Clarity Is Missing Link in Supply Chain – WSJ.com
Ah, here we go, it's time for the annual Just-In-Time-bashing article from the Wall Street Journal. Some past “the WSJ doesn't get it” posts include:
- This WSJ Article (as do Many Organizations) Misses the Point of 5S
- WSJ's Wrong Conclusion on Frederick Taylor
- Updated: Step 1 Earthquake, Step 2 JIT Bashing
This new article, from this morning, follows the common pattern of ripping practices they call “JIT” that are really just the normal bad practices of a typical manufacturer in today's global supply chain. What they call “lean” (vis a vis “JIT”) is either not lean at all or it's “LAME” (Lean as Misguidedly Executed). Either way, it's frustrating and it's not the type of article you want to read on a Monday morning if you're a lean thinker.
So it begins:
The world's complex “just in time” manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.
Why would we blame JIT for this lack of customer intimacy or communication? Why blame Zoran, isn't that bad supplier relations on the customer's part?
And then we have the notion of a “complex JIT” supply chain. Who said “complex” and “JIT” ever went together anyway?
I have a copy of Richard Shonberger's book from 1982 called Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity
In Chapter 7 on “Just In Time” Purchasing, page 159 lists some characteristics of JIT, including the following (with my comments in italics).
- Long-term contracts (don't jump from supplier to supplier based on piece-price)
- Few suppliers
- Nearby suppliers (not complex and global)
Schonberger shares an example of how Kawasaki chose a seat supplier who was two miles away.
So it's clear that the WSJ starts off on the wrong foot… describing something as JIT that's clearly not JIT. It continues:
Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive.
Ah, here's another problematic use of the word “lean.” Fastest reaction times? Industry rewards SLOW but CHEAP suppliers, often located far away in China. Who is rewarding (say other than Toyota and a few like minded companies) FAST over CHEAP?
Distance and slow speed causes problems… the longer the lead time for components (production and shipping), the harder it is to forecast accurately, even in stable times unlike those we live in today.
Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard.
When supply chains are slow and long, you have to “guess” (called “forecasting” in more polite terms). With forecasting, you can overproduce or even underproduce when your production isn't in sync with demand.
The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers “all decided to build a lot less,” says Best Buy merchandizing chief Michael Vitelli. As the contraction raced down the supply chain, its effects became amplified.
The amplification is known as the “bullwhip effect” or the “Beer Game effect.” The bullwhip effect is made worse when you have long lead times and slow response from suppliers.
The WSJ gives an example where the fall in consumer demand is amplified as you go back the supply chain.
- Consumer electronics sales — end customer (down 8%)
- Production of electronics (down 10%)
- Chips for electronics — components (down 20%)
“Usually the guy at the rearmost end suffers the most,” says Morris Chang, [chipmaker] TSMC's chairman.
Ten years ago, I saw Jim Womack describe a similar effect in the airline industry — when passenger miles flown was pretty stable, Boeing's production varied quite a bit and their suppliers even more so. The solution to this, as proposed by Womack, was Lean and JIT. JIT was not the cause of Boeing's problems back then.
“JIT” order taking is not the same as JIT production:
As recently as the early 2000s, companies compiled orders only monthly or quarterly; now they often do it every week. Their quicker reflexes this time kept their inventories from swelling dangerously, as happened last time, supply-chain experts say.
I wonder if they are talking about real orders or forecasts? Changing your forecasts frequently can cause chaos in the supply chain, especially if you are re-running an MRP/ERP master production schedule. Small changes can be amplified throughout the system, again causing big variations in production levels.
Then here's a point where the WSJ article is inconsistent. If JIT kept inventories from swelling, why then did we have this happen:
Although U.S. gross domestic product fell 6.1%, on an annual basis, in the first quarter, nearly half of that was due to inventory reductions.
So which is it? Inventory reductions hurt the economy because companies were more reactive and cut inventories…. but I thought JIT kept inventories from swelling? This doesn't make sense.
