Will high gas prices bring back the demand for warehouses?

Question

Is there a point where "Just-In Time" delivery systems will be more costly than warehouses?

Answer 1

If I understand correctly your argument is that JIT systems use all lot of transportation and because of the high fuel prices they become inefficient so the storing of merchandise will become again efficient. I would not support your argument.

JIT systems can not be used in all companies and markets. They are used more in production companies and less in comercial. What I mean is that you may have many production companies building warehouses but a lot of commercial companies will not do that. So the tedency for stocking will be limited comming only from production companies.

Moreover JIT systems can not be applied everywhere. To apply JIT, your suppliers should be somewhere near you but in many cases your suppliers are situtated really far way. According to your argument the trasportation cost will increase so it will be better for companies to persue JIT systems to bring their suppliers closer and hence to reduce transportation costs. So the tedency is to increase JIT systems.

Also JIT systems are not applied only between suppliers and purchasers. They can be applied inside a production plant (pull systems). That means that again JIT systems are not affected by fuel prices. Of course it is more efficient to have JIT to all your supply and value chain.

The main cost of JIT comes from the investments you make to train your suppliers and customers in using JIT systems. Many companies invest in IT and IS systems to facilitate their partners to work with them. Also they spend a lot of money to select suppliers that can actualy implement these systems. For the customers applies the same but in the sence that they spend a lot of money to build stable relations with their customers. So the main cost of JIT comes from implementing the system and not the trasportation costs.

I want to add something that comes from personal experience. I am a financial analyst for an extremely big multinational company and I work in one of its commercial-production subsidiaries. The transportation costs represent less than 1% of the value of the stocks. Especialy when you deal with really expencive products the transportation costs are not worth mentioning. On the other hand having these expensive products stocked costs millions. To give you an indication a huge truck to travel fully loaded from one end of Europe to the other costs from 3000 to 4500 euros. The goods on this truck can worth easilly 500,000 euros or even more but of course this depends on the products.

Also you should take under consideration the financial costs. If I buy something today to stock it and to sell it in 4 months it means that I have to pay it today but get my money back in 4 months. So I lose the bank interest and the oportunity to invest this money in the mean-time in a project or something else.So I lose money two times.

Finaly high fuel prices mean high production costs and hence more expencive products. So your products become more expencive making it more inefficient to store them.

I should add again that not all companies can apply JIT systems and not what I mentioned above apply for all companies that use JIT.

Answer 2

Warehousing has always been the way for manufacturers to build a product and move on. Why I bet even the styles of clothing you buy was decided years ago. haha. Well perhaps your basics spent a few years in warehouses. We haven't gotten that far ahead, but its always been an economically sound idea.