Consumer and medical goods shortages during the global pandemic have inspired some media backlash against Lean Manufacturing practices; the Wall Street Journal even published an article saying we should “blame lean manufacturing” for paper towel shortages. Yet most manufacturing leaders have been taught (or learned the hard way) to “buffer or suffer” — that is, carry some inventory of key parts or materials, lest production halt for a simple stock-out. But inventory buffers are costly, and more than just the cost of capital: there’s also storage space and the risk of damage or obsolescence.
Demand or supply shocks are particularly challenging to process manufacturing (paper, paint, etc.), because winning in such products generally requires scale — often huge scale, expensive and time-consuming to build. But discrete manufacturing is vulnerable as well, especially if capacity (robots, material handling automation, assembly lines) is expensive.
This WSJ article provoked responses from Lean experts and practitioners, chiefly that:
- Lean practices work best with steady (or predictable, or controllable) demand, and that the pandemic created surges in demand that predictably created shortages; and
- Over the full cycle, Lean Practices (as demonstrated by Toyota) save much more than they cost.
The critics complain that producers are unwilling (or unable) to quickly add capacity when demand surges, and the rest of the supply chain is insufficiently buffered against demand (or supply) shocks. This restraint is attributed to the high cost and time required to add capacity (especially in process industries), but it also reflects managers having learned their lessons while playing the “Beer Game” in business school. The Beer Game is an exercise wherein teams of four (representing the factory, distributor, wholesaler, and retailer) compete to deliver beer to their customers at the lowest total cost over the course of the game (both stockouts and excess inventory incur penalties). End consumer demand is steady throughout the first part of the game, then doubles for the remainder. Inevitably, that single step change in demand generates a huge over-response in the system. Players learn that the best way to avoid “whiplash” in the Beer Game is to be slow to react to demand shocks.
So it is not surprising that many goods (including medical PPE and more) are still in short supply, even nine months into the pandemic. So, is there anything to be done, any adjustments that can be made? How should business leaders decide whether to stay (or become) lean, or instead build in more buffers to cushion against shocks? And how far should you go? The answer lies in your business strategy, which should drive your manufacturing strategy.
It starts with your value proposition — why your customers buy from you instead of your competitors. This is a key element of any business strategy. Generically, firms compete on the basis of price, differentiation, or customer intimacy.
Price includes not just cost to the customer, but also terms and transaction costs. To be sustainable, competing on price requires a secure cost advantage. Differentiation can include product quality (such as materials, durability, reliability), features, and performance. The value of the brand (where it means something to buyers) is also an element of differentiation, as is local production – really anything that a customer values and sets you apart from the competition. Customer intimacy is about the relationship, support, and responsiveness; it can include product scope, range, and customization; as well as order windows and delivery policies. (Customer intimacy can also be thought of as a dimension of differentiation.)
Customers don’t select one or another so much as they make tradeoffs between them: e.g., “good enough” quality at a “low enough” price, with adequate delivery performance. Moreover, not all customers make the same tradeoffs — although customers in particular segments may make similar tradeoffs.
If your most important customer segments will trade off the lowest possible price in return for product availability and reliability of delivery, then you should consider taking on the added costs of buffering finished goods and/or critical inputs. But if your targeted customer segments instead value the lowest price more than product availability (perhaps they prefer to hold their own inventory), then it’s worth risking occasional shortages to keep your operations as lean and efficient as possible. (In either case, you need to consider what your competitors can do for those customers — if they can accommodate those customer needs better than you, you’ll need to shift the basis of competition.)
Another way of handling these tradeoffs is to build flexibility into your sourcing and manufacturing, not by buffering but by configuring your operations to flex with supply or demand shocks. In the simplest case, lean methodology has always insisted on the need to identify and qualify additional suppliers — and many firms always source from one or two alternate suppliers as well as their primary, to ensure additional supply is available. But some disruptions (like hurricanes or pandemics) affect all regional suppliers, not just one.
You can also build flexibility into your manufacturing network, especially if you have modularized product designs (products consisting of assemblies of interchangeable modules), by:
- Manufacturing modules in more than one location, so production in one location can cover for outages or cost surges in another
- Ensuring those manufacturing capabilities are in differing trade zones and supply bases
- Carrying some additional production capacity in those locations
Modular product designs enable you to offer more product variety, by offering different permutations of modules — which can also help limit the size and scope of inventory buffers.
Lastly, it need not be entirely up to manufacturing to respond to demand shifts: demand can be shaped to better fit manufacturing capacity. Makers of large capital equipment, for example, often offer discounts for early orders, or price options consistent with the availability of parts to make them.
Lean practices have attracted scrutiny as a result of the disruptions caused by the global pandemic. But whether you should modify what you are doing — and how — depends not just on costs, but on your business strategy.
Read more: Manufacturing Strategy
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