The Myths that are Destroying
Copyright © March 29, 2010 by Robert Wayne Atkins, P.E.
The United States of America
Along with the Rest of the Civilized World
All Rights Reserved.
I was born in 1949 shortly after the end of the Second World War.
As I grew up in the 1950's and the 1960's I saw the United States of America become the envy of the entire world as our "poverty level" living conditions improved far beyond the "average" living conditions of all the other nation across the face of the earth.
In the 1970's and 1980's I observed the death of the "vacuum tube" and the birth of the microchip. I not only watched but I helped implement small computer systems in all types of businesses. These computers replaced many human jobs. The computers performed their tasks flawlessly and with amazing speed. This resulted in significant improvements in quality and significant reductions in cost.
Then in the 1990's and the 2000's I watched as many businesses and companies around the world began to implement business strategies that were ill advised and doomed to failure.
Now we are entering a new decade beginning in the year 2010. Is there hope for an economic and social recovery for the United States and the rest of the world? Perhaps. But only if our companies and our businesses abandon the "ill-advised new strategies" that are destroying them and revert back to the "traditional time-honored strategies" that were the foundation of their original success.
Will this be easy to do? Absolutely not. It is never easy to replace a business strategy after it becomes entrenched within a business, even when that strategy is resulting in the death of the organization. Some business strategies can be like a cancer and they will resist every effort to eradicate they and they will continue to harm the organization unless they can be 100% removed.
But there is always hope. And that is the purpose of this article: to provide hope. And to offer some specific suggestions on how businesses and companies in the United States and throughout the world can:
As time permits, I will share my thoughts on a wide variety of beneficial healthy business strategies below.
- improve their quality,
- lower their costs, and
- increase their profitability.
However, in each case it will first be necessary to explain the fallacy behind a "myth" that is standing in the way of the successful implementation of these traditional business strategies.
I will begin by discussing the "Just-In-Time Inventory Strategy."
The Myth of the Just-In-Time (JIT) Inventory Strategy
The myth of the "Just-In-Time (JIT) Inventory Strategy" is based on the following precepts:
Now let's examine each one of the above statements one-at-a-time:
- Inventory is evil.
- Inventory is an expense. If the inventory is eliminated then that money can be more productively used in some other way.
- Inventory requires storage space. If the inventory is eliminated then that storage space will not be needed.
- Inventory slows down the overall production process.
- Therefore if inventory can be eliminated and each item is delivered to the exact spot where it is needed at the exact time it is needed then maximum productivity will be achieved and total costs will be minimized.
- Anyone who does not 100% agree with the above analysis is intellectually impaired and the rest of us brilliant people will not associate with you.
In summary, the vast majority of companies that have implemented a JIT strategy are in serious financial trouble today. But these companies refuse to believe that one of the major reasons they are having problems is their JIT strategy because too many really famous and really important people have staked their reputations on JIT being the right course of action to pursue. Unfortunately, those people were wrong.
- Inventory is evil.
The only time that inventory can actually be considered "evil" is if it is inherently dangerous or harmful in some way. For example, radioactive nuclear waste material is evil and it needs to be minimized and eliminated. However, most other types of inventory are not evil, such as automobile tires on the rack in a Tire Store, or food on the shelves in a Grocery Store. If the inventory at these locations is eliminated until it is actually needed by a customer, then the business that attempts to implement that JIT cost reduction strategy will quickly find that it does not have any customers and it will immediately go out of business. Do you want your company to go out of business?
- Inventory is an expense.
Inventory is not an expense. Inventory is an asset. For example, paying your electric bill is an expense and if you can figure out some way to reduce your usage of electricity then you will be reducing an expense item. On the other hand, your vehicle is not an expense - it is an asset. Your vehicle has costs associated with owning and operating it, but the vehicle itself is one of your assets. Your vehicle has value. Your vehicle improves your ability to do whatever it is that you need to do. Your vehicle is one of the inventory items on your personal balance sheet. Would keeping your vehicle parked at the home of one of your relatives improve your standard of living or would it result in a decrease in your standard of living? If you completely eliminated your vehicle would your life be better or worse? The same basic line of reasoning applies to inventory at a business. That inventory does have costs associated with it but the inventory itself is an asset. And assets can be sold. Therefore, inventory is not an expense. Inventory is an asset.
- Inventory requires storage space.
