Yossi Sheffi of MIT Says Companies May Be Overshooting New Inventory Buffers in the Face of Supply Disruptions

Amid the pandemic, many companies experienced wide swing in supply and demand.

The most common scenario seems to have been rising demand but with significant disruption in the supply of materials and components, leading to long lead times and missed sales opportunities.

Supply Chain Digest Says...   “When demand collapses, as it inevitably will, and companies will be saddled with bloated inventories,” Sheffi says. What do you say? Click here to send us your comments   Click here to see reader feedback

And that has caused many companies to question whether the Lean, Just-in-Time (JIT) inventory strategies they have embraced for years need rethought to provide more cushion in a supply-constrained environment.

The concepts of Lean and JIT have their roots in the practices of Toyota decades ago, an approach which spread rapidly to the rest of the automotive manufacturing world and then to many other sectors, tailored for the needs of each industry.

But some are thinking, at least for a while, maybe being less Lean may be the better choice, riding out the volatility with more inventory.

But it’s not quite that simple, says MIT’s Dr. Yossi Sheffi, writing recently as a guest columnist in the Wall Street Journal. For example, inventory, perhaps surprisingly, is only part of the driver behind JIT. Quality is another key factor.

How?

“A system built around a carefully synchronized supply of components cannot tolerate a high level of defective parts or other quality-related issues,” Sheffi notes.

JIT quickly identifies quality problems, enabling rapid changes to production processes to eliminate the defects. As overall quality improves, sales should go up, often leading to lower production costs per unit.

Sheffi notes some proponents of adding inventories say the strategy will make their supply chains more resilient. Maybe that is true – but that benefit becomes at a cost.

But Sheffi says Lean also increases resilience.

JIT “strengthens the relationships along the supply chain between companies, their suppliers and customers,” Sheffi writes. “Close relationships allow companies to react collaboratively to supply chain disruptions."

He adds that a well-constructed JIT model should enable supply chains to react quickly to unexpected shifts in supply or demand, without the distractions of large inventory buffers.

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“When disruptions occur, the response speed can make the difference between locking up alternative capacity and losing production because the required manufacturing capacity is unavailable,” Sheffi notes.

But that doesn’t mean companies shouldn’t tweak Lean practices. Toyota itself, Sheffi says, made some changes to its JIT thinking after the 2011 tsunami wreaked havoc to its supplier base, deciding to increase semiconductor inventories due to the long lead times the chips generally have.

But even that change didn’t go far enough to enable Toyota to avoid disruption from the extreme semiconductor shortage that started last year, with the company cutting production in recent months as a result of the supply crunch.

“Even JIT-heavy companies often have substantial buffer stocks for certain materials and parts,” Sheffi notes.

But there is also danger from rising inventories, as the Bullwhip Effect starts to take hold. (See Global Microchip Crisis Sewing Seeds of Recession, MIT's Yossi Sheffi Says.)

“When demand collapses, as it inevitably will, companies will be saddled with bloated inventories,” Sheffi says.

That in turn will probably cause renewed interest in going back to the future and re-invigorating JIT strategies.

Companies “should keep in mind that the benefits of just-in-time remain just as important now as they were before today’s disruptions, and should continue to guide well-designed supply chains in a post-pandemic world,” Sheffi concludes.

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