It has been said those who can't learn from history are forced to repeat it. As we move through this current downturn, it appears we need to review the chapter about inventory. Perhaps we should take this opportunity to really learn this lesson once and for all: less inventory really is better.
The just-in-time (JIT) inventory management philosophy has been around since the 1970s. Taiichi Ohno is often referred to as the father of JIT, since he first developed the concept at Toyota's plants as a way to get exactly the right products to the right customers at the right time.
Later the focus became a way to eliminate waste in the production cycle. But as the years went by, attention turned to financial matters and Wall Street learned about the concept. People became more concerned about how JIT affected the bottom line. If capital wasn't tied up in inventory, balance sheets looked better. The financial experts liked the idea of spending capital on research and development or acquisition activities, rather than inventory.
In the years since its introduction, the industry has perhaps lost sight of the original purpose behind JIT: customer responsiveness. Whether that customer is the finished product's end user or the next supplier downstream in the supply chain, JIT is all about having exactly the right amount of all the right parts at the right time to continually improve cycle times. Shorter cycle times automatically improve responsiveness and make the supply chain more flexible. Then when demand shifts, no one is caught with excess inventory.
The industry's test to follow this path comes during the upside of a demand curve. There is an almost irresistible tendency to overstock inventory when consumer demand heats up. From the supplier side, we see forecasts get increasingly less realistic as "irrational exuberance" takes over. We all want to believe market demand will keep going up. Parts go on allocation, and then the panic sets in.
Customers double and triple order to ensure adequate supply to meet the inflated forecasts and all those good intentions fly out the window. If everyone would just stick with the program the problem would be greatly reduced or disappear.
This latest correction provides clear evidence the industry as a whole performed poorly during the last upturn. Now, we are all paying the price. Certainly there were some qualities about this latest cycle that were unique. The technology is changing so fast and there are so many new companies coming online that it was difficult for everyone to produce an accurate forecast. And the demand curve-both up and down-was particularly steep in the telecommunications industry.
But the next cycle will also have its unique and unpredictable aspects and we can't let that throw us off balance. Let's all promise we will remember this little lesson, so we won't have to repeat this particular piece of history during the next cycle.
Philip Gallagher is president of Avnet Electronics Marketing/Americas at Avnet Inc. in Phoenix. E-mail comments to email@example.com