Is Lean Toast?

Political economist David Ricardo (1772-1823) coined the term “comparative advantage.” From that came the economic law of comparative advantage, and the intellectual foundation for international free trade. More familiar terms these days are “global sourcing” or “global supply chains,” which means procuring goods from the source that can produce most efficiently regardless of location. That usually means to procure “commodity” and even “specialty” materials in countries with labor low wages. Here is an explanation of Ricardo’s comparative advantage:

Ricardo suggested that industry specialization combined with free international trade always produces positive results. Ricardo  suggested that there is mutual national benefit from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage, that is in those industries in which it has the greatest competitive edge. Ricardo suggested that national industries which were, in fact, profitable and internationally competitive should be jettisoned in favour of the most competitive industries, the assumption being that subsequent economic growth would more than offset any economic dislocation which would result from closing profitable and competitive national industries.

Source: Wikipedia

As a result of this then-new idea, it was increasingly seen as acceptable to lengthen supply lines and source goods from whomever could produce them most efficiently (cheaply). As we all know, global sourcing expanded greatly since the mid-1990s. The implication of the above description of Ricardo’s “Law” in relation to the coronavirus pandemic is obvious. Production of a wide range of basic necessities, such as personal protective equipment (PPE), were moved to far-away places. Sudden demand for PPE and other medical equipment and supplies has led to massive supply chain disruptions in production and distribution, causing shortages that will affect human life. The result, as we have all seen, is criticism of Lean and Just-in-Time, criticism of business leaders for their over-zealous pursuit of low costs and unwise use of monies earned (executive compensation, stock buy-backs, etc.), criticism of consumers for demanding ever-lower prices, criticism of the long lead-times needed increase production, criticism of low wages at home, criticism of inadequate social safety nets, and so on.

Global supply chains, as has long been known, are “fragile.” Recall that in the mid-1980s, one of the generic names that the MIT research team considered giving to Toyota’s production system was “fragile” — fragile production. But, they recognized that people don’t like the word “fragile” and chose “lean” instead — lean production. COVID-19 exposes fragility in numerous forms and in numerous unsettling ways, whether or not Just-in-Time is used (Note: 3-4 months of inventory is not JIT). People don’t like “fragile.” And the words “lean” and Just-in-Time aren’t doing so well lately either.

But what is most important here, after caring for the ill and saving lives, is a long-lasting lesson that governments, business leaders, and society may learn from COVID-19. The emerging commonplace view is that the pursuit of low costs through global sourcing has led to intolerable vulnerabilities in healthcare and several other important industries. The natural human reaction produced by COVID-19 is to stockpile, Just-in-Case, this drags on. This memorable event may propel a return to higher-cost batch-and-queue production methods for current manufacturing — as well as the future domestic manufacturing that will return from overseas. After all, batch-and-queue production is much easier for the producer, and everybody makes money along the way. Though, consumers end up paying higher prices if even more inventory sits in warehouses. They may be willing to do this in exchange for higher domestic productive capacity (or unused reserve capacity that can be quickly activated) and short, domestic supply lines. People might skimp and save in other spending categories to feel more secure and better prepared.

In is book, Toyota Production System, Taiichi Ohno said (pp. 14-15): “We naturally feel more secure with a considerable amount of inventory.” Indeed, we do, now, for sure. And “…buying and hoarding [are] natural behaviors.” Indeed, they are. COVID19 is a big shock to ALL systems and nearly all corners of society — government, business, financial, family, and individuals. This event will likely not be easily forgotten. It could lead to a nostalgia for days past, perhaps the Cold War era, where materials were produced locally and always readily available, and where preparedness was high on everyone’s mind at all times. People felt prepared then.

Lean people will surely be among those who stockpile Just-in-Case of a future pandemic or other emergency. Perhaps more than others because of what we know or don’t know. Whether we like it or not, business leaders’ interest in Lean may fade in some measure because of COVID-19. If it does, it may re-emerge after people forget COVID-19. When might that be?