When just-in-time becomes just-too-late
I used to work in the corporate offices of a major fashion mailorder retailer. One of the most important things in that industry is to make sure that you manufacture enough product to meet demand, but not so much that you’ll have tons left to liquidate later. If you’re designing an item to sell at $175, you want to make sure that you don’t lose the sales opportunity by not having it in stock, but also that you don’t have to blow them out at $35 at the end of the season. Both problems seriously erode the profit margin.
In addition, we knew how marketing drove demand. We knew that an item in a color pictured (in the catalog) on a live model would sell more than one on a mannequin, which in turn would sell more than one in a stack (of colors). If early metrics showed us that we did get the popularity of colors wrong, we’d have an opportunity to drive demand in a different direction by putting the color that we had plenty of onto a live model in the next edition of the catalog, thereby steering demand in that direction.
Sounds good. How can it go wrong? Well, what if an external factor pops up, one that causes demand to go in a different direction? I’ll never forget the time that someone was on the Oprah Winfrey show, wearing and talking about a product from my company, and the phones immediately started ringing off the hook. We knew what was happening because people were calling and asking for the one that was just on Oprah! We sold out of an entire season’s inventory in a single day. Sounds great! But it meant a lot of reworking of future catalogs, and a lot of unhappy would-be customers.
Switch now to Detroit. For decades, the bane of the automobile industry was having too much inventory on hand when the new models came out. Nobody wanted that. In fact, it is the reduction of this problem, and not the cost of inventory, that was the biggest single factor leading to the creation of the “just in time” model. Those who were most successful at predicting demand and manufacturing to demand, especially in long-lead-time items such as automobiles, would theoretically be the best off. Chrysler seems to have gotten pretty good at that. They had lean inventories. Occasionally, but seldom, shortages.
So then along comes the Oprah in the room: Cash for Clunkers. Ford, GM, Toyota, and others, have plenty of inventory on hand, God knows. So the government comes out with this great program to generate demand for new cars. It wasn’t planned far enough in advance, however, for manufacturers to actually prepare for it, which might have allowed them to maximize results. It was just done because, well, it seemed like a good idea at the time. Now all of a sudden, Chrysler, with a smallish number of cars on the lots, is caught short. Unable to meet the externally induced demand, they missed profit opportunities that the others, arguably less “just-in-time” than Chrysler, enjoyed.
In measuring the performance of each manufacturer then, it appears that Chrysler didn’t do as well. However in the school of just-in-time, had there been no Cash for Clunkers program, they would have ended up with better inventory management than their competiton, and fewer vehicles to liquidate at unprofitable prices.
Know what you’re talking about when evaluating the success of one program over another. It may just be that, all else being equal, the “loser” was the “winner” after all!