Money &Markets: Just In Time is failing because of supply chain issues

JIT (just in time) has become NIT (not in time), and supply chains are having a hard time resetting to the silken smoothness of the past. On the face of it, JIT is a brave strategy because it relies on the business world spinning in a super-efficient way with everyone not only competent but also cooperative and collegiate. A nervous type could easily see that for a manufacturer to push the responsibility of having a stock of parts onto their suppliers, it could easily become a recipe for disaster, because if an enterprise gives itself over to the care of its suppliers and if those parties fail, everything will grind to a halt for that trusting customer. A warehouse of stock is insurance against just that kind of expected outcome.

JIT means, by definition, there is little to no slack in the system. Likewise, the suppliers of the suppliers have no slack either and this chain of efficiency has become the trademark of modern industrial thinking which drives efficiency up and prices down. The supply lines themselves become a virtual warehouse, and businesses link up to become a single well-oiled industrial machine.

This is all well and good until something dramatic happens, something bad like Covid. The trouble is that few realise (or even wish to care about) the interconnectedness of the modern world, so disasters, natural or otherwise, can and now have disrupted the system, and it will take a decent period of time to get that economic equilibrium back.

An unspoken problem that has exacerbated the current supply chain disruption is that during Covid a huge amount of de-stocking went on, in an attempt by locked-down businesses to turn assets into cash and thereby keep their business going.

As the economy restarted, it was not just the trains and boats and planes that caused the supply chain to malfunction but a lack of goods to carry down that chain. If you don’t have cotton, you can’t make cloth, so you can’t make t-shirts which you can’t print slogans on because you have no ink because the ink-maker has no more ink because the chemical company can’t supply the ingredients… and so on.

This limping conga line will take time to get its rhythm back. It will, but as it does it will be fighting a headwind of inflation that is being driven by a series of vicious circles.

Supply chain disruption is fuelling inflation.

The oversupply of money is fuelling inflation.

Government deficit spending is fuelling the over-creation of money, which is fuelling inflation.

Inflation is fuelling wage demands, which is fuelling inflation.

Inflation is fuelling commodity prices, which is fuelling inflation.

…and they are all feeding back into one another.

In the UK, the government decided to pour yet more gasoline on the inflationary fire by handing out free cash to all to pay for energy price rises. A cost-of-living crisis is not solved by the supply of more money to pay for higher prices. I feel it unnecessary to point out that handing out free money is inflationary, but it seems few are aware of this. The real answer is the old stock markets solution: ‘the solution to high prices is high prices’. High prices cause demand destruction, whereas cash handouts create yet higher demand.

There is a simple way out of the inflationary doom loop, and that is to pull money out of the system. However, such shock treatment would reveal the significant loss of wealth suffered by all because of the pandemic, and chronic is the politic way forward, not rude awakenings. Instead the plan is to blame higher prices on ‘the supply chain’ rather than governmental money printing, then let the situation pan out over a few years, with inflation the grease to allow the economy to reach a new equilibrium. Then when the economy gets back to stability, the plug gets pulled on the oversupply of money. Check back in 2024 or 2025.

Meanwhile the catastrophic war in Ukraine, coupled with rising instability in China, throws the whole ‘supply chain’ JIT idea into question. Can ‘just in time’ work in an erratic world?

Whether a business is ‘continuous flowing’, marching down the ‘Toyota way’ or holding lean Kanbans, the ability of a company to rely on the globalisation of its workflow is under question in the post-Covid world of superpowers with failing emotional intelligence.

What is likely to happen in the rebalancing years ahead is the slaughter of many sacred cows. Luxury beliefs get put on the back burner in hard economic times, and it will take years to get back to where we were in 2019.

The trick to thriving will be navigating a world of elevated inflation where many companies will fail simply because they will not adjust their prices successfully.

Business will share volatility with markets, and it will be in abundance.

The great bifurcation is upon us.