The state of the global supply chain remains in focus for both Wall Street and lawmakers in Washington, DC. What could be causing the slowdown?
Back in the 1980s, manufacturing companies adopted an approach called “just-in-time” inventory management. Just-in-time (“JIT”) calls for the necessary raw materials or parts to be delivered to the factory just before production must begin to fulfill orders on time. By reducing the amount of excess material on hand, companies can reduce waste, control costs, and better forecast revenue.
The Toyota Motor Company pioneered JIT in the 1970s. The company’s success led to the rapid spread of JIT principles to industries worldwide. It helped create the deeply interconnected global supply chain we have today.
Now, JIT works great if supply-chain disruptions are minimal. Because the company has to supply customers with what they want, when they want it, and spend as little money as possible to make it happen, any disruption to the supply chain can quickly lead to negative downstream effects. For example, in 1997, a catastrophic fire at one of Toyota’s auto-parts suppliers forced the company to stop production across the supply chain, costing the company billions in revenue.
The lockdowns used to control the coronavirus pandemic forced companies to shut their doors, some of them forever. As the pandemic eases, the surviving companies across the supply chain need to resume operations. That can mean tackling a list of logistical issues like rehiring workers, renegotiating contracts, and locating new supplier or purchaser relationships – alongside actually manufacturing and shipping an item.
As long as the world runs on time, JIT can leverage a highly interconnected supply chain to deliver what you want when you want it for a reasonable cost. The pandemic disrupted supply chains worldwide, forcing companies to play catch-up. As a result, some experts now expect supply-chain issues to persist through 2022.
Robert Rolfe is a Financial Advisor at Harmony Financial Services (HFS). Securities and Advisory Services offered through SagePoint Financial (SPF). SPF and HFS are separately owned. www.harmonyfinancialservices.com
