Just in Time?

At some point in the 1980s, the Japanese mastered a manufacturing strategy known as “just-in-time” inventory. During that decade, there were great fears that the Japanese would come to completely dominate manufacturing and JIT was just one of the many weapons they had in their arsenal at the time.

The philosophy behind JIT is really easy to understand. Basically, its core principle is that a company’s inventory, be it in components or finished goods, should be as close to zero as possible. So, if you manufacture cars, for example, the tires you need for the day’s production should arrive on that day. Sometimes, in fact, for a common component, deliveries would happen multiple times during the day. The objective would simply be to start the day with no tires in inventory and end the day with all tires delivered during the day attached to completed vehicles.

The reason for pursuing JIT is similarly simple and obvious. Inventory costs money and eliminating it saves money. Companies that have inventory need: somewhere to store it; processes to both manage it and account for it; cash to fund it; and, an appetite for the risk that said inventory may become obsolete before it becomes part of finished goods. Thus, as Toyota pioneered advanced JIT inventory techniques, they derived a significant financial advantage over their competitors.

The success of the Japanese was not lost on the rest of the world and what started as JIT blossomed into an entire family of processes and techniques known as supply chain management, or SCM. From humble beginnings with inventory, the same basic philosophy was adopted worldwide with the primary objective being delivering the exact product a customer wants at the moment they want it. This, of course, is impossible with material goods, but that end goal drives optimizing the entire chain from raw materials sourcing to finish product delivery with the goal of removing time, waste, and cost from every single “link” in the complete supply “chain.”

Every now and then, Apple finds itself as the most valuable company in the world. It wasn’t that way in the late-1990s, however, as the company teetered on the edge of bankruptcy. Its troubles could defensibly be narrowed down to two fundamental deficiencies. Firstly, while it once had a defining role in an industry it helped create, Apple no longer sold products that were either “leading edge” or “exciting” to customers. Second, its manufacturing practices were a disaster with the company loading up on completed goods it couldn’t sell and massive quality problems.

Fortunately, the Apple board had the sense to bring back Steve Jobs to fix the first problem. Steve, in turn, had the good sense to hire Tim Cook away from Compaq to fix the second. This might be the most complimentary twosome in the history of business.

Cook is a master of SCM and it took him a remarkably short time to address many of Apple’s production missteps. In fact, he probably finished his part of Apple’s turnaround quicker than did Steve to the point that the company’s keynotes actually discussed how lean and mean Apple’s inventory practices had become. They were industry-leading!

Apple was not alone in their efforts, they were simply better than most. Every company needed a strategy for managing their supply chains given that being successful at it went from being a competitive advantage to a precondition of economic sustainability. If your company can’t master its supply chain, it probably can’t survive.

Over the intervening decades between Toyota’s pioneer days to Apple’s mastery of global supply chain management to the turbocharging of the system through the incorporation of cheap, powerful, and ubiquitous information technology, our entire economic system changed to reflect as thoroughly as it could the basic principle of providing just the products and services that are demanded at the precise moment they are wanted or needed. Consumers got what they wanted faster and possibly cheaper while successful companies, especially the big ones, wrung the derived efficiencies for greater profitably.

But, there’s always eventually a “but.” And, the “but” here is that as efficiency increases, so does systemic fragility. No country mastered SCM as did China and the benefits of their leadership represented what is known as a “virtuous cycle.” Chinese producers started out being a “cheap” option, but they focused on getting better and better at optimizing supply chains and consequently ended up with more control of the entire chain. This created huge efficiencies and made these producers dominant.

But, their gains and their newly found efficiencies also had the impact of destroying traditional “legacy” supply chains around the globe. When the number of suppliers and producers decrease, dependency on those that remain increases. As dependency on fewer suppliers increases, systemic resiliency decreases.

We have refined our supply chains to such an extent that we are now reliant on systems running perfectly to keep the world going. Just-in-time approaches fracture and sometimes outright fail when a pandemic unexpectedly alters the types and amounts of goods people demand. Similarly, at the same time, the pandemic damages the ability of producers to actually produce as workers become unavailable and delivery of raw materials becomes unpredictable.

Just-in-time approaches break, too, when one of the world’s largest extractors of fossil fuels attempts to invade a country that is responsible for a significant part of the world’s food needs.

We cannot expect that the world’s producers of goods will stop managing their supply chains for maximum efficiency. They won’t, and they shouldn’t. Business’ mandate is deliver to people what they need and want as efficiently as possible.

