A Tonic For The Business Cycleby
Just-in-time has come of age. Keeping inventories lean to hold down costs was easy when business was slow and manufacturers had plenty of spare capacity to meet unexpected demand. Now, with a stronger economy, companies face the possibility of losing sales because their shelves are empty.
Nonetheless, manufacturers are resisting the temptation to refill warehouses. Instead, they are sticking with JIT, which uses automated purchasing, production, and sales systems to allow companies to receive parts just prior to assembly. The result: smaller inventories of both parts and final products. Indeed, unlike most previous recoveries, inventories have risen slower than sales.
Staying lean can save business billions of dollars, freeing money for investment or dividends. And it may help explain why the recession of 1990-91 was fairly mild and why the economy was so slow getting back up to speed. In the long run, the trend to lean inventories should act as a kind of wonder drug for the business cycle, boosting the lows and tempering the highs.
STILL WARY. Not too many years ago, business cycles were in good part driven by the ups and downs of inventories. As sales boomed, producers built up stocks in anticipation of ever-greater demand. But if the economy slowed, companies suddenly found themselves with warehouses full of TV sets and acres of unsold cars. Workers were laid off as production fell. Only after shelves finally emptied would workers be rehired. Then, as the economy strengthened, businesses would build up inventories, and the whole circle would start again.
This time, things seem quite different. When the recession started in mid-1990, companies already had their inventories under control. So the ratio of inventories to sales rose by a meager 5%, compared with 15% during the 1981-82 recession.
Despite a big pickup in demand in recent months, businesses are being cautious. Current inventory levels are a mere 2% to 3% above optimum levels, figures economist Michael K. Evans. And he doesn't expect them to grow much more. "It looks like the inventory buildup is pretty much complete," says Evans.
That's because new inventory systems have become ingrained. General Electric Co.'s appliance division is still catching up with consumers, who have been buying refrigerators and the like at a breakneck pace. But Richard L. Burke, vice-president for purchasing, technology, and manufacturing, has no regrets about focusing on short production cycles and fast turnarounds. "It's absolutely worth the price," he says. "We're going to leanness everywhere."
NO RETREAT. JIT means that companies also have to get a better handle on production and quality, since they can't pull stock off the shelf to replace rejects or cover for manufacturing problems. Last fall, General Motors Corp. fell short of production goals by 90,000 cars and trucks, largely because of snafus at its Tonawanda (N.Y.) engine plant. But there won't be any inventory backsliding at GM. Says Alan S. Dawes, executive in charge of operations at GM's auto components group: "There's absolutely no way we're going away from just-in-time."
That attitude may do more than help turn around GM. It may also improve the nation's long-term economic health. Leaner inventories, says Northwestern University economist Robert J. Gordon "may have made a permanent contribution to reducing the impact of the business cycle."