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The Downside of Just-in-Time Inventory

U.S. companies such as Boeing have learned to boost profits with tight inventories. Now, with 130 plants closed in Japan, they're learning the risks

In a control center above a wide-body jet plant in Everett, Wash., a group of Boeing (BA) staffers is poring over data from suppliers in Japan-making sure the company has enough parts to build its 787 Dreamliner in the U.S.

It's a long list. Japanese manufacturers helped design and now produce 35 percent of the 787, 20 percent of the 777, and 15 percent of the 767. What they build can't be duplicated anywhere else, and Boeing can't call in a new supplier to make one piece if it runs short. So far, the jetmaker says it has enough inventory to keep running for a few weeks.

Thirty years ago, Japan taught U.S. companies to boost profit by keeping inventory lean. Now it's teaching them the risks. Mitsubishi Heavy Industries builds the 787's wing; no one else can do that job. General Motors (GM) decided on Mar. 17 to close its Shreveport (La.) Chevrolet Colorado and GMC Canyon pickup plant for a week because it lacked components. Deere (DE) is delaying deliveries of excavators and mining equipment. And Honda Motor (HMC) suspended orders from U.S. dealers for Japan-built Honda and Acura models that would be sold in May.

"Instead of months' worth of inventory, there are now days and even hours of inventory," says Jim Lawton, head of supply management solutions at consultant Dun & Bradstreet (DNB) and a former procurement chief for Hewlett-Packard (HPQ). "If supply is disrupted as in this situation, there's nowhere to get product."

Beginning in the 1980s, to compete with Japanese manufacturers, U.S. companies became reliant on single suppliers for key parts. It was cheaper to buy in bulk from one outfit than to split orders. Now quake damage has interrupted 25 percent of the world's silicon production because of the shutdown of plants owned by Shin-Etsu Chemical and MEMC Electronic Materials, says IHS iSuppli (IHS), an El Segundo (Calif.)-based researcher. The earthquake forced more than 130 plants, mostly in auto and electronics, to close as of Mar. 22, according to data compiled by Bloomberg. Some of the affected factories make items sold directly to consumers; others are sold to manufacturers.

At Dell (DELL), the world's third-largest personal computer maker, managers are concerned that the supply of optical disk drives and batteries from Japan may be interrupted, according to a person familiar with the matter. Power failures at plants that make silicon wafers could also cause shortages in the computer-chip market in six to 10 weeks, said the source, who asked not to be identified discussing matters involving suppliers. In a statement, Dell said it doesn't "see any significant immediate supply-chain disruption."

From a command center in Boeing's Everett factory, engineers can see aircraft production from a window and a 40-foot screen that displays live video from supplier operations, weather reports, and global news. Translators are on hand around the clock. Chicago-based Boeing, which has bought parts from Japan since the end of World War II, found damage at several sites, according to Boeing Japan President Mike Denton, who is working with officials there to get them running. The leading edge of the 787's wings are built at Spirit AeroSystems Holdings (SPR) in Tulsa and shipped to Mitsubishi Heavy in Nagoya, where the full wings are assembled, then flown to Everett. Boeing and Mitsubishi Heavy use special autoclave ovens to bake composite-plastic sections of the plane and wing skins. Boeing is three years late and billions of dollars over budget on the 787.

Only about 10 percent of companies have detailed plans to deal with supply disruptions, says Lawton, who calls logistics the fastest-growing piece of Dun & Bradstreet's business. Shortages may crop up in other countries as companies seek alternative sources, he adds.

Despite the risks, companies won't abandon just-in-time inventory because the cost savings are too great, says James Womack, founder of the Lean Enterprise Institute in Cambridge, Mass. "Once they grasp the situation and they've got a plan, I would predict they are able to restore a remarkable amount of production very quickly," he says. "Never sell Japan short."

The bottom line: Japan taught U.S. companies the value of just-in-time supply chains; the crisis has exposed the downsides.

Discussion questions:

1. What are the advantages and disadvantages of "just-in-time Inventory" for a company?

2. Why do some companies still opt for "just-in-time Inventory" strategy despite its disadvantages?