According to a recent report by respected thinktank Chatham House, the UK economy could be at risk because of a growing dependence on ‘just-in-time’ business models.
The report, ‘Preparing for High-Impact, Low-probability Events: Lessons from Eyjafjallajokull’(the Icelandic volcano that caused widespread global disruption in 2010), concluded that just-in-time business models leave businesses and economies at significant risk from crisis and emergency events, such as fuel and resource shortages, natural disasters and particularly adverse weather.
Just-in-time business models are those in which production and stock processes are streamlined to provide greater efficiency, hence greatly reducing storage and associated inventory costs. Rather than keeping large amounts of stock or manufacturing great numbers of product to anticipate demand, stock is constantly replenished as current need demands, and production is run on a tight schedule. Just-in-time business models depend on having uninterrupted access to required resources, which is why they may become problematic during crisis events and shortages.
Globalisation, crises and just-in-time business models
In an increasingly globalised world, in which much hinges on open and unbroken supply chains, often spanning thousands of miles, the risk of UK businesses being affected by crisis events, disruptions or disasters is growing. According to Chatham House’s report, “The impacts of future crises are unlikely to remain local – regardless of their origins – and will likely affect more than one country or region. The vulnerabilities of globalised supply chains and particularly the just-in-time business model are likely to be exposed by any disruption lasting more than a few days.”
The reports authors also found that many businesses they surveyed indicated that had the 2010 ash cloud caused by an erupting Icelandic volcano persisted for just a few days longer, “it would have taken at least a month for their companies to recover.” They go on to say that “one week seems to be the maximum tolerance of the ‘just-in-time’ global economy.”
The benefits and risks of just-in-time
Many businesses (particularly those manufacturing high-value goods such as vehicles and consumer electronics) have adopted just-in-time business models because it enables them to react more reflexively to customer demand, and reduces the costs, and risks, associated with keeping large amounts of stock. But the problem is that with so little slack in their supply chain and processes, they become vulnerable to extended disruptions.
"Industries – especially high-value manufacturing – may need to reconsider their just-in-time business model in an interdependent world,” says Bernice Lee, one of the report’s authors.
To mitigate the risks posed by crisis events, the report makes a number of recommendations for the government and businesses, including “stress-testing risk related practices,” “Sharing best practice and, where relevant, capacity, especially among industrial sectors and governments,” and investing “additional resources in training and investment in ‘business resilience’.” They also suggest that “businesses should undertake cost-benefit analysis of options such as shifting to regional hubs and storage centres for non-perishable goods to avoid urgent inter-continental transportation.”
For many businesses currently operating according to a just-in-time model, the most crucial thing may be to carry out a cost-benefit analysis which takes into account the potential for supply chain disruption caused by a range of events, from a global crisis to something as mundane as a key supplier shutting down.