Tony Freeman, President, A.S. Freeman Advisors LLC03.03.22
Inventory management philosophies are like religions. Once committed to, it generally requires a profound world change to instill a new set of beliefs. Over the last several decades medical device OEMs have transitioned from traditional just-in-case (JIC) inventory, which keeps excess product on hand in case of unforeseen situations, to the more modern just-in-time (JIT) approach. The elegant dance between OEMs and suppliers core to JIT has been challenged by the COVID-19 pandemic. The supply chain wobbled and warped but did not break, likely enshrining JIT as the inventory philosophy for the foreseeable future.
The Rise and Results of JIT
The modern JIT inventory system was developed by Toyota in the 1970s as an extension of the LEAN principles it created to compete against the more richly resourced American automakers. Working with suppliers, Toyota arranged for more frequent, smaller shipments of inventory to arrive at its plants. These shipments were carefully timed to match the carmaker’s production schedule.
Toyota and other manufacturers who adopted JIT inventory found two benefits in carrying less inventory at any given time:
While too much inventory may be an invisible cost, a more obvious problem is the opposite condition—running out of inventory when it is needed on the production line. JIT’s success requires a firm handle on production schedules, outstanding communication across the company, and close coordination with carefully selected suppliers. Firms choosing JIT commit to a carefully choreographed business ballet.
As JIT grew in acceptance during the late 20th century, the previously oft-ignored “purchasing office” grew in power and stature. As the clearinghouse between the OEM and its suppliers, this formerly second-line department grew in staff count and business sophistication. Management tools like enterprise resource planning systems were added to track inventory with moment-by-moment accuracy. What had been a quiet department became the hub of supply chain management.
Not only were these teams and tools necessary to gain the operational and financial benefits of JIT, they were a safeguard against JIT’s short-term fragility. Bad weather, strikes, quality problems, price changes, bankruptcies, and other business disruptions affecting a single supplier could disrupt an OEM’s entire production. JIT had proven itself at Toyota and other firms but it remains a system vulnerable to the unexpected.
JIC Inventory—an Alternative?
For centuries manufacturers had functioned, like it or not, with what are now called JIC inventory systems. Lacking the lean philosophy that birthed JIT or the necessary tools to keep a JIT system running, manufacturers of old carried more inventory than needed as a cushion against uncertainty. Yes, JIC was costly and occasionally unproductive, but it was necessary to keep the lines running. Still, JIC has two benefits:
Yet most medtech companies—even those born in the JIC era—have turned to JIT as a financially superior approach. While harder to execute than JIC, most modern experts traditionally viewed JIT as a successful inventory strategy for medical device OEMs, at least until 2020.
COVID-19, JIT, and JIC
The COVID-19 pandemic has been the greatest disruptor to global supply chains since World War II. Some suppliers questioned whether the shortages and delays of the past two years could have been avoided if OEMs had taken a JIC approach to inventory. Some also opined that reshoring to North America would eliminate much of the disruption. With calm analysis, it is hard to see a compelling reason for replacing JIT or why SARS-CoV-2 is a reason to begin reshoring.
The most spectacular failures of the medtech supply chain occurred early in the pandemic with personal protective equipment (PPE) and COVID-19 test kit components. It is hard to forget hospitals in the early days of the pandemic rationing PPE, even for critical care staff, or President Trump invoking wartime powers to increase nasal swab production at a plant in Maine.
Chaos and uncertainty are not the same as supply chain collapse. Could a JIC model have addressed these examples of supply/demand disconnect? Likely not. Even JIC inventory systems are based on expected demand with some leeway for unexpected events. As COVID-19 is considered a once-a-century event, no for-profit entity can afford to keep excess inventory on its shelves forever. A government agency might fill this role, but not a medical device maker.
