Hurricane Sandy’s Economic Sucker Punch

Hurricane Sandy upended the plans of thousands of marathoners, and the lives of hundreds of thousands of people who are still without power or access to their homes. It also upended one of the most important concepts in modern business: just-in-time management.

The discipline of just-in-time started with manufacturing. Companies began to realize that it made sense to keep on hand only the parts that were needed to assemble products on any given day. Keeping excess inventory around tied up cash, cluttered up factory floors, and imposed storage and management costs. Retailers were the next to catch on. Information technology and an understanding of consumer habits spurred stores to have only the amount of stock necessary to meet demand. There was no point in bringing in Christmas goods to stores in July and August; just wait until November. The mentality applied to people and services as well as goods. How many times have you waited on a plane for the pilot and flight crew to arrive from another plane?

Next the just-in-time mentality was married to long supply chains. In a world of rising interconnections, it made sense to source materials and services from locations where they can be produced cheaply. Our clothing and electronics no longer arrive from South Carolina and California; they come from China. Oil arrives on ships from Angola and Russia rather than on trucks and trains from Pennsylvania. Tech support comes from India, not from the guy working on the fifth floor.

We’ve learned, however, that the just-in-time economy is subject to disruptions by forces of nature. Last year, Japan’s tsunami quickly led to shortages at Honda and Toyota dealerships in the U.S. And we’re seeing it with Sandy today. Because of its size and location, Sandy inflicted maximum damage on the just-in-time economy. It took out 19th-century infrastructure (ports, rail), 20th-century infrastructure (tunnels, highways, airports), and 21st-century infrastructure (cellphone and Internet service). “The New York area’s port system is the largest on the East Coast, and the third largest in the nation. Last year, it handled $208 billion in cargo,” as Stephanie Clifford and Nelson Schwartz reported in The New York Times on Monday. And that is causing significant disruptions. “The supply chain is backing up at a crucial time, just as retailers normally bring their final shipments into stores for the holiday shopping season, which retailers depend on for annual profitability.”

The just-in-time mentality has spread from manufacturing and retailing into other businesses, and into our personal lives. And the logic is both compelling and unavoidable. We don’t power our homes by running coal-burning stoves and storing electricity in immense batteries; we bring in power produced by distant coal-burning plants over wires. Gas-station owners take delivery of gasoline every other day. Why? Doing so lets them conserve cash and maintain flexibility in pricing. What’s more, maintaining bigger supplies would require the construction of expensive, unsightly, and environmentally problematic storage tanks. We don’t arrive at a train station an hour before the train leaves; we arrive just before it does. We don’t can and pickle vegetables, or store meat in the chest freezer we had when I was a kid; we have it delivered just-in-time from Freshdirect.com or Peapod. We don’t walk down to the boutique; we order from Rue La La.

In fact, e-commerce is a massive and growing just-in-time industry. See something you want, click and buy it, and wait for the UPS truck. According to the Census Bureau (PDF), electronic and online sales are up 11.5 percent this year, more than twice the rate at which the overall retail market is growing. Such just-in-time commerce accounts for about 9 percent of retail sales. And it’s growing. Just wait until Amazon.com rolls out same-day delivery. Meanwhile, we’re now turning data into a just-in-time business. Why go to the expense and inconvenience of storing and managing your own information, when it can reside in the cloud—and be served to you where you want it at any time.

It’s all to the good. But once a link in the chain is broken—or when several links are broken at once—outages, delays, and shortages ensue. And that causes massive economic inefficiency.

The problem is that once you’ve adapted a just-in-time mentality, it’s very hard to go back. Sure, we could protect from electricity-supply disruptions by installing generators. But that’s a very expensive form of insurance. Some people might be tempted to go off the grid entirely, and live like the Ingalls family in Little House on the Prairie: chop your own wood, grow your own garden, go hunting for meat, make your own clothes. Adapting a more local lifestyle is appealing. But it’s hardly a solution. Factories that relied only on suppliers within a few-mile radius would have difficulty getting everything they need. I’m a member of a CSA run by a farm 20 miles from my home in Connecticut. There were no meat and vegetable deliveries this week because of problems with roads and electricity.

Ultimately, the solution lies not in moving away from a just-in-time world. Rather, we have to understand our reliance on it and act accordingly. Sandy’s economic damage is going to be magnified precisely because it hit a region and a grouping of businesses and consumers that lead a just-in-time lifestyle. Buildings can be constructed and fortified in such a way that they are more resistant to earthquakes, floods, and other natural phenomena. We have to do the same with our commercial infrastructure.