'Just-in-time' inventory may be thing of the past

August 22, 1994|By Bloomberg Business News

HIGH POINT, N.C. -- There are a lot of red faces in corporate America these days.

Warehouses are bulging with raw materials and finished goods. Inventories in the second quarter grew faster than at any time since 1987, up $54 billion, according to the Commerce Department. That's more than double the gain in the first quarter and twice what economists had expected.

Even more embarrassing than the excess sitting on the shelves, though, is the question it begs: What happened to "just-in-time" inventory, one of the most ballyhooed business concepts in the 1990s? This notion, in which producers buy only enough raw materials to fill orders and retailers move products from manufacturers to customers almost instantly, was adopted by thousands of companies in the past few years.

Just-in-time was supposed to cut down on the costs of companies having to blindly carry inventory that may not lead to sales. Now, its short heyday may already be over.

"Just-in-time is slowly going with the wind," said Michael Evans, president of the Evans Group, a Boca Raton, Fla., economic forecasting firm.

At Ladd Furniture Inc., the largest publicly held furniture maker in the United States, inventory rose 18 percent in the second quarter to $122 million -- mostly wood products for jumbo-sized TV-set cabinets.

Borden Inc., the giant food producer, is loading up on semi-processed wheat used to make its Creamette, Prince and Anthony's pastas. The New York company is also stocking up on polyvinyl chloride for use in packaging. In the first six months of the year, its stocks in those two products increased 20 percent.

"We don't want to be sitting on too much inventory," said Bill Creekmuir, Ladd's chief financial officer. "But we can't run the risk of being unable to fill orders."

Sealing just-in-time's fate is the nation's peculiar economic recovery. The gross domestic product is growing without inflation. And the recent strong corporate profits are built on cost-cutting -- layoffs, office closings and salary tightening -- and not on a significant resurgence in revenues.

"The economy is growing with momentum and breadth," said Gene Sherman, research director at investment firm M. A. Schapiro & Co. "Businesses are gearing up for the continuing expansion."

At the same time, commodity prices -- steel, oil, lumber and wheat, for example -- have surged for a wide range of reasons. The Commodity Research Bureau Index, a benchmark index of 21 commodities, rose 10 percent over a two-month period earlier this summer.

But with retail prices flat, companies that wait to buy raw materials until they're ready to use them are likely to pay more for the commodities without being able to equally increase the price tags on the finished products.

"Businesses caught short of supplies could find themselves in a heap of trouble if that commodity is in an upward spiral," said Eric Johnson, professor of management at Vanderbilt University.

One company that got hurt by this economic cycle because it stood by just-in-time is Clayton Homes Inc., the Knoxville, Tenn.-based maker of prefabricated houses.

When lumber prices rose 33 percent in just four months to $466 per thousand-board-feet in February, Clayton refused to warehouse wood, buying only when it was needed.

"We've long been faithful to just-in-time inventory control, mainly because we don't have the storage space to stockpile lumber, nor do we want to invest in the infrastructure," said Richard Ray Jr., Clayton's chief financial officer.

Clayton tried to pass the increased costs to homebuyers, but that strategy didn't work with mortgage rates rising because of Fed actions. And, consumers were still worried about jobs and unsure about the strength of the economic recovery.

Better than warehouses

"Sure it may have cost us some sales," Mr. Ray said. "But that's the nature of our business. It seems a better risk than to build giant warehouses."

To avoid being in Clayton's shoes, companies like Allen Edmonds Shoe Corp., a Port Washington, Wis.-based maker of pricey footwear has been buying lots of leather. And Greensboro, N.C.-based Cone Mills Corp., a maker of denim, has been adding to its cotton reserves.

At many companies, hedging against future raw materials costs has become the corporate mantra.

"Maybe one company in 10 is really using just-in-time," said Thomas Arenberg, partner at Andersen Consulting in Milwaukee, who specializes in companies that produce industrial products.

Just as difficult as predicting the future of raw material prices is puzzling out how much consumers will be buying in the next 12 months. The concept of just-in-time depends on knowing what customers need and when they need it -- something increasingly difficult to do in this economic recovery.

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