Looking deeper, few procedures were postponed for lack of a medical device, even during the darkest days of the pandemic. Fear of COVID-19 infection of staff and patients? Yes, postponements occurred. Lack of necessary medical personnel who were busy treating critical COVID-19 cases? Yes, that occurred. Inability of a medical device OEM to manufacture the products needed to treat the patient? No, that did not happen. The JIT supply struggled with lockdowns, sick workers, and transportation snarls, but it never snapped.
Turning to the reshoring question, it is unlikely there will be a concerted effort by medical device and diagnostics OEMs to move production to more costly North American suppliers to fix a problem that does not exist. While members of the U.S. and Western European supply chain may hope for such a transition, it is unclear what problem they think reshoring will solve other than increasing their sales. Certainly, transportation is easier when it is not necessary to cross an ocean but it’s doubtful OEMs will take to holding large inventory positions. Nor will they turn to dual sourcing with pricy manufacturers in developed countries in the absence of an actual problem.
What Will Change? Who Will Benefit in the Supply Chain?
OEM supply chain managers have and will review where their JIT inventory systems held and where they buckled during the pandemic. Some vulnerable suppliers will be replaced and a few key components may be dual sourced. Yet almost all of the $65 billion supply chain spending will remain in the hands of incumbent vendors.
Whatever changes do occur will benefit larger, international contract manufacturers and suppliers. Their financial stability, multiple manufacturing locations, and often international reach reduce risk for their OEM customers. Smaller supply chain firms are less likely to benefit from dual sourcing arrangements unless they offer a specialized, difficult-to-replicate capability. Larger suppliers may be counted on to subtlety stress their capabilities to endure challenging conditions as part of their ongoing sales efforts.
JIT is here to stay in the medtech supply chain. The cost benefits to the OEMs will not permit a return to JIC inventory systems. A global pandemic, though disruptive, was not enough to force a new strategy for working with the supply chain. JIT isn’t going anywhere anytime soon.
Tony Freeman is the President of A.S. Freeman Advisors LLC, a merger and acquisitions and corporate valuation strategy firm based in New York City. The company provides M&A advisory services and strategic consulting to organizations in the specialty materials and precision manufacturing industries.
The Rise and Results of JIT
The modern JIT inventory system was developed by Toyota in the 1970s as an extension of the LEAN principles it created to compete against the more richly resourced American automakers. Working with suppliers, Toyota arranged for more frequent, smaller shipments of inventory to arrive at its plants. These shipments were carefully timed to match the carmaker’s production schedule.
Toyota and other manufacturers who adopted JIT inventory found two benefits in carrying less inventory at any given time:
- JIT resulted in higher productivity among inventory and warehousing staff, as might be expected from a LEAN initiative. Work was more evenly spread across time, reducing slack.
- JIT offered massive cost savings. By ordering and consuming inventory closer to the time of sale, practitioners sharply reduced the amount of working capital tied up in inventory buys. Additionally, the “operational holding cost” of inventory declined. Warehouse space and warehouse staff were reduced, increasing profits.
While too much inventory may be an invisible cost, a more obvious problem is the opposite condition—running out of inventory when it is needed on the production line. JIT’s success requires a firm handle on production schedules, outstanding communication across the company, and close coordination with carefully selected suppliers. Firms choosing JIT commit to a carefully choreographed business ballet.
As JIT grew in acceptance during the late 20th century, the previously oft-ignored “purchasing office” grew in power and stature. As the clearinghouse between the OEM and its suppliers, this formerly second-line department grew in staff count and business sophistication. Management tools like enterprise resource planning systems were added to track inventory with moment-by-moment accuracy. What had been a quiet department became the hub of supply chain management.
Not only were these teams and tools necessary to gain the operational and financial benefits of JIT, they were a safeguard against JIT’s short-term fragility. Bad weather, strikes, quality problems, price changes, bankruptcies, and other business disruptions affecting a single supplier could disrupt an OEM’s entire production. JIT had proven itself at Toyota and other firms but it remains a system vulnerable to the unexpected.
JIC Inventory—an Alternative?
