February 14, 2002
Terrorist attcks on U.S. soil have given domestic manufactuers cause to rethink the entire process of keeping inventory and metting customer demands.
The aftermath of the Sept. 11 attacks on the World Trade Center and Pentagon has cast some doubts on the practice of lean manufacturing and just-in-time (JIT) delivery of supplies and components, according to a Purdue University economics professor and Modern Materials Handling magazine.
Lean manufacturing has three legs: meager inventories that are delivered JIT, outsourced components, and pay-for-performance incentive systems for productivity. In theory, an OEM is supplied by a Tier 1 supplier, who in turn depends on a Tier 2 supplier for its components, while the Tier 2 turns to a Tier 3 for its goods. This is the ever-growing supply chain aimed at lowering per-unit costs by improving productivity and using least-cost labor.1
For years supply chain managers' core premise was effective: The less inventory of components anywhere within the system, the better. However, managing the chain has become much trickier since Sept. 11. Until then small amounts of components were delivered JIT at each link of the supply chain; except for the odd glitch, no inventory piled up anywhere, and production proceeded swiftly. Everyone in the supply chain dependED on a supplier, and any interruption or delay in the chain had repercussions farther up and down the line.
The terrorist attacks in New York City and Washington, D.C., initially made an expensive hash of supply chains as deliveries were delayed because air traffic was grounded, border inspections took longer, and surface transportation nearly came to a halt.
In a recent study, Professor David L. Hummels of Purdue's Economics Department calculated that reducing the transit time of high-value components and supplies by a single day is the equivalent of reducing their prices by 0.8 percent. With manufacturing imports to the U.S. running at more than $800 billion a year, an extra day in transit because of delays caused by heightened security is the equivalent of $7 billion in added costs annually.
"You're talking about very serious expenses if goods are subject to even minimal scrutiny and delay on the way in," Hummels said.
Many plants were forced to close temporarily for lack of parts after Sept. 11. These interruptions have caused many companies to reconsider their approaches to lean manufacturing.
As a result of these interruptions, inventory intended for retail stores such as The Gap, Banana Republic, and Old Navy was stuck in a port somewhere or in a warehouse adjacent an airport. Then a shipment of toilets destined for a major plumbing supply distributor backed up at the Mexican border. With 30-mile-plus traffic jams at the Canadian border, Ford was forced to shut down five assembly plants for a week after the No. 2 U.S. automaker ran short of critical parts.
At first the lean supply chain was another casualty of the attacks. Many thought that companies, especially those in the key automotive sector, would move from lean JIT inventories to fatter, more expensive just-in-case (JIC) inventory levels.
A month after the attacks, logistics managers began having second thoughts as the supply chain began to settle down again. Inventory once again began to flow smoothly to retail distribution centers and automotive assembly plants, where inventories were whittled back as early as Sept. 18. But, as the song says, " ... the memory lingers on."
"We've said all along that lean manufacturing, JIT, and wage incentive plans are the way of the future," Ford spokesman Ed Lewis said. "But Sept. 11 was a wake-up call. Although we have no plans to back away from these initiatives, there is no doubt that there will be some modifications of the practice. A terrorist attack may be rare, but snowstorms, hurricanes, fires, strikes-all can disrupt the supply chain.
"It means we cannot continue to operate as before without any inventory," he added. "We need safety supplies on hand at each link of our chain to take care of emergencies."
By October, shippers such as UPS Logistics Group-the supply chain arm of the parcel carrier-were reporting that even international shipments were flowing at close-to-normal levels.
"We're still seeing some shutdowns at the northbound Mexican border," UPS spokesperson Lynnette McIntire said. "But we're having less trouble at the Canadian border. There have always been some slight delays due to security checks in Europe and Asia, but nothing troublesome."
According to Jim Apple Jr., a partner with the Progress Group, Atlanta, JIT will remain firmly in place.
"There may be a short-term buildup of inventory, but in these tough times, there's just too much pressure to cut costs to afford carrying some just-in-case inventory," Apple said.
Still, the events of Sept. 11 are having an impact on how supply chain professionals think about their business going forward.
One executive asked Dick Metzler, CEO of APL Logistics, a third-party logistics provider in Oakland, Calif., to create a "Def Con One" contingency plan to cover events such as the closing of the Suez or Panama canals or another shutdown of the air cargo transportation industry.
"They wanted to know what kind of contingency plans we could put in place to make sure they weren't caught short again," Metzler said.
Companies are taking steps to maintain a responsive supply chain but at the same time keep inventories lean in case of future catastrophes.
One tactic is to look at where inventory is stored.
"Some of our customers used to store all their parts close to their suppliers and rely on overnight shipments from Asia or Europe," UPS' McIntire said. "Now they're asking us to redeploy some of that stock to get closer to home."
Another approach taken to counter the costs of high inventory is to shore up materials handling systems. Many facilities now are designed for cross-docking or flowing inventory through a distribution center.
"As we do see increases in buffer stock, improved materials handling systems will be a must to reduce handling and increase productivity," said John Splude, CEO of HK Systems, Milwaukee.
Ultimately, taking steps to re-examine how supply chains work might benefit businesses in the long run-a JIC approach to ensure survival of JIT supply chain management.
"One think often forgotten in supply chain management is the necessity of keeping high productivity in the supplier plants," Ford's Lewis said. "Why have materials or components arriving JIT if they are too costly? We want a safe supply of inventory maintained at all levels, but we also want our suppliers to make the components as inexpensively as possible. They need to motivate their work forces. That's why we often tell suppliers to use pay-for-performance incentive systems like gainsharing plans."
While supply chain management basically is a good tool for getting materials to end users expeditiously, it also is a way to identify and use the lowest-cost producers with the most motivated, productive work forces at each stage of production. Given the pressures end users such as Detroit's Big Three; agricultural equipment makers such as Case and Deere; and appliance manufacturers such as Whirlpool, Amana, and General Electric, all are putting on their suppliers, Tier 2 and 3 companies in all industries should investigate every way possible to lower their per-unit costs if they want to survive.
1. "How The Growth of Outsourcing Will Affect Suppliers," Handbook of Business Strategy, 1999).