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.
Retail sales had been growing robustly this year, before turning erratic in recent months. Still, consumer spending is expected to continue at a 3 percent clip for the rest of the year, said Jason Bram, analyst at the Conference Board, a New York-based economic research firm.
With the future of consumer appetites unclear, companies don't want to be caught flat-footed if sales suddenly pick up.
Automakers claim they've been a victim of this, saying part of July's 0.3 percent decline in sales, the industry's slowest annual gain in 10 months, is from not supplying dealerships with enough cars.
Avoiding that kind of problem is behind the huge inventory increase at Fieldcrest Cannon Inc. The $1 billion textile maker's inventory swelled 13 percent to $28.4 million in the second quarter. The reason: company executives forecast a surge of orders for blankets, decorative bed sheets and pillowcases for the rest of the year.
Strong orders predicted
"We have a sense from our customers that orders for these products will be strong," said Tom Staab, chief financial officer of the Eden, N.C.-based company. "That dictates our policy, not any theory on inventory management."
Though it uses just-in-time to help stock its shelves, Dollar General Corp. has increased inventories in its 1,893 stores by 4 percent because it doesn't want to lose a sale by running out of stock.
"It's important for us to have toothpaste in stock if a customer comes in to buy toothpaste. Otherwise, the next time that customers needs toothpaste, he's not going to shop with us," said Kent Garner, chief financial officer of the Nashville, Tenn., chain.
Still, while just-in-time has lost its luster, it's too early to write its obituary, economists say.
For one thing, a lot of companies religiously adhere to the concept -- especially those in industries where products are selling briskly and inventory growth is a nonissue.
Take automobiles. Despite a recent retreat, U.S. car and truck sales are up 8 percent through the first seven months of this year, and General Motors Corp., Ford Motor Co. and Chrysler Corp. just reported record profits of $4.57 billion in the second quarter.
Varity Corp.'s Kelsey-Hayes Group, a Livonia, Mich.-based supplier of brake systems, has a one-day turnaround from the time it buys materials to when it's shipped out as a finished good.
Seats shipped quickly
And Lear Seating Corp. builds and ships an entire set of seats for a vehicle within two hours of receiving an order.
That kind of performance has enabled the $2 billion company based in Southfield, Mich., to set up about 30 "satellite" facilities near vehicle assembly plants and steal market share from its competitors.
Computer networking companies have it just as good, with hungry buyers lined up for their hardware and software.
"Everything is just-in-time. Everything!" said David Abramson, corporate public affairs manager at 3Com Corp. "You've got parts coming in the morning that go out as products that day, and that's the rule, not the exception."
Economists say that's the right way to do business because it builds in efficiency, cuts down on inventory investment and warehouse space.
"Everything we see [companies doing] is to improve productivity and cycle time, and having stockpiles anywhere in the system is a no-no," said Alex Beavers, partner in charge of the center for operations technology at Coopers & Lybrand in Boston.