September 29, 2022

Unitranche

Supportive Business Potential

Rising chaos makes the case for Just-in-Case management

KATEMANGOSTAR-FREEPIK

THE BUSINESS WORLD is in the process of adopting a revolutionary new philosophy — or perhaps having a new philosophy thrust upon it: just-in-case management. In the great age of globalization that started in the 1980s and entered its triumphant phase in the 1990s and 2000s, the twin watchwords of business were speed and efficiency. Today speed and efficiency must compete with security and resilience.

This new belt-and-braces world has been coming for some time. The climate crisis put a question mark next to efficiency. What is the point of creating the world’s most cost-effective machine if you torch the planet in the process? Donald Trump’s ill-tempered repudiation of the postwar consensus in favor of America First isolationism forced businesses to rethink their assumptions about tariffs, regulations and relations between the US and European Union. Then the global pandemic forced them to rethink even more basic assumptions about office life. Now Vladimir Putin’s invasion of Ukraine is completing the uncertainty revolution. Suddenly everything that business had taken for granted has been torn to shreds and replaced by a series of just-in-case questions.

The problems of war and pandemic reinforce each other. The war is sending markets gyrating while raising the long-term cost of inputs. It also raises the possibility of much worse to come if China sides with Russia and America imposes sanctions. The Chinese authorities recently imposed a lockdown on Shenzhen, a port city of 17.5 million people and one of the hubs of the high-tech economy, to contain the spread of the highly infectious Omicron strain of COVID-19. Foxconn Technology Group, the Taiwanese electronics firm that is Apple, Inc.’s primary iPhone assembler, was among dozens of manufacturers forced to suspend operations for a while.

The most obvious change is from just-in-time (JIT) to just-in-case manufacturing. JIT manufacturing was introduced in Japan after World War II, most notably by Toyota Motor Corp., to reduce the amount of capital tied up in idle capacity. The innovation replaced “push” manufacturing, whereby you had large stores of parts sitting next to the plant, with “pull” manufacturing, whereby you kept minimum inventories on hand and then replenished them with new deliveries from suppliers whenever you needed to.

This system of just-in-time manufacturing went global from the 1980s onward in two ways. Western companies had to adopt Japanese manufacturing techniques if they were to compete with Japanese companies in terms of cost and efficiency. And companies sourced their products in the far corners of the world in a restless search for the best combination of price and quality: Orders for components in Detroit sent signals to suppliers half a world away in Shenzhen.

The problem with JIT is that when it breaks down, problems cascade around the world: Ports pile up with containers, trucking companies are overwhelmed by orders, factories are buried under a backlog of goods and, on the other side, frustrated consumers are unable to get their hands on new cars or fridges or electronic equipment. A McKinsey & Co. survey of senior supply-chain executives in July 2020 found that 91% had encountered problems with suppliers, and 93% planned to increase resilience across the supply chain. Now the Ukraine War is driving the same lesson home with renewed force: Having a first-class supplier in China or Eastern Europe is pointless if the supply chains might well be cut by war or plague.

The result is a rush from just-in-time to just-in-case. JIC might involve one or all of the following alternatives: establishing back-up suppliers; looking for suppliers closer to home (“local to local” is a new buzz phrase); forming partnerships with suppliers of critical components, as Ford Motor Co. and General Motors Co. have done with chip-makers; or else increasing your inventories, perhaps even abandoning JIT for the old world of large warehouses sitting next to factories. A survey by McKinsey in Nov. 2021 found that 61% of companies had increased their inventory of critical products and 55% had made sure that they had at least two sources of raw materials. Warehouse costs are escalating as the sector struggles with shortages of labor, materials, and space.

The new philosophy of just-in-case extends well beyond supply-chain management, however. Bosses who had grown complacent about the inevitability of globalization must suddenly confront a plethora of just-in-case questions. What do they do if the oil price stays well above $100 a barrel? Or if a hostile power seizes one of their employees (the Russians recently threatened to arrest employees of multinational companies if they criticized the invasion of Ukraine)? Or if a new and even more deadly pandemic strikes (epidemiologists worry that global warming may bring tropical diseases such as Ebola to Europe)? Or if NATO is dragged into a war with Russia? Or if China becomes a hostile power? The only thing they are certain about is that the old way of doing things will need to be rethought.

What will this new world of just-in-case management look like — apart from angst-ridden and dispiriting? The obsession with “lean” (cutting waste out of manufacturing) will be replaced by a tolerance of “fat.” Much more redundancy will be built into manufacturing systems. That in turn will add to price pressures as companies tie up capital with inventories or spend money on taking out insurance in the form of back-up suppliers. Supply chains will shorten as companies calculate that a dependence on Asia for crucial parts is too risky. Just-in-case will inevitably add to all the other pressures to expand the role of the state as the greatest guarantor of security, with France’s President Emmanuel Macron already declaring that “the state will have to take control of several aspects of the energy sector,” Hungary banning grain exports, and Argentina and Turkey increasing their control over local food supplies.

The best guide to the new just-in-case business world is provided by Intel Corp.’s decision to build giant new chip plants in the Old World — one in Ohio, one in Arizona, and one in Magdeburg, in eastern Germany. This is designed to reduce European and American dependence on chip-making in Taiwan, the world’s biggest manufacturer of silicon chips but also a geopolitical hotspot, with Xi Jinping regarding it in much the same way that Putin regards Ukraine. Even before Putin’s invasion of Ukraine, Patrick Gelsinger, who took over as Intel’s CEO just over a year ago, set himself the goal of raising the US’s share of global chip production to about 30% over the next decade, from 12% today, and Europe’s share to 20% from 9%.

This is obviously good news for some Western workers: Magdeburg will get 3,000 long-term high-tech jobs and 7,000 construction jobs. For taxpayers, not so much. The US and the European Union are promising to stump up a combined $100 million to subsidize domestic chip-making and make up the difference between the cost of producing chips in Asia and the cost of doing so back home. Subsidy wars have a way of feeding on themselves as blocks compete to produce favored goods. They also have a way of stifling innovation as companies devote ever more time to wooing politicians rather than improving their products.

The prospect of a closer relationship between business and government, with all the attendant rent-seeking and arm-twisting, may have many of us longing for the frictionless world of just-in-time business. That world is unlikely to return any time soon, not only because of plague and war but also because of climate change. There’s always a chance that Putin will be toppled over the quagmire in Ukraine and that great plagues will prove to be a once-in-a-century phenomenon akin to the Spanish flu. But when it comes to the climate, just-in-case is the least that we can do.

BLOOMBERG OPINION