INSIGHTS

A CASE FOR ECONOMIC DIVERSITY, PART 1

Kenji Baugham
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May 13, 2022

Over the last 70 years, the economy has been rapidly becoming more complex and global, and its players more interconnected. The benefits have been substantial, but a side effect of the increase in complexity has been an increase in risk factors that went largely ignored for decades. However, in the last couple of years, a number of successive crises -- the COVID-19 pandemic being foremost -- have suddenly and dramatically brought them to our attention.

In 1948, engineers Taiichi Ohno and Eiji Toyoda began a system of production reforms for Toyota that would change the way that distribution and manufacturing work around the world. Originally called the Toyota Production System, this manufacturing model is now frequently referred to as Just In Time Inventory or Just In Time Manufacturing (JIT). The main goals of the JIT model are to limit manufacturing overhead by maintaining the most time- and space-efficient management of supply inventory and manufacturing processes.

Prior to JIT, factories would maintain sizeable inventories of materials and parts to provide flexibility and consistency in the ability to manufacture goods over time. Along with this approach came the cost of extra warehouse space, the risk of materials wastage, and a need for larger capital investments in materials stockpiles. In contrast, with JIT, materials and parts are received from suppliers only as needed, and finished products are shipped out as quickly as possible, with the goal of holding as little inventory at a given time as possible. The benefits of this maximization of time and space to a company's profit margin quickly became apparent, and starting in the late 1970s, other companies began to take notice. By the 1980s and 1990s the practice became widespread to the point that now it is considered fairly standard.

This timing coincided with an explosion in the technological development of computational information systems. The power of computing has grown exponentially year over year thanks to Moore's Law (which roughly states that computing power doubles every year). This law has held up consistently until very recently, as we are now starting to reach very fundamental limits in the physics of miniaturization that have fueled the growth of computing. The rapid increase in the complexity of computer systems over the last half century has helped to support this growth of complexity in JIT.

What we have arrived at now, then, is a massively complex economic system based on widespread interdependence and a whole lot of moving parts. It's a marvelous thing to admire, really. The efficiencies have helped to fuel a wealth of manufactured goods far beyond what has ever been available at any other time in history. The homes of even those with modest means are now overflowing with manufactured goods to the point where they are spilling out, overflowing landfills, and starting to fill the oceans that once seemed to stretch out without end.

Everything comes with a cost, however. With this historical context established, next week I will discuss some of the risks and hazards that have arisen from this production model.

References
1. Roser, Christoph, et al. “What Is ‘Just in Time.’” AllAboutLean.com, 8 Mar. 2022, https://www.allaboutlean.com/what-is-just-in-time/
2. Hadwick, Alex. “The End of Just-in-Time? | Reuters Events | Supply Chain and Logistics Business Intelligence.” Reuters Events, 3 July 2020, https://www.reutersevents.com/supplychain/supply-chain/end-just-time

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