The only real Lean goal: improving customer value

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A few weeks ago, the media was filled with images of a gigantic container ship that ran aground and blocked the entire width of the Suez Canal for nearly a week, delaying nearly $ 10 billion of freight per day. This vulnerability in the global supply chain has prompted the New York Times to proclaim that we are “overly dependent on just-in-time manufacturing.” This over-reliance on JIT, the Times continued, is also the cause of global shortages of protective medical equipment during the first wave of the Covid-19 pandemic.

Unfortunately, over the past year we have not been short of shortages. Initially, it was about masks, ventilators and toilet paper; more recently it has been vaccines, semiconductor chips, and many other products, from puppies to bikes to wood.

And with every retail outage, the popular press has jumped to the same mistaken conclusion: The shortage is caused by “low inventory.” Also, these low stocks are somehow caused by “JIT manufacturing”. This defamation of JIT is so widespread that last summer LEI wrote a refutation to a Wall Street Journal item blame JIT for the shortage of paper towels.

All of these misconceptions share a common misconception. It is important to note that JIT is not only a production system, but that Jim Womack and Dan Jones called a supply system. In other words, JIT is about providing end consumers with exactly what you need, when you need it, with the right level of quality and functionality, in the right quantity, at the right price. A supply system begins with a production process; but it ends with a consumer located away from the factory, also encompassing the transportation, distribution, wholesale and retail aspects of the supply chain. From the perspective of the end consumer, our overall sourcing system is anything but JIT.

The joys of JIT

When done right, JIT or lean manufacturing is a wonderful thing that can bring many benefits to workers, owners and direct customers (distributors and wholesalers). This saves costs by organizing operations to require less inventory. It requires suppliers to deliver small batches of materials and parts more frequently so that the factory does not need to transport excess raw materials. JIT balances and coordinates its production lines to minimize its work in progress. And it frequently ships finished products to customers in small batches.

But as profitable as JIT production may be, it is totally insufficient as a supply system because it stops at the factory. Since the majority of the goods we consume in developed countries are produced halfway around the world, we depend not only on the capacity of factories (JIT or not), but also on a global network of transportation and giant logistics to provide us with the things we need in a timely manner.

Unfortunately, the popular press focused on the more visible aspect of JIT’s ‘low inventory’ of production and assumed that all stages of the supply chain were involved. The popular narrative (found, by example, here and here) is that private firms have for too long pursued low-cost strategies through cheap foreign labor and by maintaining “lean” stocks. This drive for efficiency, the story goes, causes our supply chains to become “fragile” and vulnerable to disruptive events such as a pandemic. Rather, businesses should choose to be more “resilient” and hold more inventory for emergency events.

One of the problems with this argument is that global inventories are do not low. Looking at the Ever Given stuck in the Suez Canal, it’s hard to ignore the fact that the ship is as long as the Empire State Building is tall and can carry almost 20,000 TEUs (twenty foot equivalents). It’s a lot of inventory.

The size of the Ever Given is typical of container ships on the Asia-Europe and trans-Pacific (Asia-North America) routes. Global container shipping capacity has increased by 2500% since 1980, growing alongside the outsourcing of manufacturing. We think that 80% of the world’s goods now travel by ocean. The report of inventory to sales for US companies has been increasing steadily since 2010 and is currently back to the same level as in 2000. Inventories are not lower than before; they are increasingly transferred to floating warehouses.

Look for more plausible causes of shortage

A more plausible reason for shortages is simply the long and complex nature of our global supply chains. Just as JIT production prefers suppliers to be physically close, our factories also need to be geographically closer to consumers if they are to deliver the right thing at the right time on a reliable basis. When products need to move from a distant overseas factory to your home via a long network of transfers between ports, ships, trucks, trains, depots and warehouses, all managed by different companies with capacities and different prioritization systems, the likelihood that something, somewhere, will be delayed is very high, especially during times of high demand when the system is under intense stress.

We see this playing out in the rolling bottlenecks seen in the news: one day it’s a port labor shortage, the next one is a production capacity problem; after that it’s a shortage of shipping containers, then a shortage of warehouse space. More often than not, the right thing is do not arrive at the right time. The press is correct in calling our supply chains fragile, but it is wrong to attribute this to low stocks or any sort of JIT strategy. This is due to long and complex supply chains – the exact opposite by JIT.

If we continue to think of the problem as one of the JIT “low stocks” then it looks like all we have to do is stockpile goods around the world and we’ll be fine. Since globalization has already created more floating stocks than ever before, asking private companies to take even more land-side stocks “just in case” might have associated problems. Like Jim Womack wrote in 2006 (at the time of the avian flu fear), “to think that companies alone will maintain a buffer stock of finished units adequate for a real emergency is … naive.” They would go bankrupt if they tried. He opposes a government proposal to keep emergency stocks of the most vital supplies as a sort of social insurance program for occasional but very disruptive events. For less essential products, JIT can be used as an effective way to improve manufacturing capacity, flexibility and responsiveness to fluctuations in consumer demand.

Likewise, Tjorben Netland valorize that we should stop thinking of JIT or lean as an inventory management strategy and start thinking of it as a system to increase customer satisfaction through shorter lead times. Lean is not part of the problem, Netland argues, but should be part of the solution.

Lean should be part of the solution

Of course, one of the most direct ways to increase customer satisfaction and shorten lead times is to shorten the length of the supply chain itself. The pandemic shortages sparked new discussions around the ideas of re-shoring, outsourcing, lean shoring, near the shoring or right shoring manufacturing. The higher labor costs can be compensated by reducing the amount of floating inventory, reducing lead times and taking advantage of all the cost savings resulting from a lean management system.

Do a little lean math– that is, calculating the total costs of the system, including the cost of long and unreliable lead times, rather than just calculating production costs per part in isolation – can make national or regional production viable under many circumstances. Include carbon dioxide emission, human health and national security considerations as part of these calculations, and it makes even more sense to bring certain manufacturing industries – especially for essential emergency supplies – closer to the end consumer.

JIT production may not be the problem, but it alone cannot be the solution. Only when combined with a shorter transport network and also JIT can we create a truly consumer-centric supply system. With some creativity, our future supply chains can be both more efficient and more resilient.

Ken Eakin is the author of Office Lean: Understand and implement flow in administrative and professional environments (CRC Press, 2020). He currently works as a lean consultant, coach, facilitator and trainer at Ken Eakin Consulting. Prior to becoming a consultant, he was Senior Operational Excellence Advisor at Export Development Canada and Director of Process Improvement at Maersk Line.

This article originally appeared in the Lean Post, a publication of the Lean Enterprise Institute. It is used with permission.

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