December 4, 2008

The next frontier of economic efficiency

Much of the progress in improved efficiency in the last 50 years has come from reducing inventory. Holding inventory is expensive. You can't earn interest or dividends on goods you own. Plus, you have to pay to store it, keep track of it, find it, etc.

The Just-in-Time manufacturing process made famous by Toyota focuses on cutting work-in-process inventory -- parts get delivered to assembly line stations just before they're needed. Similarly, containerized shipping has reduced the inventory tied up in transportation because it can be loaded and unloaded faster. At the retail end, Wal-Mart and Costco have radically cut inventory held by retailers through a plethora of techniques, such as using UPC scanners to measure sales and compare them against shipments to keep track of inventory and reorder automatically. (By the way, is "plethora" an inherently comic word and thus should be reserved only for facetious uses?)

The retailers, in fact, have shoved a lot of their old inventory holding costs onto consumers by, for example, selling them cases rather than individual items. Part of the demand for bigger houses and bigger vehicles that has proven so expensive to us as a society comes from consumers taking on more of the burden of storing and transporting goods.

While there has been enormous systematic progress at improving inventory management in the commercial world, there has been very little progress toward Just-in-Time practices in the domestic world. Just as it was fifty years ago, some householders are good at it, some are bad at it. (I'm one of the very, very bad ones, so I notice this lack more). There's just a lot more inventory of household goods to manage today than there was back then, so the need for more advanced household logistics is much greater.

I can't in good conscience advise anybody to make a career in this field because I fear it won't take off for a long time, but it will take off eventually.

My published articles are archived at iSteve.com -- Steve Sailer

26 comments:

headache said...

Actually JIT is not such a hot idea. Here in Germany most of the parts for auto factories are being "stored" on the highways. But highway transit permits are continuously going up since highways cost money to maintain, especially with heavy trucks, which are trying to cut their footprints thus driving up induced stresses, tearing away at them. In addition these JIT inventories have caused more than a few hiccups in factories. And it usually means factories cannot switch quickly. What do you do with defect parts which had been planned into the production cycle? What do you do when the client asks for design changes during manufacturing but your parts are on the container ship off China already, etc?

If anything, there is a trend to rebuild stock at the factories and perhaps cut on transport costs by sourcing locally or making parts oneself.

I got the funny feeling that in Germany mental work is being globalised and manual work localised.

rightsaidfred said...

>>>>You can't earn interest or dividends on goods you own.

They are still an asset and provide a hedge against inflation and delivery hiccups.

Companies sometimes give generous terms (no payments for six months) that appear to negate inventory control. I don't think the savings from just in time inventory control are all that high. If it is something you use eventually, the month/six month/ whatever saving is a one time deal. A big saving is reducing things you don't need at all, and here I think consumers could be making big savings. I'm a little queasy about an economy built on people buying things they don't really need. Car sales are down 30% or so, but I don't hear anyone complaining about not having transportation. I suspect a lot of car sales in the past provided little utility over someone's older car, so now when people look around at places to save money, the oversold car business takes a hit. We built a lot of houses that no one seems to need. It provided an economic boost to Henry Paulson's friends for awhile, but now that that has caught up with them, he has to loot the Treasury to maintain them in a manner to which they have become accustomed.

Anonymous said...

Steve wrote:

"The Just-in-Time manufacturing process made famous by Toyota focuses on cutting work-in-process inventory -- parts get delivered to assembly line stations just before they're needed."


This requires the work force to make many "changeovers" to one size or car to another. If you change a production line over to another part or part number, it takes several minutes, lessening the amount of units that get ran on that line that particular day.

In other words, there is some productivity lost (and a good deal more effort required of the work force and managers) to constantly keep "just enough" inventory of various products that you make without running out of one or two of them for a few hours (a very bad thing).


Im not suggesting Toyota overrun x-amount of Corrollas only to find out their Matrixes are selling better, and thus winding up with extra Corrollas, but when a production line is "humming" along, right in the middle of a "long run", its operating at peak efficiency, with the employees doing the same thing over and over. Less mistakes are made, etc.


Bar codes and scanners let the home office know exactly what is in inventory now, and can accurately predict how soon a different complete product could be in the warehouse post-inspection for shipping within a few hours. Its pretty detailed, but very stressful on plant management on down.

George said...

That is how the Absolut factory in Sweden operates. It was originaly a small, local distiller serving a small market decades ago. Its popularity is worldwide now but the company wanted to stay in the same small town at the same small distillery. How to overcome the logistics? All deliveries of grain, bottles, tops, boxes etc. are calculated down to the minute in exactly the right quantities. Efficient yes, but you are the mercy of many potential glitches.

Thrasymachus said...

"Plethora" was not inherently comic until it was used in the movie "The Three Amigos" after which is was.

kerdasi amaq said...

