‘Just In Time’ Ran Itself Out?

“It’s sort of like supply chain run amok…In a race to get to the lowest cost, I have concentrated my risk. We are at the logical conclusion of all that” said Willy C. Shih, an international trade expert at Harvard Business School as mentioned in a recent piece published by the New York Times (How the World Ran Out of Everything; Peter S. Brookman & Chokshi). 

Willy was referring to the tumultuous events from the past year when the pandemic struck rendering the world into dark. There was a chaos on the seas and highways were desolate, with every soul confined to the dark uncertainty of time. In the making was a supply crunch.

Brookman & Chokshi recounts the story of Toyota, the Japanese auto-giant which pioneered the so-called Just In Time manufacturing in which parts & spares were delivered to the factories just as they need them allowing factories & manufacturers pairing production with demand with the burden of warehousing offloaded. This allowed major retailers to manage with a thin inventory and use more of their space to display a wider array of goods, and at the same time enabling manufacturers to customize their wares. 

Leaner production has significantly cut costs while allowing companies to pivot quickly to new products. This soon became a fad for businesses across board, from automotive to FMCG to RMG to pharmaceuticals. It has helped develop global supply chain lanes and domestic logistics networks. From manufacturer to retailer to the supply chain solutions & logistics partner, it was a “happy all” scenario. Is this so?  

In March this year, a gigantic vessel remained lodged in the Suez Canal for a week closing the primary route between Europe and Asia cutting supplies to many countries including India, leaving no one “happy at all.”  

Willy C. Shih specifically used two enlightening phrases; ‘race to get to the lowest cost’ and ‘concentrated risk’ to describe the thrall the businesses have gone into. Deng Xiaoping in 1978 gave the wings to Just In Time and businesses drove in hoards to invest transforming China into manufacturer of the world. Slowly much of South East Asia and India was producing inventory but at the same time were dependent on the other manufacturers for the raw material or spares. 

Input cost, specialization and technology in different ratios drove the show. This global arrangement soon manifested within nationalities like India where some states became producers whilst other consumers. Taxation system was worked out to complement the arrangement. In order to get to the lowest cost, businesses have gone too far in concentrating manufacturing across the globe and within the countries. Connected end-to-end, the supply chain and logistics helped sustain the balance until the applecart was disturbed.

Proliferation of logistics & distribution companies in India has come in spurts coinciding two major events; opening up of economy in 1990s and then the advent of online retail around 2010 as the next big thing. Structurally strengthened over time, logistics companies are now more formalized, more in sync with manufacturing activity. Naturally, more than 90% of all the investment in warehousing & logistics in the last decade have been restricted to top 8 cities.

This is the same global pattern of concentration Willy C. Shih has talked about and as a recent report (JLL Capital Market Update Q2, 2021) points out, the warehousing sector saw a 15% fall in new supply YOY during the January-March 2020 amid subdued occupier leasing and investment activity. The contraction was 30% in case of absorption.

Clearly, this is unsustainable and experts for decades have warned about the consequences of over reliance on this business model. The solution lies in more regionalization, more decentralized production and closely-knit business-logistics ecosystem operating in concentric circles. Sceptics would say consumers don’t pay for resilience if not faced with a crisis. What would the businesses do? Buzz is that efficient supply chain & logistics is the calling.