On his blog for The Atlantic, James Fallows appears to be supporting “the argument that today's lean, hyper-efficient, ‘just in time’ economy was magnifying the effects of today's economic collapse.” Sounds plausible, but how does it stack up against statements from sages such as Alan Greenspan—okay, bad example—suggesting that lean production practices had the effect of smoothing out economic cycles? Let’s give the blame-lean-production theory a closer look, using the auto industry as an example.
Let’s say that a financial crisis leads to a credit crunch that deprives a cash-starved, lean-production auto company of adequate financing to maintain its production, distribution and sales operations. This process is repeated up and down the supply chain, causing overall auto production to plummet. The idea behind Fallows’ argument I suppose is that if this auto company (and its suppliers as well as its distribution chain) had maintained stocks of parts and components, it could continue producing autos even without financing until… until something happened to reduce the growing piles of unshipped autos on the company yard and docks and unsold autos on the dealer lots? And how does allowing that to happen ameliorate, rather than compound, the difficulties for the auto company? The current financial crisis, which has nothing to do with lean production, precipitated an economic downturn, which has nothing to do with lean production, that has lead to a dramatic fall in auto demand, which has nothing to do with lean production. The financial crisis exacerbates the precarious financial situation of the Detroit Three, which is connected to lean production only to the extent that they may have lagged behind their foreign competitors in adopting the practice.
The potential flaw in lean production lies in its logistics, not economics. Supply chains can indeed be disrupted, sometimes with dire consequences. That is why, for example, states and energy producers hold large, expensive, but immediately accessible reserve stocks. That is why manufacturers maintain multiple sources. Both these needs, of course, are balanced against costs. Auto companies are in less of a spot than providers of products whose supplies must not allowed to be disrupted, though they did encounter serious problems when the Niigata Earthquake damaged the production facilities of the major supplier for a vital component. Even then, the industry as a whole coped remarkably well, with what wound up being a mere blip in production—nobody noticed anything unusual at the retail level.
On a final note, the assertion that “’Just-In-Time,’ is based upon ... a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption” and that it has anything meaningful to do with the current economic difficulties just doesn’t hold water; the whole thing is a straw man that was set up to justify an unfounded argument. Nobody is making such assumptions save the author of the essay for which Fallows uncharacteristically fell without bothering to match it up against reality.
ADD: I urge those of you who usually don’t read the comments to click to see what Janne has to say. I hope that my response is as interesting.