PDA

View Full Version : JIT (Just in Time) = hoovering nickels in front of steamroller?



c1ue
08-20-07, 04:19 PM
I have been looking at the economics of "Just in Time" manufacturing - and the more I look at it, the more it looks like the manufacturing equivalent of the yen carry trade.

When commodity prices are dropping, it pays NOT to have inventory. You save some money on financial costs for inventory carry, but this is more a function of interest rates. With interest rates recently being so low, it is difficult to argue that this was a benefit.

The other benefit of JIT was in squeezing the suppliers; JIT basically forces suppliers to take on the commodity risk.

On the other hand with commodity prices rising and suppliers consolidating, there is a potential downside to JIT: being held hostage.

A sufficiently large supplier can play 'chicken' with the manufacturer; a single customer supplier can be held hostage but a supplier conglomerate reverses the roles.

zoog
08-20-07, 04:48 PM
I have been looking at the economics of "Just in Time" manufacturing - and the more I look at it, the more it looks like the manufacturing equivalent of the yen carry trade.

When commodity prices are dropping, it pays NOT to have inventory.
.
.
.
On the other hand with commodity prices rising and suppliers consolidating, there is a potential downside to JIT: being held hostage.

Interesting idea. I remember watching a documentary on Wal-mart a couple years ago which discussed their JIT store stocking methods. They try to keep as little back-store inventory on hand as possible. Someone buys one microwave on a given day, it gets scanned at the register, that goes into the system and marks a need for another microwave, it gets put on a truck from a distro warehouse, and shows up the next day (or whatever their delivery schedule is). This tight balance appeared to run all the way back to their manufacturing suppliers. One Chinese factory manager complained that the system makes it very difficult for them (the factory) to predict production needs, profitability, staffing, etc. because the demand from Wal-mart varies wildly from week to week, month to month. It would be a warm fuzzy irony if the tables became turned at some point.

FRED
08-20-07, 05:30 PM
I have been looking at the economics of "Just in Time" manufacturing - and the more I look at it, the more it looks like the manufacturing equivalent of the yen carry trade.

When commodity prices are dropping, it pays NOT to have inventory. You save some money on financial costs for inventory carry, but this is more a function of interest rates. With interest rates recently being so low, it is difficult to argue that this was a benefit.

The other benefit of JIT was in squeezing the suppliers; JIT basically forces suppliers to take on the commodity risk.

On the other hand with commodity prices rising and suppliers consolidating, there is a potential downside to JIT: being held hostage.

A sufficiently large supplier can play 'chicken' with the manufacturer; a single customer supplier can be held hostage but a supplier conglomerate reverses the roles.

Depends on the level of inflation and rate of change. In a rapid transition to high inflation rate, a manufacturer can run into real trouble. Finished goods sell at high prices relative to input costs, as inflation at the time finished goods exit is higher than it was when parts entered on the input side. This looks like increased profits if you don't know what you're looking at, and that's why it's dangerous. The next parts purchase cycle begins and if input prices have increased more than projected because your CFO has underestimated the inflation rate (perhaps because the government stats are far from reality), a company can find itself in a serious cash flow crunch just as real borrowing costs are skyrocketing.

The #1 mistake that manufacturers make in the transition from low to high inflation environment is to fail to retain enough profits, and to fail to hedge the loss of purchasing power of retained profits. This is the #1 cause of bankruptcies in those periods.