This is true. But it is not true that the inventory disappears from the entire production system when JIT is implemented. What actually happens is that the inventory is transferred from the customer's location to the supplier's location. The inventory still exists except it is now in a different location. The customer can therefore boast that he has eliminated all his inventory and he has no space currently dedicated to the storage of inventory. However, that inventory still exists at his supplier's facility and his supplier will gradually increase his cost to the customer to include the cost of keeping that inventory in storage for the customer. Most people refuse to believe this simple basic truth and instead they choose to believe that all the inventory has really just somehow disappeared from the entire system and therefore the entire system is working more efficiently. They are wrong. The system is actually work less efficiently because you have just started parking your vehicle at the home of one of your relatives and you are trying to convince yourself that you are saving a lot of money by doing this.
- Inventory slows down the production process.
This is false. Inventory is the lubricant that facilities the smooth operation of the production process. Inventory allows a facility to decouple its manufacturing operations. If there is a problem with one manufacturing operation then all the other operations can continue to operate at peak efficiency while the broken machine is being repaired. However, if all the inventory is eliminated from the production system then a failure of any one machine shuts down every machine in the facility because there is no inventory between those machines. This increases your labor cost because your labor force has nothing to do, and it decreases your equipment utilization because your equipment is sitting idle. As an example, if you decided to minimize your costs by keeping just enough gasoline in your vehicle's gas tank to get you to work and to get you home every day, and you added exactly that amount of gasoline to your vehicle the next day, then what type of schedule do you think you would be able to keep? If traffic were not normal and it took a little longer to get to work, or to get home, and you ran out of gas, how would you feel? Would you feel like a genius? Would you feel like you were optimizing the use of your resources? Or would you feel stupid? This happens every day in manufacturing companies around the world but these companies are so big that the true financial impact of their "lack of inventory" is not understood by the people who are in charge of forcing the "no inventory policy" on their company. However, JIT is one of the major reasons these companies are experiencing problems today but they don't realize that their increased cost of doing business, and their shrinking profit margins, are directly related to their inefficient manufacturing operations that are hemorrhaging every day due to the lack of inventory inside their facility.
- Inventory can be delivered to the exact spot it is needed at the exact time it is needed in the exact quantity that is needed.
Any company whose production strategy is based on the arrival of materials exactly when they are needed is doomed to fail if there is a reasonable geographical distance between that company and its suppliers for two fundamental reasons:
Therefore, because of the occasional defective part and the occasional bad weather it is not reasonable to believe that the exact quantity of parts will always be delivered at the exact spot they are needed at the exact time they are needed.
- People make mistakes. Everyone, including myself, occasionally makes a mistake. In manufacturing a mistake usually means a defective part. When that defective part reaches its destination it will result in the product that it is being assembled into having to being set aside until a replacement part can be delivered. This is a serious problem for large expensive finished products.
- Unpredictable weather events or union strikes or anything else could delay a critically needed shipment from arriving at the exact time it is needed. Unfortunately, business executives do not control the weather or the overall transportation system and therefore this variable will continue to cause disruptions to the expected delivery times of critically needed materials.
- Anyone who does not agree with Just-in-Time is intellectually impaired.
When Just-in-Time was becoming more popular in the United States in the early 1990's I suggested to several companies that they not adopt this strategy. Every one of those companies immediately terminated my consulting relationship with them. However, over the years I have maintained my position against JIT in every university course and seminar I have taught that dealt with the topics of facility design, inventory control, and organizational efficiency. The individuals who attended those courses may or may not have agreed with me but they were polite and they didn't voice a dissenting opinion since I was the course instructor. It is now up to you whether or not you personally choose to agree or disagree with me. If you agree with me then unfortunately you will become one of those rare individuals who is considered to be "intellectually inept" by the rest of the world.
Fortunately however, many of those people are now retired or they are in the process of retiring so it is now possible for your company to undo the damage done by JIT and implement a new strategy of having sufficient quantities of inventory in your Raw Material Warehouse, and between each step in your manufacturing process.
This inventory strategy is not new. It is referred to as "Inventory Management." It was taught in every major business school throughout the world until JIT replaced it as the new paradigm.
"Inventory Management" is based on the following simple premise:
Always have enough inventory on hand to keep your facility working smoothly and efficiently so you do not experience unnecessary disruptions due to:
- a delivery being late, or
- a machine breaking down, or
- a defective part being discovered at some stage in the manufacturing process.
This concludes my comments on the myth of the "Just-In-Time Inventory Strategy" and why it should be replaced with the old-fashioned traditional "Inventory Management Strategy."
As time permits I will continue to add my thoughts on a wide variety of other "myths" onto this web page.
March 29, 2010 - Created this new web page with the first article: The Myth of the Just-In-Time Inventory Strategy.
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