What happens if the transport system is seriously disrupted?

Anonymous said...

I was dirt poor growing up, so Costco appeals to the hoarding, "never be hungry again" side of me. I feel psychologically more secure having a metric assload of food and household items on hand at any given moment, so just in time delivery of this stuff doesn't appeal to me.

Anonymous said...

Yup I have been thinking about the inventory cost to households recently. Since the average American household holds $8000 in credit card debt (I heard it on CNN so it must be true), what is the cost is of holding, say $500 in inventory of food and toilet paper? Depends on the interest rate, but it turns out the discounts on bulk may not be such a good deal. Are those big freezers in people's garages full of meat really such a good deal either? What about personal inventory of gasoline? When prices are going up, I try to refill more frequently. When prices are going down, as now, I run the tank dry.

Anonymous said...

True about the highways thing. JIT pushes some costs onto the consumer but more importantly pushes them back up the supply chain.

If Toyota make their own stainless steel overlocker grillets, fine, they can build that into their own JIT set-up. If they buy them in then their supplier has to guarantee that supply. That probably means truck loads of finished grillets sitting around down the road from the Toyota factory.

So all thats happened is the stockpiling of parts now happens at the suppliers expense instead of Toyota's.

Garland said...

Household goods management is the bane of my existence*. It seems I spend half my life buying groceries or organizing them and I still can't get the just-in-time part right. It is the one thing that makes me want to be married, the chance that my wife will be better at it.

*another phrase that should probably only be used ironically, though I am not here.

Bill said...

POD publishing is starting to make a big difference. No more need to print many times the books that actually sell. I'm thinking about taking advantage of that business.

As for household inventory management, I've come to realize that it is indeed a problem. I am frequently tempted to throw out the bulk of my kids' toys. As for myself, I neither have nor want too many consumer goods.

Drawbacks said...

Lean Solutions by Jones and Womack is probably the book to read if you're interested in this idea.

Martin said...

Steve,

Way too sophisticated. Laundries are not just the business of the future; they will be goldmines. At the spped at which energy prices are increasing, you'll soon need Malcolm Gladwell's money to be able to operate your own washing machine. Laundries are the way to go.

cranky matron said...

I'm with the contingent who hoards food for the psychological comfort of it all.

In fact, I feel duty-bound to know I could feed the family for at least a month on whatever is in the pantry. Sometimes I think the Mormons, with their year's worth of food-storage. have this down pat.

The key is to keep the goods rotated and to store what you actually eat. The cost and hassle of storage is a form of insurance to me.

Interestingly, none of my Great-Depression relatives indulge in bulk food buying.

Byrdmachine said...

My JIT 7eleven coffee serves me just fine. Old concept, really.

Kirby Hoover said...

"Just In Time" (or as we prefer,'Should Have In Time") works well in Japan where physical real estate is at a high premium and the Japanese are well adjusted to making one, long run of a particular product then discontinuing it never to make it again.

Cameras and stereo equipment are good examples, items Japan iconically dominated for a long time. One model would be made in one run, then the new one introduced. Ofttimes the new one was not as well liked as the old one, but once the facility was changed there was no going back.

The Japanese support systems were well geared to this with suppliers making nonstandard items for a particular customer. Personal relationships between the vendors were key. Few standards existed, meaning every screw and bolt was vendor and model specific. Semiconductors (transistors) were made for one device, and when the order ended there were no spares.

They devised this largely from reading W. Edwards Deming and studying the Western Electric manufacturing business. In fact, a certain WE-made vacuum tube (the 300B, a four pin medium mu triode) is worth four figures (in US dollars) to Japanese audiophiles who build their own amplifiers to use these no longer manufactured tubes.

But WE was not a typical business: it had only one customer and a complete monopoly with them.

Blind adoption of JIT, kanban and other Japanese manufacturing practices has in fact been very detrimental to US manufacturing businesses. We have different relative expenses, different supplier relationships and different customer expectations.

Where factory floor space is not hideously expensive, inventory is a cheap solution to many problems. And design around standard components sourceable from multiple vendors-standard connectors, fittings, etc-saves a great deal of hassle.

Anonymous said...

I live in Japan and JIT household management is required -- there's just no space to hold an inventory, even the refrigerator is small. So we go and buy the night's groceries the same night, with the exception of white rice, of which we have about a week's supply. Also I buy my two cans of beer every night to keep myself from drinking a whole sixer in one sitting.

non de guerre said...

Garland said: "It seems I spend half my life buying groceries or organizing them and I still can't get the just-in-time part right. It is the one thing that makes me want to be married, the chance that my wife will be better at it."

LOL. I have long suspected the main reason guys get married is in the hope that they will never have to step foot in a supermarket again. Nothing fills me with dread more than having to run an errand to the grocery store.

Anonymous said...

