What are the value implications of the supply chain disruptions? Let’s say, you are a retailer. You have a product that is flying off the shelves. Think cabbage patch kids dolls in 1994. How would you find more product? Would you pay more for it?
Just in time
Just in time manufacturing is an idea developed by, Toyota Motor company, the Japanese automotive manufacturing company. Also known as JIT Manufacturing or Lean Manufacturing, the idea addresses the need to increase productivity by decreasing inefficiencies. Inefficiencies arise in manufacturing through having to wait for required supplies, producing too much by estimating demand, wasting space and resources on excessive supply inventory and moving products unnecessarily. Toyota also recognized the less common inefficiencies that include making products with attributes not required or desired by the customer, making products that are defective or fixing defective products, and changing how products are made before engineering a better process. Companies employing JIT benefit by reducing their costs. They require secure reliable suppliers, accurate demand forecasting, efficient movement of goods, and a stable manufacturing process. By reducing costs companies improve their productivity, utilization of their resources, and ultimately profitability.
Just In Case
Just in Case, or JIC, is an inventory strategy employed by some companies who have risk in their supply chains. Companies employing JIC recognize risk that arises from unexpected spikes in demand, poor forecasting of product demand, inability to secure product, insecure supply lines and shipping delays. The result of these risks include a loss of potential sales due to in ability to meet the demand, loss of a key customer due to inability to supply, loss of reputation and other risks. These companies mitigate their risk of loss of sales due to insufficient inventory, by having lots of stock on hand. Companies employing JIC incur increased costs through excessive and wasted inventory and increased storage costs.
Pandemic effect on supply lines
COVID had an unequal distribution of costs and benefits. The pandemic forced changes in both supply and demand for products – at various times and places. At the beginning of the pandemic, manufacturers were forced to shutdown reducing their output. Workers in all industries were sent home. Manufacturing slowed to a trickle. Those that could work and relied on JIT found they had insufficient supplies on hand. Demand fell. Manufacturing forecasting models did not contemplate such significant reductions in demand, leading to overproduction and storage of product. Manufacturers were unable to engage shippers to move the products. Then, midway through the pandemic, there were emerged spikes in demand for product resulting from changes in the working environment and generous government benefits.
Wholesalers’ and Retailers’ Response
Product wholesalers and retailers who had previously relied upon JIT found they could not meet demand from their customers. They risked losing their customers to their competitors. Retailers missed out with empty shelves, losing loyal customers who shopped elsewhere. To mitigate their risk, wholesalers and retailers moved to JIC Inventory. This led to increased demand on the manufacturers of products. Unsure of their supply lines, wholesalers ordered excessive products for warehousing in the event of further shutdowns. Excessive product demands forced manufacturers to increase production, leading to increased demand from their suppliers and JIC Inventory for necessary supplies.
In Canada, the post pandemic response in Retail Sales is overwhelmingly positive. Year over year changes in the retail sales of gasoline, clothing and miscellaneous and general merch exceeded losses in electronics and appliances, building materials and sporting goods.
The pandemic has affected both supply lines and demand. Where JIT and Lean Manufacturing improved productivity and profitability in the time before the pandemic, JIC has forced increased costs and reduced profitability. Where possible, sellers have increased prices passing these inefficiencies onto their customers. Those sellers who have been unable to pass on these inefficiencies in the form of increased pricing have suffered a loss of profitability, perhaps increased legacy inventory and increased warehousing costs.