It's always a pleasure to see an article make it's own point… especially when it is contradictory to the premise of the article itself. Take, for example, a recent article on how companies are trying to streamline inventories in the face of the economic downturn.
The economic downturn is hitting companies so hard and so fast that even those that have made huge strides implementing inventory-control systems haven't been able to react quickly enough to avoid a costly buildup.
After falling sharply for a year, U.S. inventories shot up by $6.2 billion unexpectedly in the fourth quarter of 2008, according to the latest U.S. Commerce Department figures. The surge underscores the rapid demand decline that is hitting large and small manufacturers.
"The system went from full speed ahead to stop," said Ronald DeFeo, chief executive of Westport, Conn., mining and construction equipment maker Terex Corp.
The impact both cascades and amplifies the problem.
The upshot is that companies up and down the line are slashing prices and throwing the brakes on new production. As they rush to clear away the excess, their actions tend to magnify slowdowns already underway.
Nothing really new, but then comes the couple of lines that piqued my interest.
Part of the problem is that many companies built stockpiles last year in the face of surging prices for items such as steel and plastics. That goes against the principles of just-in-time production, which dictates holding minimumstocks of raw materials. But such hoarding makes sense when prices are rising.
Wait a minute… didn't he just say that the increase of inventory "in the face of surging prices" was "part of the problem"? Then how does the exact same thing, hoarding, "makes sense when prices are rising."?
The answer is that it doesn't. Remember a few months ago when we were talking about the foresight of Southwest Airlines for locking in fuel at a relatively moderate price point? Now a few months later their competitors are eating their shorts thanks to a precipitous reduction in fuel costs, and Southwest is now locked in at higher than market levels.
There's a global supply chain component as well.
Another factor making inventory management more difficult has been growing globalization. Red Wing Shoe Company Inc. in Red Wing, Minn., produces in three U.S. plants, but also outsources some lower-priced lines to Asian factories. Chief Executive David Murphy said he has been able to quickly curb production at his U.S. plants as demand slowed, but his inventories of imported shoes have swelled, in part because those orders were placed far in advance of the downturn.
The bottom line? You need to either believe in the power of just-in-time, commit to it by absorbing some occasional swings in raw material pricing and demand, or just give up. Long term competitiveness is truly based on a long-term commitment and mindset.