RIETI Report September 8, 2023

From just-in-time to just-in-case: Global sourcing and firm inventory after the pandemic

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we are featuring topics related to the shift among importers from just-in-time to just-in-case production after the pandemic. Using quarterly Japanese firm-level data, RIETI Senior Fellow Hongyong Zhang and Dr. Thi Thanh Ha Doan of the Economic Research Institute for ASEAN and East Asia shows such a trend.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

From just-in-time to just-in-case: Global sourcing and firm inventory after the pandemic

ZHANG HongyongSenior Fellow, RIETI

DOAN Thi Thanh HaEconomist at Economic Research Institute For Asean And East Asia (ERIA)

The Covid-19 pandemic and recent Russia-Ukraine war disrupted global supply chains and led to significant delivery delays, input shortages, and stockout risks. Firms exposed to such risks have been forced to rethink their production and inventory management from just-in-time to just-in-case. Using quarterly Japanese firm-level data, this column shows that relative to firms that purchase inputs only domestically, importers significantly and persistently increased their inventories of intermediate inputs. This suggests the possibility of a shift from just-in-time to just-in-case production after the pandemic.

Inventory plays an important role in international trade. Because of delivery lags and lumpy trade, importers face severe inventory management problems. It is reported that importing firms have approximately twice the inventory of firms that purchase materials only domestically (e.g. Alessandria et al. 2010). Supply chain disruptions during the pandemic have garnered attention from researchers and policymakers regarding the role of inventory as a buffer against input shortages. The previous study shows that among French firms exposed to the Chinese lockdown, those holding more inventories ex-ante performed better in the aftermath of the shock (Lafrogne-Joussier et al. 2022). Furthermore, Alessandria et al. (2023) examine the aggregate effects of supply-chain disruptions in the post-pandemic period and show that firms optimally hold inventories that depend on the source of supply, whether domestic or imported. However, little is known about global sourcing and inventory adjustments to supply chain shocks at the firm level.

Figure 1 shows the quarterly movements in Japan’s manufacturing production and inventory ratio indices (seasonally adjusted) from Q1 2015 to Q2 2022. Manufacturing production was disrupted during Q1-Q2 2020 after the Japanese government took its first emergency measures in April-May in major economic regions. Meanwhile, inventories increased substantially, and their magnitudes were much larger than the decline in production. The inventory ratio declined quickly after Q2 2020 but it increased again after early 2021. It is worth noting that the inventory ratio remains persistently high even though production recovered by 2021. In early 2022, the inventory ratio further increased, probably because of the Shanghai lockdown and the Russia-Ukraine war.

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Related papers

“Global Sourcing and Firm Inventory during the Pandemic”
ZHANG Hongyong (Senior Fellow, RIETI) / DOAN Thi Thanh Ha (Economic Research Institute for ASEAN and East Asia)

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MORIKAWA Masayuki (President and CRO, RIETI)

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