Kanban: America’s Ubiquitous “Just in Time” Inventory System–A Fragile House of Cards

When I give lectures or do radio interviews, I’m often asked for proof when I mention that we live in a “fragile society.” Here is one prime example: kanban. The kanban or “just in time” inventory system was developed in Japan, and became popular in America starting in the 1970s. It is now ubiquitous in nearly every industry. The concept is simple: Through close coordination with subcontractors and piece part suppliers, a manufacturer can keep its parts inventory small. (Kanban is a key element of “lean manufacturing.”) They only order batches of parts as needed (“just in time”), sometimes ordering as frequently as twice a week. Companies now hire Six Sigma consultants and Kaizen gurus, they buy sophisticated data processing systems, and they hire extra purchasing administrators. But these expenses actually save them money at the bottom line. I have a close friend, “B.A.”, that has worked as a lean process consultant, and he chimed in on a draft of this article that I sent him last weekend. (See his interspersed notes.) “Just in time” inventory systems have several advantages: Less warehouse space, less capital tied up in parts inventory, and less risk of parts obsolescence.

B.A. Adds: Actually, in many cases, if the simplest [lean process] methods are revealed through asking the “5 Whys” and understanding optimum flow, the sophistication (including data processing systems) can often be greatly reduced or eliminated; I think the perception is that complexity is better is often a sales job from folks selling the hardware and software!

The downside is that lean inventories leave companies vulnerable to any disruption of supply. If transportation gets snarled, or if communications get disrupted, or a parts vendor has a strike or a production problem, then assembly lines grind to halt. Just one missing part means that no finished products go out the door. In some industries, the complexity and length of the supply chain can be staggering. Some manufacturers of complex products-such as automobiles–now rely on many dozens of parts vendors on several continents. American businessmen have built very big, very complex, very vulnerable supply chains.

The kanban concept has also been taken up by America’s retailers, most notably its grocery sellers. In the “old days”–say 20 years ago–grocery stores had well-stocked “back rooms”, with many extra cases of dry goods. But now in most stores the “back room” has been replaced with just a pallet break-down area. Merchandise comes in from distribution centers, and it all goes immediately to the consumer shelves out front. Thus, what you see on the grocery store shelf is all that the store has on hand. What you see is what you get. The bar code scanners at the checkout counters feed a complex re-ordering system. If Mrs. Jones buys three bottles of pasta sauce, that could trigger a re-order. (Even the U.S. Military has embraced some “lean” techniques in their maintenance and logistics infrastructures, and saved taxpayers millions of dollars.) As long as communications and transportation work smoothly, then the entire system hums along like a Swiss watch.But what happens when the transportation infrastructure gets disrupted?

B.A. Adds: One of the 9 Wastes (I added one of my own 🙂 is excess Transport. Ideally, a systemic approach to manufacturing will co-locate (in theory) to the point where no transportation, or even movement is required, so transportation is one of the “nasties” that effective lean thinking tends to eliminate; here are the 8 Wastes (to which I would add “E” for Energy to the TIM WOODS acronym, which now becomes TIMEWOODS 🙂
Transport (excess)
Inventory (excess)
Skills, Savvy, Smarts (squandering the inherent genius in all people involved)

One of the factors that has strongly encouraged lean inventories is that many states levy an annual tax on business inventories of finished good or sometimes even semi-finished subassemblies. Also, under the Federal tax law, businesses must “keep an inventory and use the accrual method for purchases and sales of merchandise.” As is the case with most other government intervention in the free market, this is another “unintended consequence.” Businessmen hate paying a nickel more in tax than they absolutely have to, so by keeping their inventory small, they avoid the taxes. In some states like California, it is not unusual to see annual “inventory reduction” sales, timed for the month before before the annual inventory tax is levied.

The big “lean machine” works great in normal times. But in times of economic instability, or following a natural disaster, the machine can’t cope. Panic buying can clean out supermarket shelves in a matter of hours. And again, in most cases there is no longer a “back room” with extra inventory. The important lesson in all this is to be prepared. DO NOT count on being able to buy anything to provide for your family on TEOTWAWKI Day +1. Stock up.

B.A. Adds: “Good points, although I’d emphasize the caveat of stocking up (where it makes sense) on the items that you know you will personally use, and you have the space to store, and that won’t suffer any significant shelf-life deterioration, spoilage or nutritional loss (whole grain, water, honey, et cetera.) Also, have some silver for barter currency, [to trade for the items that you overlooked or that you didn’t stock in sufficient depth.]”

Also, while the sensitivity and stability of authentic lean manufacturing and production (as is practiced … or not in many cases) is of some concern, one emphasis that lean senseis make is flexibility and responsiveness, so that, for example, mixed inventory models can respond almost instantaneously to changes in demand (and the intent is to hone the bidirectional speed of communication so that the entire supply web is informed at a much quicker rate to adjust).
The concerns you raise are valid. However, as in so many areas of life, the optimum solutions are not either/or, but both/and. In the case of dependence on technologies such as computer and telecommunication networks, the initial concentration of processing power (mainframes) has given way to vastly distributed, parallel and redundant systems that are far more tolerant of disruptions than ever before.