For centuries manufacturers had functioned, like it or not, with what are now called JIC inventory systems. Lacking the lean philosophy that birthed JIT or the necessary tools to keep a JIT system running, manufacturers of old carried more inventory than needed as a cushion against uncertainty. Yes, JIC was costly and occasionally unproductive, but it was necessary to keep the lines running. Still, JIC has two benefits:
- JIC is a buffer against uncertain supply and demand. Missed shipments and other disruptions do not send an OEM scrambling for alternatives.
- JIC also insulates the OEM from price volatility, at least for a period of time.
Yet most medtech companies—even those born in the JIC era—have turned to JIT as a financially superior approach. While harder to execute than JIC, most modern experts traditionally viewed JIT as a successful inventory strategy for medical device OEMs, at least until 2020.
COVID-19, JIT, and JIC
The COVID-19 pandemic has been the greatest disruptor to global supply chains since World War II. Some suppliers questioned whether the shortages and delays of the past two years could have been avoided if OEMs had taken a JIC approach to inventory. Some also opined that reshoring to North America would eliminate much of the disruption. With calm analysis, it is hard to see a compelling reason for replacing JIT or why SARS-CoV-2 is a reason to begin reshoring.
The most spectacular failures of the medtech supply chain occurred early in the pandemic with personal protective equipment (PPE) and COVID-19 test kit components. It is hard to forget hospitals in the early days of the pandemic rationing PPE, even for critical care staff, or President Trump invoking wartime powers to increase nasal swab production at a plant in Maine.
Chaos and uncertainty are not the same as supply chain collapse. Could a JIC model have addressed these examples of supply/demand disconnect? Likely not. Even JIC inventory systems are based on expected demand with some leeway for unexpected events. As COVID-19 is considered a once-a-century event, no for-profit entity can afford to keep excess inventory on its shelves forever. A government agency might fill this role, but not a medical device maker.
Looking deeper, few procedures were postponed for lack of a medical device, even during the darkest days of the pandemic. Fear of COVID-19 infection of staff and patients? Yes, postponements occurred. Lack of necessary medical personnel who were busy treating critical COVID-19 cases? Yes, that occurred. Inability of a medical device OEM to manufacture the products needed to treat the patient? No, that did not happen. The JIT supply struggled with lockdowns, sick workers, and transportation snarls, but it never snapped.
Turning to the reshoring question, it is unlikely there will be a concerted effort by medical device and diagnostics OEMs to move production to more costly North American suppliers to fix a problem that does not exist. While members of the U.S. and Western European supply chain may hope for such a transition, it is unclear what problem they think reshoring will solve other than increasing their sales. Certainly, transportation is easier when it is not necessary to cross an ocean but it’s doubtful OEMs will take to holding large inventory positions. Nor will they turn to dual sourcing with pricy manufacturers in developed countries in the absence of an actual problem.
What Will Change? Who Will Benefit in the Supply Chain?
OEM supply chain managers have and will review where their JIT inventory systems held and where they buckled during the pandemic. Some vulnerable suppliers will be replaced and a few key components may be dual sourced. Yet almost all of the $65 billion supply chain spending will remain in the hands of incumbent vendors.
Whatever changes do occur will benefit larger, international contract manufacturers and suppliers. Their financial stability, multiple manufacturing locations, and often international reach reduce risk for their OEM customers. Smaller supply chain firms are less likely to benefit from dual sourcing arrangements unless they offer a specialized, difficult-to-replicate capability. Larger suppliers may be counted on to subtlety stress their capabilities to endure challenging conditions as part of their ongoing sales efforts.
JIT is here to stay in the medtech supply chain. The cost benefits to the OEMs will not permit a return to JIC inventory systems. A global pandemic, though disruptive, was not enough to force a new strategy for working with the supply chain. JIT isn’t going anywhere anytime soon.
Tony Freeman is the President of A.S. Freeman Advisors LLC, a merger and acquisitions and corporate valuation strategy firm based in New York City. The company provides M&A advisory services and strategic consulting to organizations in the specialty materials and precision manufacturing industries.