Just in time only seems to work when the structure is efficient and run by competent people. The way the US is headed, it would end up being more like shoulda-been-here-in-time-but-wasn't.

steve wood said...

I live in Japan and JIT household management is required -- there's just no space to hold an inventory, even the refrigerator is small. So we go and buy the night's groceries the same night, with the exception of white rice, of which we have about a week's supply. Also I buy my two cans of beer every night to keep myself from drinking a whole sixer in one sitting.

A lot of people who live in small New York apartments do the same thing. The problem with exporting such a system to a wider American population is that it's dependent on convenient shopping options. If you walk past a grocery store or bodega on your way home from the subway--and there's one in just about every block on major streets in NY--then it's easy to do most of your shopping in small daily amounts. For the rest of us, though, such a system would cost the extra time of a side trip to the supermarket every day. You trade time for space, a trade-off that's uneconomical unless space is very expensive or you have a lot of free time.

headache said...

"Also I buy my two cans of beer every night to keep myself from drinking a whole sixer in one sitting."

Good one, me too! But the other poster had it right. JIT only works in a modern european country. Forget JIT in developing nations, or in the case of the US in an underdeveloping nation.

Mr. Anon said...

""The Just-in-Time manufacturing process made famous by Toyota focuses on cutting work-in-process inventory -- parts get delivered to assembly line stations just before they're needed.""

Could this have been a case of us learning the wrong lesson from Japan? It may make sense to cut back inventory to the bare minimum in Japan, where space is at a premium (due as much to social as to physical constraints). There isn't as big a premium on space-saving in the U.S. So your warehouse is big - who cares - this is America, we've got a lot of space.

Perhaps the real advantage the japanese had was in the intrinsic productivity of their workers. But that was not something we could readily copy (or we did not permit ourselves to recognize it), so we settled for copying their inventory control techniques.

Anonymous said...

"Plethora" usage from the Three Amigos.
Jefe: I have put many beautiful pinatas in the storeroom, each of them filled with little suprises.
El Guapo: Many pinatas?
Jefe: Oh yes, many!
El Guapo: Would you say I have a plethora of pinatas?
Jefe: A what?
El Guapo: A *plethora*.
Jefe: Oh yes, you have a plethora.
El Guapo: Jefe, what is a plethora?
Jefe: Why, El Guapo?
El Guapo: Well, you told me I have a plethora. And I just would like to know if you know what a plethora is. I would not like to think that a person would tell someone he has a plethora, and then find out that that person has *no idea* what it means to have a plethora.
Jefe: Forgive me, El Guapo. I know that I, Jefe, do not have your superior intellect and education. But could it be that once again, you are angry at something else, and are looking to take it out on me?

Ronduck said...

The simplest inventory control method is the elimination of stores altogether. We can now shop Amazon's warehouse from the comfort of home.

David said...

kirby hoover said

Where factory floor space is not hideously expensive, inventory is a cheap solution to many problems.

And household space is not at all expensive. Unless you're running a business from home. "Honey, clear out the garage so I can install an assembly line - the workers will be here first thing in the morning!"

Is a house a capital asset now?

Anyway, JIT seems like a perfect model for social disruption and misery. Forget delivery hiccups. As headache said, most stuff under JIT is stored on highways. Here on Interstate I-75 in Tennessee it is difficult for regular drivers even to get on the interstate: 24/7, all lanes resemble very busy railroad tracks, with tractor-trailers in place of railroad cars.

My father observed, "A plant in Michigan orders widgets from Alabama. A plant in Alabama orders widgets from Michigan. The two trucks pass each other coming and going. It's insane; but multiply this by a factor of about a million, and you have America today." The insane part is not just the negative externalities, but also the fact that the plant managers apparently consider themselves economical.

With the national economy about to go sharply south, hoarding household supplies, including food, is the smart move. Your corner market may not be there much longer for you to pick up a quarter-pint of gourmet organic hummus every Tuesday afternoon.

Wealth means goods. If you're goodless (or waiting on someone to deliver goods), you're poor. Period.

Hoard intelligently, of course. Buy only non-perishables in bulk. Buy a freezer large enough to hold a lot of meat. Can food. Grow gardens. (Gardens are a better use for your land than land$caping is.) And buy guns and ammo. Move on these things quickly.

W Baker said...

I always thought the English use of plethora had the connotation of overabundance, a glut of something. Only JIT logicians would use plethora in writing - and use it incorrectly! They have no Greek, nor metrical sense of English prose, let alone poetry. "Gobs", "glut", even "rivers of" something work for a great many folks. The JIT dandies use words like "cornucopia" to describe large amounts of litter on the sides of overly travelled highways!

I like "anonymous" grew up dirt poor. The idea of having just enough, at just the right time smacks of too much chance to me. I like to see full larders, plump babies, and full-chested (natural, please) women! Maybe I'm too Dickensonian for my own good...!