The Committee of Public Safety

This article (props Zenpundit) had this interesting bit the ongoing crisis for JIT-think:

COLLAPSING JUST-IN-TIME SUPPLY CHAINS

Today’s economy relies on the constant transport of inventory between processing and delivery points across the globe. Relying on traditionally low transportation costs, companies were able to avoid maintaining storage facilities by keeping inventory moving and having it arrive “just-in-time.” The resulting high-profit margins for producers and cheaper prices for consumers propelled globalization.

Unfortunately, this “just-in-time” production approach has not scaled with oil prices. Rapid and volatile movements in the price of oil have placed a significant amount of stress on the world’s superinfrastructure, shrinking those large profits and increasing the cost for consumers. As a result, Stephen Jen, a strategist at Morgan Stanley in London, argues high oil prices will “…stress-test the entire Asian model, which has been built in a time of low energy costs and low shipping costs.” For example, over the last decade, the American steel sector has declined primarily due to China’s cheap labor costs. For a short time, it was actually more cost-effective to ship raw iron ore from the United States to China for processing and then return it in final form for consumption than it was to complete the process domestically. However, Jeff Rubin, chief economist at the Canadian Imperial Bank of Commerce (CIBC), estimates that phenomenon is now nearing its end due to rising transportation costs which have eroded China’s labor cost advantage almost entirely. As a result, “US domestic steel production has risen by almost 10%,” while China’s steel exports are “now falling by more than 20% on a year-over-year basis.”

It is important to note that Japan, Korea, Singapore, and Taiwan are likely to fail this “stress test” as well. “Just-in-time” supply chains are designed to avoid the requirement of costly reserves, or margins, for times when supply is disrupted. Given this key design principle, these countries are unable to absorb the shock of increased oil prices without reducing production. Already, Japan has seen its industrial production decline by 3.5%, a full 50% more than was expected by economists, at the same time unemployment reached a four year high.

While oil may decline in price (since there was probably an oil bubble like there was in the late 1970s), other stresses will continue to shake JIT-world. The JIT-decade of the 1990s increasingly looks like an abnormally calm time in recent history. Extrapolating trends out from the 1990s probably will lead to systematic blindness, which leads to black swans, which leads to catastrophe’s. Better to have a margin of safety, as Ed Catmull, president of Pixar, points out in this article (props nerdplusart):

When it comes to producing breakthroughs, both technological and artistic, Pixar’s track record is unique. In the early 1990s, we were known as the leading technological pioneer in the field of computer animation. Our years of R&D culminated in the release of Toy Story in 1995, the world’s first computer-animated feature film. In the following 13 years, we have released eight other films (A Bug’s Life; Toy Story 2; Monsters, Inc.; Finding Nemo; The Incredibles; Cars; Ratatouille; and WALL·E), which also have been blockbusters. Unlike most other studios, we have never bought scripts or movie ideas from the outside. All of our stories, worlds, and characters were created internally by our community of artists. And in making these films, we have continued to push the technological boundaries of computer animation, securing dozens of patents in the process.

While I’m not foolish enough to predict that we will never have a flop, I don’t think our success is largely luck. Rather, I believe our adherence to a set of principles and practices for managing creative talent and risk is responsible. Pixar is a community in the true sense of the word. We think that lasting relationships matter, and we share some basic beliefs: Talent is rare. Management’s job is not to prevent risk but to build the capability to recover when failures occur. It must be safe to tell the truth. We must constantly challenge all of our assumptions and search for the flaws that could destroy our culture.