The bullwhip effect can hit you in the other direction — increases in production will also be amplified down the supply chain.
Still, “It's easier to turn the switch off than turn it back on,” says David Pederson, Zoran's vice president of corporate marketing. Growth forecasts also get muddied because several of Zoran's customers may be optimistically competing for the same manufacturing contract, he says, and they can't all win it.
I saw this in 1998 when I was a grad school intern at the semiconductor making image sensor division of Kodak (yes, Kodak made CCD chips — still do, I believe). They made linear sensors for flat-bed document scanners, supplying all the major producers. Their six customers each forecasted they would have 33% market share… and Kodak got stuck with excess inventory as a result.
The WSJ illustrates the long, slow global supply chain:
That about says it all… long, slow, convoluted supply chains are the problem, not “JIT.” I wish the WSJ would quit getting this wrong. I wrote a letter to the WSJ reporter suggesting that, in the future, he not just consult with “supply chain experts.” He needs to talk to Lean experts like Womack or even Shonberger himself. Now *that* would be some good reporting.
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GR8 post Mark.
I have no claim to be expert in supply chains, but it does make you wonder if the article were titled “Communication is Missing Link …” if that might better point to what is actually the problem. Better yet how about “Transparency is Missing Link …”.
/Dr. Pete
Precisely. One major inhibitor to more demand-driven “lean” supply chains is that lowest-cost manufacturers are also usually poorly integrated into supply-demand information systems. These are the companies building all the products that we consume at retail. There is a huge overcapacity in China – for consumer electronics especially – and thus we have a heavily cost-competitive and fragmented stage of the supply chain.
Lowest-cost manufacturers typically have very poorly diversified customer portfolios, since they specialize to drive down costs… and thus they have very little ability to find alternate channels for long-lead-time raw materials for instance when one particular customer or segment’s demand goes south.
Long-lead, and usually higher cost components, like those of Zoran, are the hot potato in the supply chain. No one wants that inventory on their books.
Only the very large initial orders with long-times are amply supplied, it is more typical that part shortages result… as there is typically a material rush/scramble routine to handle any unexpected jumps in a retailers’ ordering habits.
What happened in recent quarters has been fear entering everyone’s minds. BBY signalling major consumer demand shortfalls rippled like hell thru the chain and the suppliers of the hot potato component end up the one holding onto the high cost inventory.
My personal feeling on this matter is that this is exactly who SHOULD be stuck with the material, as it’s the point in the supply chain that the component cost is the smallest. Zoran seems to take on a “victim” mentality in the article which is pathetic. It’s their business! You are not a victim of your own core business. Rather, Zoran should amp up their own demand intelligence, and work with retailers directly to predict demand, without relying on supply chain intermediaries who they don’t control.
Further, Best Buy (and other big-box retailers) must recognize that the entire CE supply chain is their ecosystem. Technology partners who innovate and are known to deliver best in class technology should be nurtured and engaged with strategic demand reviews. Further, suppliers in the chain should be held to higher standard of supply transparency for the downstream, and demand transparency for their upstream. The gaps in sourcing that BBY will encounter as their demand picture improves will highlight the benefits of this as they help the industry liquidate older good in the place of newer goods they can’t get their hands on due to material shortages on strategic parts.
I was just in a meeting where lead-times on components were discussed with a silicon vendor. Their sales engineer reluctantly mentioned that lead-times are usually 4 weeks if there is stock, but for a large initial order, it could be 16 to 60 weeks if it requires them to spin up a recently shutdown fab. Ugh.
After emailing the reporter, I received a response from the Wall Street Journal indicating this article was intending to refer to JIT in “a wider range of practices than the precise ones pioneered by Toyota.” The responder from the WSJ said the reference was in this “broader sense”.
“Broader sense” as in incorrect?
Or as incorrect as JIT is typically thrown about by manufacturing people who don’t know any better???
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