But this isn’t government’s mandate. Government’s role is to ensure resiliency in critical “systems” such that national defense isn’t placed at risk and domestic and social stability is ensured. The problem is that there has been an international problem of governments pursuing business and economic interests in the interest of serving consumers’ “frugality” all the while ignoring the geopolitical risks of such a strategy.

Let’s just pick on energy for a moment. The German government naively thought Russia, in the wake of the dissolution of the Soviet Union, would be a dependable supplier of natural gas for the purpose of home heating. Well, maybe not dependable, but cheap and “dependable enough.” And, for two decades, that has worked out pretty well for both sides. But, twenty years is truly a short period of time in the context of history. And, in that short period of time, Russia has failed to develop in a variety of ways. It cannot shake its strong thirst for imperialism and empire. It squandered the vast human potential it had in the areas of science and software technology and placed its bets squarely on easy petrochemical profits. It has failed to tame rampant corruption, especially in its governance.

I would bet that the Germans felt that by establishing stronger economic ties to Russia, that Russia would become adopt more of the habits that have made Western Europe so successful. But, except in very rare situations, “petrowealth” first makes nations lazy, and then it makes them stupid. Putin’s Russia looks far more like second-rate oil-dependent dictatorship than it does a thriving Western economy.

As I’ve written about before, despite being half a century past the Arab Oil Embargo that so clearly highlighted the need for energy independence for national and economic security, our current president still had to recently travel to meet face to face with a man who is probably singularly responsible for the dismembering of a journalist who was “critical” of his regime.

America has made bet with China that looks a lot like the German-Russian arrangement. That is, neoliberal thinking concluded that bringing China into the mainstream global economy would influence its politics such that it would open itself to more productive integration with foreign countries and expand domestic freedom and liberty. Find any long-term citizen of Hong Kong and ask them how that’s been going.

Yet, over roughly the same period, the Germans have become seriously dependent on Russia gas to stay warm during the winter and America has become dangerously dependent on China for manufacturing. Check the products in your home and count how many are made there. Take a look around the nation and look at all the factories that have closed in the past 25 years. Are we consuming less than we did before? Or, has production, and along with it, jobs, moved somewhere else? We will be sorting out what’s happened over the past two decades for decades to come.

The most profound wisdom of the founders of our nation, those who authored the Declaration of Independence and our Constitution, was their inherent mistrust of the behavior of powerful people. Simply, they knew enough about human nature to know that even the best of us can be seduced when we find ourselves gifted with power. They were wary of powerful foreign nations, especially those run by monarchs. They recognized both that a wealthy aristocracy and a rebellious “mob” were threats to social stability as well as individual freedom and liberty. The Declaration was a statement directed squarely at the heart of unbounded power (the king) and the republic formed through the Constitution was designed primarily to keep power in check so as to ensure personal liberty.

Russia and China are cut from the same cloth. They are both old empires that today do not enjoy the fruits of being an empire. And, they both seek to regain those fruits. China seems well-positioned to succeed.

Western leaders simultaneously deluded their people, and clearly themselves, that human beings had somehow evolved into better people. Or, perhaps, that the world had changed such that better human behavior could be expected. Chief Justice Roberts proffered as the Court gutted voting rights that a fundamental change in racism had occurred in America over the past 60 years. The country has surely changed, but not fundamentally enough, as evidenced by the events of the past five years. Neoliberals in America and Europe thought the failure of the Soviet Union meant that the core interests of Communist nations had changed and that we could and should develop strong economic ties with all comers, especially if we could buy stuff at better prices!

And, what we have done as a result of these miscalculations is built a more fragile world. “Just-in-time” works great when everything works great; but, everything doesn’t always work great. Throw a few kinks into the system and things begin to fracture. Throw in a pandemic and a war of choice and you get a meltdown.

Cheaper goods is a huge price to pay for a lack of economic security. A lack of economic security—at both the macro and micro levels—opens the door for social insecurity and weakness in national security. America should never have struck a bad deal for cheaper consumer goods sourced by China and stocked on the shelves of Walmart. Germany should never have gotten into bed with Russia and allowed themselves to become dependent on an historically antagonistic country for natural gas that is needed to keep their people warm.

A stable world is built amongst peoples that share values and interests. Cheap goods and cheap gas have turned out to be very expensive indeed. Businesses should be obsessed with things like just-in-time inventory and supply chain optimization. But, governments need to be holistic in their approach to governance and recognize that selling out freedom and liberty for cheap goods doesn’t represent any kind of bargain. The “Post War” leaders understood the need for balance. Those who succeeded them did not appreciate the need to balance freedom and prosperity. Our emerging generation of leadership needs to relearn what their grandparents, who experienced the Great Depression and the horrors of World War, learned so completely.