On Business: Nearly just in time

Cutting all the slack out of a system simply transfers the risk to others and leaves it vulnerable to unexpected disruptions. I recently had a party and not being sure how many people would bring friends, laid in enough food and drink to cover for a certain amount of indeterminacy.

by Christopher Grey, World Business
Last Updated: 23 Jul 2013

It's no more than commonsense and yet, alarmingly, it is the exact opposite of how most companies behave. Over the past two decades, business has been in thrall to the doctrines of lean production and just-in-time (JIT) management. Originally derived from the automobile industry, the idea is that you keep zero inventories, ordering goods and services as and when they are needed, and working all your assets, including human capital, at their maximum. It makes a lot of sense - until it goes wrong.

At the end of last year, Heathrow airport was shrouded in fog and had to start cancelling flights in enormous numbers. Normally, it works at 98% of capacity; nowadays, all airlines use sophisticated yield-management systems to ensure they run at or close to capacity.

So the effects were huge: those travelling home for Christmas were stranded for days and business people missed meetings. In healthcare, JIT dictates maximisation of bed occupancy, which is very efficient until an epidemic or major incident occurs, at which point the lack of spare capacity causes not just inconvenience but death.

At a more mundane level, it is commonplace in retail outlets when buying anything from shoes to iPods for the customer to be told that the item is not in stock but can be delivered in 24 hours' time. Most customers won't bother to place an order: why should they make another trip to the shop when they can order through the internet? And having done so, they begin to wonder why they bother with the retailer at all.

The love affair with lean production and JIT is creating a world of mounting inconvenience and of real danger. Cutting all the slack out of a business seems efficient from one point of view, but it simply transfers risk to other people. If demand temporarily outstrips supply, then it is someone else who suffers. Costs are passed on to another business and it is no good an individual business saying that it does not care about these effects because it, in turn, is affected by the same attitude from others. And when it affects customers in a competitive market, they will look elsewhere.

This situation is exacerbated, and risks creating serious social problems, by the fact that we now have elongated, interlocking and international supply chains. It takes only one disruption or blockage to devastate an economy. The global economy is enormously fragile, as we saw when Russia closed off energy supplies to Ukraine. It takes perhaps three days' disruption to the energy, road, rail or air infrastructure to reduce an advanced industrial society to complete anarchy. Such disruption could easily be achieved by industrial action, political protest, terrorism or simply by adverse weather conditions, as Hurricane Katrina showed. It is easy to imagine how relatively minor events could precipitate a catastrophic breakdown.

Does this mean that managers should abandon JIT and go back to the days of big inventories? Certainly not. What we need could be called 'resilient-JIT'. The concept of resilience is much used in disaster planning and entails ensuring the presence of mission-critical factors.

These factors will vary from business to business, of course. In societal terms, resilient-JIT matters much more for an electricity company than for a shoe retailer. Yet even for the shoe retailer, resilient-JIT is important: if your shop does not stock my size but the adjacent seller does, then you will most likely lose my custom.

The big revolution in business over the past few years has been the move from producer-focused firms, which tell the customer to take it or leave it, to customer-focused operations. JIT was part of that revolution but, perversely, has become part of the problem by expecting the customer to fit in with the delivery schedules of the producer. But customers don't care how lean your operation is: if your cost-cutting simply transfers cost to them, in terms of inconvenience, then they can go elsewhere.

That is a matter of importance to the shoe retailer, but electricity or healthcare have a much wider significance. In such cases, the need for resilient-JIT becomes a matter of public concern.

There is much talk of 'corporate social responsibility', which is normally thought of in terms of governance codes, environmental concerns and community relations. But, more extensively, social responsibility means creating the resilience to withstand the unexpected, which implies creating some slack in the system. Just as I have a responsibility to my guests to cope with indeterminacy, so too do businesses have a responsibility to do the same for society.

Christopher Grey is professor of organisational behaviour at Warwick Business School and a visiting senior research associate at the Judge Business School, University of Cambridge.

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