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NU OPNS 430 - Hurry-Up Inventory Method Hurts Where It Once Helped

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June 25, 2002 PAGE ONEHurry-Up Inventory MethodHurts Where It Once HelpedBy CLARE ANSBERRY Staff Reporter of THE WALL STREET JOURNALIt's the most important missing ingredient for an economicrecovery: a steady flow of big purchase orders from businesses.But take a look at how business really works these days inside agrowing number of companies. Brush Engineered Materials Inc.of Cleveland, which makes specialty metal products for cars,computers and airplanes, says orders it receives are smaller, morefrequent and rushed. Wiremold Co. of West Hartford, Conn., getsfrantic calls from distributors that have cut inventories so low theyneed electrical-wiring devices air-freighted overnight. Lead timesare evaporating, too, for Jeff Hammergren at Industrial Supply Co.of Minneapolis, which supplies ball bearings. Business customers"don't build 'wait' into the way they do things," he says.Urgent last-minute orders have become a way of life for a growingnumber of companies, thanks to years of advances in keepinginventories lean. The approach has made many companies moreefficient. But for now it is also slowing a general recovery bymaking the economy as a whole more volatile and less predictable.Over the last 20 years, U.S. industry has grown used to the "just-in-time" delivery systempioneered by the Japanese. The goal is to keep inventories of raw materials and parts to a minimumto avoid tying up cash where it isn't productive.Today, lingering economic anxiety is pushing just-in-time delivery to the brink. Companies areholding onto their cash as long as they can. Rather than order in advance, they are waiting until thelast possible moment, trying to be sure that every order they place will lead to profits. By the timethey finally pull the trigger, they need goods at once. This stop-and-start pattern is rattling thesupply chain, from buyer to supplier to raw-material provider.COMPANIESDow Jones, ReutersBrush Engineered Materials Inc. (BW)PRICECHANGEU.S. dollars12.08-0.072:30 p.m. General Mills Inc. (GIS)PRICECHANGEU.S. dollars42.70-0.252:30 p.m. Procter & Gamble Co. (PG)PRICECHANGEU.S. dollars91.53-1.872:30 p.m. * At Market Close1 of 5 6/25/2002 1:51 PMWSJ.com - Major Business News wysiwyg://1019/http://online.wsj.com/article_print/0,,SB1024952665607014520,00.htm"Decisions are being made this morning about thisafternoon, rather than weeks before," says Ruth Hurd,publisher of Thomas Register, a Web site that tracksindustrial buyers. Its recent survey of those buyers showsthat 57% are boosting just-in-time purchases this year andreducing buying based on forecasts.The phenomenon helps explain why much-watchedeconomic indicators, such as capital-goods orders, havebeen swinging wildly this year. Excluding defense, thoseorders rose 4.6% in February, fell 3.1% in March androse 1.9% in April.Companies, meanwhile, are increasingly foggy aboutprojected sales and profits. The lack of clarity dampsinvestor enthusiasm.The process tends to have a compounding effect. Suppliers receiving unsteady, unpredictableorders have difficulty themselves justifying large equipment purchases.So far, consumer spending has been keeping the economy from slipping back into recession,according to most economists. But stepped-up capital spending by business will be critical for asustained recovery.Hesitancy and HasteWhile the strange current mix of hesitancy and haste reflects and feeds into the prevailinguncertainty, it also reflects a fundamentally more agile economy. Over the long run, just-in-timemethods have allowed U.S. manufacturers to become more efficient and profitable, achievementsthat in theory ought to trickle down to employees and consumers.Suppliers in businesses ranging from airplanes to wheelchairs have grown more adept at adjustingto customer demands, as the companies have had to deliver goods in smaller batches and accordingto changing specifications. Production processes and delivery systems have become so refined thatLantech in Louisville, Ky., can in two days make and deliver a complex shrink-wrap machinecontaining hundreds of parts. "People can demand instant delivery and get it." says DonaldNorman, an economist with the Manufacturers Alliance, a trade group in Arlington, Va.Plenty of goods still move at a more leisurely pace. Generators for power plants aren'tquick-turnaround products. Neither is wheat.Still, for many manufacturers, the last-minute culture appears to be here to stay. "The guy tappinghis foot in line at McDonald's is tapping his foot when he places an order with me," says PatrickLancaster, chairman of Lantech.Manufacturers laid off thousands of workers and idled factories or lines during the recentrecession. A year ago, customers began calling Brush Engineered Materials to cancel large ordersfor special-alloy products, as demand for telecommunications equipment and computersevaporated. With that sector representing as much as 50% of its business, Brush laid off 25% of itswork force, idled certain operations and suspended its quarterly dividend.Now orders are coming back, but in a far-less-predictable fashion. That makes life difficult forDon Klimkowicz. As vice president of operations for Brush Wellman, the company's largest2 of 5 6/25/2002 1:51 PMWSJ.com - Major Business News wysiwyg://1019/http://online.wsj.com/article_print/0,,SB1024952665607014520,00.htmdivision, he supervises three North American plants and 650 people.Like many manufacturers, Brush invests in huge and expensive pieces of equipment. The best wayto justify the cost is to run them constantly: The more parts produced, the less each costsproportionally, and the greater profit from each one sold. Stopping production to install a newmold to make another part can take several hours, or even a day. As a result, the company keepschanges to a minimum. That also gives plant managers a better handle on how many workers theyneed and how much metal and lubricant will be consumed that month.The system works best when customers place big orders well in advance. "They're not," Mr.Klimkowicz says.More UncertaintyFirst it was the auto makers, backing off big advance orders and demanding frequent, smaller andfaster deliveries. Now his other customers, including aerospace, oil- and gas-explorationcompanies and those in the plastic-mold business, are behaving the same way. Typically, theydon't have stockpiles and don't want them. "They're placing an order when they need something,"he says. "It creates more uncertainty. I'm more


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