to the Federal Reserve's benchmark rate than at any time in the last 25 years. To be fair to banks, they may only be trying to restore their financial strength as quickly as possible because many have still not come clean on their exposure to bad commercial property loans and huge, multi-billion pound potential losses from loans to shipping lines, most of whom are probably bankrupt.

Supply chain companies may also be reluctant to invest heavily in new capacity to meet rising demand because of volatile, uncertain, global economic conditions. China's vigorous growth rate appears to be faltering and the impact of government spending cuts across Europe and the dreadful US housing market has still be be felt.

A double dip in the global economy, expected by many, may well ease the supply chain deliveries problems but companies, nevertheless, are now committing JIT sacrilege -- stockpiling scarce components as a buffer in case supplies run out. The leading producers, however, are now beginning to realize that they should have paid more attention to their supply chain partners, at least towards their tier one suppliers. This could involve extending easy credit terms to suppliers who feel that they are being fleeced by their traditional lenders, a common practice in Japan.

Ultimately, however, governments and business institutions must work more together to smooth the economic cycle, and above all that means trammeling the greed culture which has seen so many financial institutions throw caution to the winds. As ye sow, so shall ye reap.

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