Misconceptions of lean supply chain approaches such as ‘just-in-time (JIT)’ could be increasing risks to businesses and adding costs, according to Tim McLean, TXM Lean Solutions Managing Director.
McLean says JIT is often mistaken as meaning less inventory, but when implemented correctly, is effective in reducing supply chain risks and increasing efficiency.
“JIT is about only having the inventory you need, where you need it and when you need it,” he says.
“When people say ‘we need more stock, we’re too lean and we need a bit of fat’, that is a simplistic analysis of a situation that could lead to real problems in the business with serious consequences.”
Demand and supply usually operate close to balance supply chains. During COVID this was put to the biggest test in decades where demand for goods surged, quickly outstripping supply.
“The pandemic had a ‘bullwhip effect’, where changes in underlying demand for goods were amplified many times by the actions of businesses in the supply chain,” McLean says.
“This is like how the small move of the hand lead to a large movement at the end of the whip. In 2021 and 2022 supply chain shortages lead companies to order more materials to build up stock and this made the shortages worse, lead times even longer and for many SMEs, serious cashflow issues.
“COVID produced the biggest bullwhip effect since the end of WWII.”
Lead time is biggest supply chain risk
The pandemic put supply chains in the spotlight – for both businesses and consumers – with the number one risk being, according to McLean, lead time.
“The longer your goods have to travel to get from your supplier to you, the greater the chance of something going wrong,” he says.
“If you’re placing an order and not seeing the goods for 16 or 20 weeks, an awful lot can happen in that time.”
McLean says people are realising that lead time, and the supply chains they've created where goods are sourced from across the globe, are vulnerable.
He encourages businesses to carefully consider the risks of sourcing goods from places that have present geopolitical or ESG risks, or have frequent natural disasters.
Simple solutions can reduce risk
Rather than being the cause of supply chain problems, McLean believes that JIT and other lean concepts offer solutions to help build more resilient, lower cost supply chains.
This starts by gaining a detailed understanding of the end-to-end supply chain from your suppliers (and often their suppliers) all the way to your end consumer.
“A powerful business tool called an extended supply chain value stream map can help you understand where the risks and delays are in your supply chain and design a more robust and responsive solution,” he says.
“Businesses around the world are bringing production closer to home by choosing suppliers in their own country or by ‘near-shoring’ – sourcing from lower cost countries close to the home market.
“Even more businesses are making use of innovative technologies such as additive manufacturing or CNC equipment to bring production in-house.
“Vertically integrating with lean thinking can lead to very responsive operations and the ability to make customised products for clients.”
Where insourcing or near-shoring is not possible, McLean says businesses need to understand the specific risks for each group of products they source.
“Consider what could go wrong and how long it could interrupt supply and plan for the highest risks by building targeted inventory buffers or establishing alternative supply,” he says.
“Just increasing stock for everything, as many companies did after the pandemic, is costly, unnecessary and actually increases risk.”
Build resilience by diversifying supply chain
Diversifying supply chains is an effective way for businesses to increase their supply chain resilience.
He says a good way to do this is having two suppliers for the same product, with one being the majority supplier and a secondary supplier, but enough of them to keep that supplier interested and competitive.
“Then, if you need to, you can easily adjust how much you order from each,” he says.
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