The Risk of Keeping Things Lean

Keeping things lean certainly has financial advantages. Assume Jim manufactures and sells customized shirts. Each shirt is made-to-order: the shirt is not manufactured until an order is received. This “Just in Time” inventory strategy minimizes Jim’s costs. He does not keep completed shirts on hand. Jim is also able to reduce his raw material costs (cotton, silk for shirts, buttons, thread, etc.). Financially, it’s a sound strategy.
There are several downsides to Just in Time inventory. First, Jim may have difficulty getting enough material and supplies when a big order comes in. If someone orders 12 silk shirts, will Jim be able to get enough silk to make the shirts quickly? Second, if Jim cannot produce shirts for a period, there is no excess inventory to fill customer orders.
Toyota recently had this problem. An earthquake at a parts supplier prevented Toyota from getting parts to make cars. Because the company keeps a low level of inventory, Toyota could not fill car orders from inventory on hand. Car deliveries were delayed. A Toyota executive said, “Quality is the most vital aspect of our organization”. He felt it was more important to get quality parts from a reliable supplier, and deliver the cars later. Keeping large amounts of inventory, or securing other (lower quality) suppliers was not an option.
The Lesson: If you intend to minimize your inventory levels, consider setting up contingency plans to fill customer orders. If you cannot meet customer needs because of a crisis, find some way to keep those clients satisfied.
Your Homework: If you have had a situation that prevented you from filling orders, how did your clients react? What steps did you take to keep the clients doing business with you?
(Source: “Toyota Sticks by ‘Just In Time’ Strategy After Quake”, Wall Street Journal, 7/24/07)