As companies and consumers reacted to coronavirus pandemic lockdowns, shortages developed of everything from toilet paper to protective medical gear. A big cause of the disruptions, according to misinformed media outlets, was lean management with its over-emphasis on just-in-time production and cost cutting.
In a new white paper, Robert Martichenko, founding CEO of LeanCor Supply Chain Group, reminds us that JIT is based on inventory optimization, not inventory minimization. The paper, “Post COVID-19 Crisis Supply Chain,” also outlines how the public and the private sectors can create a “national core competency” in flexible manufacturing and efficient supply chain practices to guarantee a more robust response to the next pandemic or other crises. Robert has "For us to significantly improve our supply chain response post COVID-19, we will need to form teams of private and public organizations to manage the ecosystem that is created during a crisis." spent over 25 years implementing lean supply chain principles in a variety of companies that includes Toyota Motor Manufacturing. He serves on the board of the American Logistics Aid Network, an industry-wide organization that provides supply chain assistance to disaster relief organizations.
What follows is the first of two articles based on the white paper. Today, Robert, explains what JIT is and isn’t. In the second article, Robert explores the flaws in our current supply chain responses to weather and medical crises and suggests how to create a national “one team-one system” strategy for producing and delivering lifesaving supplies to the right places, in the right quantities, at the right times.
Private Enterprise - Supply Chain Management and Inventory Optimization
For purposes of this writing, I will combine a few terms together and define them as the “lean supply chain.” Just-in-Time (JIT), efficient-consumer-response, continuous flow and operational excellence are a small sample of terms that can be considered part of the lean supply chain lexicon. In addition, the principles of the lean supply chain are a good representation of known best practices that many organizations embrace. Let’s introduce a definition:
The lean supply chain is an end-to-end supply chain that is planned, visible, stable, flexible, reliable, and highly collaborative, and it provides an operational-feedback loop. Supply-chain initiatives relentlessly focus on end-to-end flow, speed, and lead-time reduction by identifying and eliminating all non-value complexities and waste. This is accomplished through rigorous process discipline, inventory optimization, and first-time quality of processes.
The lean supply chain flows to the pace of customer demand, where all supply-chain activities are triggered by the pull of the pace-setting process. The goal of lean supply chain operations is to deliver the highest value to the customer at the lowest possible total cost to the business.
There is obviously a lot to unpack here, no less than 20 operational principles, and some of the unpacking is for a later day; however, some content is appropriate for today’s critical conversation.
What’s very important to recognize is the lean supply chain (and by proxy just-in-time inventory) is not a supply chain where the organization is minimizing inventories to the point that we create operational instability and ultimately fail our customers. Stability and customer satisfaction are core tenants of lean thinking.
However, it may be argued the lean supply chain and just-in-time do not provide for just-in-case. In other words, if our organizations planned for more just-in-case inventory, perhaps we would not be failing our healthcare system today.
Let’s examine this argument.
From our definition above, we can paraphrase: The lean supply chain has a principle of inventory optimization, and this optimal inventory flows to the pace of customer demand where all supply-chain activities are triggered by the pull of the pace-setting process.
A key term here is inventory optimization, not inventory minimization. The goal of the lean supply chain is not to minimize inventories, but rather to optimize inventories. Which begs the question, what are optimal inventory levels?
Private Enterprise - Supply Chain Management and Inventory Optimization
Optimal inventory levels are those levels that will allow us to be successful as it relates to what we know about current customer demand patterns and our operational capability to fill this demand. From an inventory management point of view, this means optimal inventories are those where the stocking levels are calculated with three types of inventory: cycle stock, buffer stock, and safety stock, where we define these as
- Cycle Stock: Inventory required to meet average demand (in days/weeks), and inventory to support demand during replenishment lead time.
- Buffer Stock: Inventory to protect against common cause variation in demand (e.g. daily variation of usage or demand by the end consumer as a normal course of business).
- Safety Stock: Inventory to protect against special cause variation in demand (e.g. protection against severe weather, machine downtime, transportation interruptions).
As we see from these three variables, two of our drivers, buffer stock and safety stock, are in fact just-in-case inventories. Only cycle stock is just-in-time. Therefore, and at the risk of talking in absolutes, it is safe to say that best practices in supply chain planning certainly plans for some variables that can be described as just-in-case.
However, what is now acceptable to inject into the argument is: Fine, then why do we not have hand sanitizers, ventilators, surgical masks, and other seriously needed medical supplies?
The short answer is because inventory models, in general, do not take black swan events (catastrophic and unprecedented) into consideration. For a host of well-intended reasons, both financial and operational, the average for-profit company does not plan for catastrophic emergency inventory, nor should we expect them to. Private organizations by design strive to be effective and efficient. Efficiency is what allows an organization to be competitive, and ultimately thrive and survive. Consequently, it would be unreasonable for the general public, or our governments, to hold private enterprise solely responsible to plan, prepare, and pay for emergency inventory for an unknown health crisis.
However, private enterprise must play a key role in the new post COVID-19 team, working alongside with members from public, not-for-profit, academic and governmental agencies. For us to significantly improve our supply chain response post COVID-19, we will need to form teams of private and public organizations to manage the ecosystem that is created during a crisis.
This will require all members of the solution to be systems thinkers.
- Plan for a post-COVID world. Get the complete 17-page white paper by Robert Martichenko. “Post COVID-19 Crisis Supply Chain.” No form to fill out. Download and read.
- Turn Your Supply Chain into a Fulfillment Stream: This is the workbook that “will change the way you think about your supply chain and logistics networks,” reads the Shingo Publication Award citation for Building a Lean Fulfillment Stream. Learn more about its step-by-step methodology – backed up by 41 illustrations – for transforming your supply chain into a fast-flowing fulfillment stream. See sample chapters and graphics.
- Learn Online: You need 8 guiding principles to turn sluggish supply “chains" into swift-flowing lean fulfillment “streams." Discover the 8 and how to use them in this archived webinar with Robert Martichenko, CEO, LeanCor, and Kevin von Grabe, vice president, coauthors of Building a Lean Fulfillment Stream. Listen to the webinar.