Just in Time vs. Resilient Supply Chains

A business school 101 class would tell you that excess inventory consumes cash flow and lowers the return on capital. Armed with that simple fact, an unquestioned business movement over the past decades has been the “Just in Time” (our “JIT”) supply chain. “Just in Time” means that firms are:

1) Using predictive or behavioral analytics to predict demand and order raw materials

2) Make the consumed good in real-time

3) Deliver to the end customer or distributor at nearly the exact moment the customer needs the product

With this movement firms are investing less in inventory and driving more profitability. In a steady state world, this JIT process can be a thing of beauty.

And this works, until the day it does not. And a number of consumer, social and political changes are beginning to reveal the JIT weakness.

Climate events are stressing the supply chain. See: McKinsey report on climate weakening the supply chain

Changing consumer preferences are stressing the supply chain. See: EVs and lithium ion battery shortages

International geopolitics is stressing the supply chain. See: computer chip shortage affecting automotive industry

Cyber attacks are stressing the supply chain. See: Colonial Gas Attack.

I am guessing the next generation of “best practice” will move from “Just in Time” to “Resilient Supply Chain”.

Resiliency will likely mean a slightly more costly supply chain structure. But this is a supply chain that won’t buckle with a single point of failure. It means investing in cybersecurity, climate resilience, materials alternatives and potentially more localized production. Technology and software will play a big role in altering our supply chain. This is an area we are focusing on at Energize.