Wharton@Work

August 2021 | Strategy

Rethinking Your Just-in-Time Supply Chain

Although widely accepted as the cause of 2020’s supply chain disasters, “COVID is the not the main culprit,” says Gad Allon, Wharton professor and director of the Jerome Fisher Program in Management & Technology. “It just exposed a high degree of supply chain neglect. Firms are realizing they need to rethink their supply chain in terms of resilience for the types of volatility we have seen and will continue to see. The reality is that most of them are simply not ready for it.”

For the auto industry, being ready is beside the point. Several governments around the world are intervening in its supply chains, and Toyota and other carmakers announced they are retreating from just-in-time production (a method that minimizes inventory levels across the supply chain). Allon notes, “I believe these developments signal important changes to other industries, regardless of whether they seem to be related to the car industry or not. In many ways, I would argue that the automotive industry has been the canary in the coalmine, or the leader and tone-setter for almost all other sectors.”

Better Aligning the Supply Chain

Allon will spend a week in October with managers charged with rethinking their approach in Designing and Managing the Agile Supply Chain for the Future (This program is no longer offered.). He says he and co-director Santiago Gallino walk participants through the different decisions they need to make to align their supply chain with their competitive strategy. “Just-in-time [JIT] is great for reducing costs,” he says, “and building a lean supply chain has provided fairly good control over value. But a laser focus on lean may mean that the supply chain is not aligned with the strategy of the firm.”

The pandemic-induced devastation of supply chains may have started in China, but that doesn’t mean companies that consider themselves “non-global” are immune. As Gad Allon notes, even if you are not global, and your supplier is not global, the supplier to your supplier is. In other words, virtually no firm is safe from today’s exponential growth of risk due to global exposure, and getting serious about rethinking supply chains should be a top priority for leaders across industries and geographies.

“There is nothing inherently wrong with being lean,” says Allon. “We cannot place all of the blame on just-in-time. But recent events have demonstrated that firms may have taken it a step too far. The issue is that the moment you tell people their main objective is reducing inventory, and point all key performance indicators towards that goal, lean becomes their north star. And when lean is the north star, it creates unprecedented levels of unpreparedness. There is virtually no consideration for pandemic-type risks, such as the weather in Texas and increasingly higher demand for chips. That means they are easily blindsided by disruptions.”

Moving Beyond Just-in-Time

One way firms can begin to rethink an overreliance on JIT is to understand how it started and how it affects players in an industry. Allon says for automakers, it wasn’t just a manufacturing play — it was a power play. “Since the Industrial Revolution, the automotive industry created the paradigm that virtually every other type of business followed. Everyone in their orbit had to organize themselves according to the pace and speed of the automotive firm. They need to make sure that the components are ready when the automotive firm needs them — quite literally, just in time. Suppliers usually co-locate and change their structure to be in a position to execute what is required.”

But now that disruptions proved the perils of a supply chain built around JIT, and automotive is by necessity changing its ways, what’s next? If a new standard emerges, Allon says it must involve a better understanding of risk. But, he adds, “What did we learn from COVID about risk? I am hesitant to say we learned much. Look at the N95 mask manufacturers that are going out of business.” He stresses that moving forward with a supply chain that can weather future disruptions also requires better alignment with strategy. It’s clear a laser focus on lean, and continuing trying to make JIT work, isn’t the way.