August 2003 | Commentary | Checking In

Jettison JIT?

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Is it time to jettison JIT? It may be, according to industry observers Ike Brannon, senior economist on the Congressional Joint Economic Committee and Michael Gorman, assistant professor at the University of Dayton (see Viewpoint, August issue). Let's think about that.

Ike and Mike say that increased transport costs offset savings companies using just-in-time regimes earn by holding less inventory. Their findings are based on a macro view of inventory costs and the offsetting higher transport costs for the speed and reliability needed to drive JIT. They conclude "a review of the transportation and inventory cost trade-off may be in order for much of U.S. manufacturing." They probably mean retailing, too.

They probably mean any logistics system that uses expedited services to minimize inventory and supporting infrastructure.

I am not an economist or professor but I disagree in part with Brannon and Gorman. I believe other factors that are JIT neutral raise transportation costs. I don't see in their analysis the cost of the supporting infrastructure needed to hold more inventory. But they are correct in that transport costs did rise, but only a portion of that is due to the higher costs for smaller/faster JIT shipments.

Transport costs rose because rates were too low for some carriers. The driver shortage problem was an indication of that. Drivers would not work for wages that low. To offset pay raises for drivers, combined with quality-of-life adjustments such as shorter trips, some carriers did raise prices. Current economic conditions have now made driver shortages a non-issue. Any costs associated with problems like those were and are still real. And they are JIT neutral.

Taxes, fees, and tolls increased exponentially this past decade. Regulations—ergonomic, environmental, and otherwise—also increased carrier costs. Carrier insurance rates have skyrocketed and additional security costs are now necessary. And let's consider what is loosely called "energy policy," and rising fuel costs. These costs have largely been passed along to customers. Higher transport costs? Yes, these are JIT neutral.

Carrier investment in new technology was very heavy during the past decade for several reasons—the need to rationalize operations, to address new customer demands driven by the Internet, and to provide control and visibility to customers (so they wouldn't have to use expedited services). These costs are borne by customers. But, in my view, these costs are all JIT neutral.

Many of these higher cost factors would have occurred whether or not smaller shipments relating to JIT practices were on the rise. I believe if we factor out the examples above, it's possible the cost of smaller shipments relating to JIT practices, when adjusted for inflation, might actually be lower because of increased carrier efficiency and tough competition between carriers.

Brannon and Gorman's macro view says increases in transport costs are due to wider use of JIT shipments. They ask if it is time to jettison JIT. My view is that other factors impacted those costs, and that evaluating JIT is more complex than some might think.

What do you think? Email me:

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