Electronics Firm Ends Practice Just in Time

THE PROBLEM: Timing the delicate dance between labor and inventory.

Way back in the boom of the late 1990s, Michael Koss couldn’t find enough employees to
work at his sprawling Milwaukee factory. Mr. Koss, 48 years old, is the second generation
to run Koss Corp., a maker of high-fidelity headphones for Walkmans, speakerphones,
headsets and similar gear.

By PAULETTE THOMAS
Staff Reporter of THE WALL STREET JOURNAL

The younger Mr. Koss was the family expert and advocate for
all of the latest, enlightened manufacturing trends. Just-in-time inventories were, of course,
a given. Although Koss kept a hefty stockpile of component parts, under the just-in-time
theory, Koss didn’t assemble a headphone until it was ordered.

But to fill 650 jobs, Mr. Koss had to resort to mostly temps and part-timers. So, like many
U.S. companies, he moved much of his manufacturing to China where labor is plentiful, not
to mention low in cost. Only about a third of his headphones are now made in the
Milwaukee plant.

And that introduced a new problem. Getting headphone parts to Hong Kong and moving
the finished product to, say, a Wal-Mart in San Antonio via Milwaukee makes for a supply
chain of many links and potential kinks. Koss, attempting to keep inventories lean as the
economy slowed, hit some snags timing its inventory to its customers. Retailers, for
instance, surprised Koss by ordering lower-cost lines of headphones or tripling orders for
unexpected promotions. Back orders sometimes reached 70% of a month’s volume.

THE SOLUTION: Koss scraped the just-in-time philosophy, and stacked up boxes of finished headphones on the factory floor.

It is a rejection of the prevailing practice — the just-in-time inventory gospel preaches that stores notify manufacturers as the goods sell, and
orders are refilled in perfect sync. Nothing becomes outdated or banged up awaiting sale.

But in the real world, that dance is less than a perfect pas de deux. "People tell you they are on automatic replenishment, and it’s just not true,"
he says. "There is always manipulation of the order cycle." So why should he tie up cash in raw parts awaiting an order, when instead he could
have a finished product ready to go?

So he has trebled his inventory of finished goods to $6 million from $2 million previously. But total inventories — including the raw parts — are
down to $8 million from $15 million. He has no back orders.

Now, amid a weak and jittery economy, he has an edge by being able to deliver immediately, he believes. That was proved in recent months as
the dockworkers’ stoppage brewed. Mr. Koss received warning letters from retailers about the perils of missing deliveries, but with higher
inventories, he wasn’t worried.

THE LESSON: The conventional wisdom isn’t right for every industry and every shift in the economy. Be ready to turn it upside down.