(Opinion of Bloomberg) — The business world is adopting a revolutionary new philosophy — or maybe it’s getting a new one: just-in-case management. In the great era of globalization that began in the 1980s and entered its triumphant phase in the 1990s and 2000s, speed and efficiency were the twin keywords of business. Today, speed and efficiency have to compete with security and resilience.
This new belt-and-braces world has been coming for a while. The climate crisis has cast a doubt on efficiency. What’s the point of making the world’s most cost-effective machine if you set the planet on fire at the same time? Donald Trump’s ill-tempered rejection of the post-war consensus in favor of America First isolationism forced companies to rethink their assumptions about tariffs, regulations and US-European Union relations. Then the global pandemic forced them to rethink even more basic assumptions about office life. Now Vladimir Putin’s invasion of Ukraine completes the uncertainty revolution. Suddenly, everything that business had taken for granted is torn to shreds and replaced by a series of just-in-case questions.
The problems of war and pandemic are mutually reinforcing. The war keeps the markets spinning while the long-term costs of inputs rise. It also raises the possibility that much worse will come if China sided with Russia and imposes sanctions on America. Chinese authorities recently imposed a lockdown on Shenzhen, a port city of 17.5 million inhabitants and one of the hubs of the high-tech economy, to contain the spread of the highly contagious ommicron strain of Covid-19. Foxconn Technology Group, the Taiwanese electronics company that is Apple Inc.’s main iPhone assembler, was one of dozens of manufacturers forced to suspend operations for a while.
The most obvious change is from just-in-time to just-in-case manufacturing. JIT production 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, where you had large stocks of parts next to the factory, with “pull” manufacturing, where you kept minimal inventories on hand and then replenished them with new supplies from suppliers when needed.
This system of just-in-time production went global in two ways from the 1980s. Western companies had to adopt Japanese production techniques if they wanted to compete with Japanese companies in terms of cost and efficiency. And companies bought 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, the problems spread all over the world: ports pile up with containers, transport companies are flooded with orders, factories are flooded with a backlog of goods and, on the other hand, frustrated consumers cannot get their hands on more new cars or refrigerators or electronic equipment. A study by McKinsey & Co. among senior supply chain executives in July 2020, 91% had experienced issues with suppliers, and 93% planned to increase resilience in the supply chain. Now, the war in Ukraine is driving home the same lesson with renewed vigor: having a first-class supplier in China or Eastern Europe is pointless if supply chains could be interrupted by war or plague.
The result is a rush from just-in-time to just-in-case. JIC may include any or all of the following alternatives: setting up backup suppliers; looking for suppliers closer to home (“local to local” is a new fashion term); Partnerships with critical component suppliers, such as Ford Motor Co. and General Motors Co. have done with chip manufacturers; or else increase your stocks, maybe even leave JIT for the old world of large warehouses next to factories. A McKinsey survey in November 2021 found that 61% of companies had increased their inventory of critical products and 55% had ensured they had at least two sources of raw materials. Warehousing costs are escalating as the industry struggles with shortages of manpower, materials and space.
However, the new philosophy of just-in-case goes far beyond supply chain management. Bosses who had grown complacent about the inevitability of globalization are suddenly faced with a plethora of just-in-case questions. What do they do if the price of oil 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 deadlier pandemic strikes (epidemiologists worry global warming could bring tropical diseases like Ebola to Europe)? Or if NATO is dragged into a war with Russia? Or if China becomes a hostile power? All they are sure of is that the old ways of doing things will have to be reconsidered.
What will this new world of just-in-case management look like – aside from fearful and daunting? The obsession with “lean” (reducing waste from production) will be replaced by a tolerance of “fat”. Much more redundancy will be built into production systems. That, in turn, will add to price pressures as companies lock in capital with inventories or spend money on insurance in the form of backup suppliers. Supply chains will shorten if companies calculate that reliance on Asia for critical components is too risky. Just-in-case will inevitably increase all other pressures to expand the role of the state as the greatest guarantor of security, with French President Emmanuel Macron already stating that “the state will have to take control of various aspects of the energy sector.” taking over. Hungary bans grain exports and Argentina and Turkey are increasing their control over local food supplies.
The best guide to the new business world at stake is Intel Corp.’s decision. to build massive new chip factories in the Old World—one in Ohio, one in Arizona, and one in Magdeburg, eastern Germany. This is intended to reduce European and American reliance on chip-making in Taiwan, the world’s largest silicon chip maker, as well as a geopolitical hot spot, with Xi Jinping seeing this in much the same way Putin views Ukraine. Even before Putin’s invasion of Ukraine, Patrick Gelsinger, who became Intel’s CEO a little over a year ago, set himself the goal of increasing the US share of global chip production to about 30% over the next decade. from 12% today, and Europe’s share from 9% to 20%.
Of course, this is good news for some western workers: Magdeburg will get 3,000 long-term high-tech jobs and 7,000 construction jobs. Not so much for taxpayers. The US and the European Union pledge to raise $100 million to subsidize domestic chip production and offset the difference between the cost of producing chips in Asia and the cost of doing so at home. Subsidy Wars have a way of feeding themselves as blocks compete to produce favored goods. They also have a way of stifling innovation as companies spend more and more time pursuing politicians rather than improving their products.
The prospect of a closer corporate-government relationship, with all the rentiness and elbow room that comes with it, can make many of us long for the frictionless world of just-in-time business. That world is unlikely to return anytime soon, not only because of the plague and war, but also because of climate change. There is always a chance that Putin will be overthrown in the swamp in Ukraine and that major plagues will turn out to be a once-in-a-century phenomenon, akin to the Spanish flu. But when it comes to climate, just-in-case is the least we can do.
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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Adrian Wooldridge is the global business columnist for Bloomberg Opinion. Before that, he was a writer at The Economist. His latest book is “The Aristocracy of Talent: How Meritocracy Made the Modern World.”
This post Rising chaos calls for just-in-case management
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