Friday, March 25, 2011

Killing Another Sacred Cow of the Bull Era

Just in Time Inventory ranks as one of the great articles of faith promulgated in the late great Bull Market. It ranks up there with computer-driven productivity, Prozac, and Free Trade as a tenet of faith that took root during the positive mood era of the 1980s and 1990s. In the late 1990s, I doubt you would have been allowed to obtain a degree from a B School without first pledging undying allegience to this theory.

JIT is like many things that grow up during fifth waves of large degree (in my opinion) - it is hyper-efficient, wringing more profit from existing structures and culling away the deadwood that can build up with inventory - and it works great, until it doesn't. Strong foundations get built during First Waves. Third Waves build up strong and vital structurs on those foundations. Fifth waves take what was once robust and replace it with more efficient, but brittle structures that often cannot withstand the crushing pressures of large-scale downturns in mood.

The Downside of Just-in-Time Inventory
By Thomas Black and Susanna Ray of Bloomber BusinessWeek
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...

Downturns in mood expose true weaknesses and sour strengths. Get ready for much, much more of this.

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