Stocking up – just in case

Just-in-time ordering made companies lean but they are vulnerable to supply-chain disruption

7 July 2021 Shanella Rajanayagam, Trade Economist

Just-in-time procedures have helped business become increasingly lean. Ordering parts only as they are needed eliminates waste, minimises costs and improves efficiency. However, the pandemic has highlighted the fragility of global supply chains that rely on the seamless movement of materials between suppliers and buyers.

Shipping delays and lockdown restrictions, plus exceptional demand for some goods, have led to shortages that have left manufacturers unable to obtain critical items, delaying production.

Semiconductor shortages are particularly acute. Bottlenecks related to COVID-19 have been exacerbated by Chinese stockpiling ahead of US trade restrictions, severe weather in Texas, drought in Taiwan, and a fire at a Japanese chips plant. Chips shortages have forced car-makers to delay deliveries.

Supply shortages and the resultant surging prices are causing companies to question the effectiveness of just-in-time supply chains during times of disruption. Some businesses are increasing their inventories – and that has implications for trade flows.

However, building up safety stocks could further increase competition for components and raw materials already in short supply, especially as shipping disruption is likely to persist all year.

Goods whose production is concentrated in a small number of economies are especially vulnerable. These include soybeans, iron ore, and coal, while mainland China, Hong Kong, Malaysia, Japan and Singapore accounted for two-thirds of global semiconductor exports pre-pandemic.

But is this a permanent shift from just-in-time to just-in-case manufacturing? Probably not. The costs of holding inventory – including rent, utilities, warehousing and insurance – is typically 25 per cent to 55 per cent of the stock’s value. Bulky items cost more to hold; changing fashions or technology make items out of date; over-ordering and increasing production can risk a supply glut once demand eventually normalises – all leaving companies with losses.

And supply pressures are likely to ease this year as lockdown restrictions lift in Western economies and consumer spending rotates back from goods to services.

Other strategies can help businesses mitigate future trade shocks. ‘China-plus’ sourcing and diversifying suppliers via trade deals could help spread risk. Local purchasing or production – ‘nearshoring’ or reshoring – can lead to shorter and less fragmented value chains and boost intra-regional trade.

Vertical integration through moving production in-house, including 3D printing, can improve supply-chain transparency and quality, besides guaranteeing supply. However, it can be costly and require significant investment in new technologies and skills.

Meanwhile predictive analytics and artificial intelligence improve inventory management. Digital technologies can optimise stock levels and run scenario analyses to help businesses mitigate future disruptions.

Supply and demand imbalances are likely to correct as lockdown restrictions lift, but shortages of critical components could persist and may be exacerbated by businesses building buffer stocks. The pandemic highlighted the fragility of lean manufacturing but this is unlikely to be the end of just-in-time production.

As businesses now look to build more resilient supply chains, the ability to flex them during external or domestic disruption will be key.

Although implementing alternative strategies can be costly, the investment is likely to pay off over time and ultimately ensure businesses are better positioned to navigate the next trade shock.

First published 21st June 2021.

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