Are Lean Supply Chains Responsible for Shortages?

How lean and JIT organizations can withstand supply chain disruptions

Published: Tuesday, February 16, 2021 - 13:02

Lean supply chains are designed based on several key principles. First, the general philosophy of lean is to reduce or eliminate nonvalue-added waste. The concept of reducing waste is always beneficial to organizations. We should continuously strive to reduce things like wasted time, wasted effort, wasted processing, wasted travel, and wasted packaging. So, even in times of disruption or crisis, efforts to reduce wasted steps or processing can actually benefit the organization. This efficiency is a good thing.

A second key principle of lean supply chains is where it gets tricky regarding the risk of disruptions. This principle is just-in-time (JIT) supply. The JIT principle means inventory and supplies are delivered just when they are needed. So instead of holding weeks or months of inventory, an organization might get daily deliveries, just as needed. When things are running smoothly, this is a great system because it significantly reduces the amount of money spent on holding inventory. Lean can even reduce losses due to perishable inventory or obsolescence because there are no warehouses full of dusty redundant items. But, of course, in the case of supply chain disruptions, the same lack of inventory can be devastating to ongoing operations.

Supply chain disruptions

Supply chain disruptions happen. It’s important to remember that most disruptions are minor: busy traffic that delays a shipment, or a brief power outage that shuts down equipment. Organizations can usually recover quickly from these small disruptions. However, occasionally a major disruption can happen and must be managed effectively for survival.

Global organizations have seen examples of hurricanes, fires, earthquakes, tsunamis, war, and even our recent Covid-19 pandemic impacting supply chains. In 2011, the world saw automotive supply chains temporarily shut down due to the earthquake and tsunami that hit major suppliers in Japan. In 2017, Hurricane Maria hit Puerto Rico and crippled the medical supply chains for some pharmaceutical products. In 2020, the Covid-19 pandemic caused disruptions in supply chains spanning toilet paper, food products, cleaning products, and hand sanitizer. Even some international supply chains were disrupted when overseas flights were halted at the beginning of the pandemic.

What can lean organizations do?

Strategic supply chain design
It’s important that you consider the overall design of your supply chain, keeping the following items in mind.

• Location matters. Organizations must be aware of the risks associated with their own locations. Are you in a coastal city, in an earthquake zone, or in a flood plain? Can you reduce or plan for these known risks? Diversifying locations can help spread the risk around to different geographic areas, which can be particularly useful in times of local or natural disasters.

• Suppliers matter. It’s not just your location, though, but also your supplier’s locations. Supply chains are very complex, so how can an organization determine the risk associated with each supplier’s geographical location? First consider the importance of the supplier. Can the supplies you get from this supplier be easily substituted from another supplier? Can you have secondary supply contracts in place just in case? If not, actively managing the risk is more important. You don’t need to actively manage every supplier, but you do need to actively manage the risk associated with Tier-1 suppliers of critical and hard-to-substitute components. It is also useful to have higher levels of supply-chain integration and information sharing among these key Tier-1 suppliers. Quick information flow and communication is exceptionally valuable in times of crisis and disruption.

Strategic inventory management
Lean and JIT advocate for very little onsite inventory. Items show up just as needed, pulled by customer demand. Again, this is great when things are running smoothly but can be quite costly in the event of a major disruption. Instead of eliminating all inventory buffers, lean companies should consider holding at least some extra inventory of critical or hard-to-substitute components. Think of it as an inventory insurance policy. But in order to stay lean, you can’t do this with all of your inventory items, so make sure to focus on the importance or rarity of the inventory items.

Planning and agility
You may be able to plan for known risks, but you cannot possibly plan for every scenario. So your organization should plan for a variety of potential disruptive events. Every organization should have a crisis management team and crisis management plan where employees are trained up and technologies are ready to deploy in the event of a major disruption. Part of this crisis management plan should be a portfolio of strategies including insurance policies, potential secondary supply sources, and crisis communication and action plans.

In addition, lean organizations that are properly managed have the potential to be more agile in times of crisis, such as disruptions from Covid-19. For instance, we saw many distilleries in the United States quickly pivot to making hand sanitizer for local communities; similarly, restaurants quickly pivoted to online orders and takeout. This ability to be both lean and agile, pivoting according to the needs of the market, can be a big source of competitive advantage.

About The Author

Ashley Y. Metcalf

Ashley Y. Metcalf, Ph.D. is an Associate Professor of Operations Management and Chair of the Management Department at Ohio University. She specializes in process improvement across many industries.