Summary by Christin Howells
Master of Accountancy Program
University of South Florida, Fall 2004
JIT Main Page | Lean
Accounting Main Page | Performance Measurements Main Page
The purpose of this article is to examine the differences between the “performance measurement and reward systems” of JIT firms and non-JIT firms in the U.S.
Fullerton states that in achieving the goals of the organization, the management accounting system of a firm should be in line with its manufacturing strategy. The management accounting system (MAS) must be able to appropriately evaluate a JIT firm’s performance with respect to the improvement of operations to aid in suitable decision-making.
Evidence indicates that those firms that have not implemented a JIT system continue to emphasize “traditional accounting criteria in performance evaluation” while the JIT system uses “nontraditional information and incentive systems” and that a significant difference exists between the two performance evaluation methods. Traditional performance measures refer to the use of “profitability and budget conformance to reward their employees” while nontraditional measures use total quality measurements such as “SPC charts, Pareto analysis, and cause-and-effect diagrams” in evaluating performance.
Survey and Firm Specifics
To address the issues mentioned above, a survey of U.S. Manufacturing firms was completed. There were 253 respondents from 14 industries. Of those, 95 had implemented JIT. The executives of the companies surveyed were asked to respond to six categories of performance measures. Their responses were then analyzed for statistical significance. The criteria and results are as follows:
Performance Measurement Techniques
This category analyzed the frequency with which companies used benchmarking measures, SPC charts, Pareto analyses, flowcharting, histograms, and cause and effect diagrams in evaluating operations. It was found that companies that utilize JIT systems use such resources more frequently than non-JIT companies in evaluating both internal and external operations. The frequency differences between the JIT firms and the non-JIT firms were found to be statistically significant.
Manufacturing Performance Measures
Manufacturing performance measures requested information about the importance of non-traditional accounting measures in regards to vendor quality, on-time delivery, setup times, rework, inventory turns, scrap, and equipment downtime. The results show a statistical difference in the importance of these measurement techniques for the firms, on average. It was found that JIT firms have found them to be more important than non-JIT firms. These results also support the idea that JIT decreases inventory and increases inventory turns.
Reporting Quality Results
In this section of the survey respondents were asked to comment on how frequently their information system “measured and reported” on quality results at each level (line supervisor, middle management, and top management). The results indicated that within each system (JIT and non-JIT), the lower level employees received these reports most frequently. However, it was shown that in the JIT systems, there was a statistical difference in the frequency of reporting, i.e., the JIT systems did so more often.
Compensation Incentives
Compensation incentives were used to evaluate the criteria for employee compensation. These results indicated that there were two determinants for compensation: quality and production efficiency or profitability and variances in volume and price. The authors also stated that for the best results, “desired employee behavior is best achieved when compensation incentives are in alignment with corporate strategy”; this is a philosophy that JIT emphasizes. As such, it was found that JIT companies use such methods of evaluating compensation more frequently than do non-JIT companies. These survey results also indicated that in determining compensation, JIT companies also place a statistically significant greater emphasis on non-financial measures such as “team performance, throughput time, and product quality”. It was also found that for both JIT and non-JIT companies, the non-traditional performance measures were used more frequently in determining compensation incentives for lower level employees than for middle and upper level employees.
Strategic Decision Making and Employee Empowerment
It is said that when the companies' employees are aware of the strategic plan, “more consistent, supportive decision making can be done on the shop floor, as well as in company headquarters”. Therefore, this category focused on the employees' awareness of the companies' strategic plan and their empowerment to make decisions. The results are consistent in that both JIT firms and non-JIT firms, non-management had a lesser understanding of the strategic plan and less empowerment. However, it was found to be statistically significant that within the non-JIT firms, strategic knowledge and empowerment were less than in the JIT firms.
Conclusion
Not only are there significant differences in the performance measurements of the JIT and non-JIT firms, there are also significant differences in their size. The survey results indicated that the average JIT firm was three times the size of the non-JIT firm and that the JIT firms indicated that they are more decentralized than non-JIT firms. It is also showed that these larger, decentralized firms perceived their company as “innovative in product technology, process design, and product design” more frequently than did non-JIT firms. These results are supported by the assumption that the larger firms have the resources to be innovative not only in product technology and process and product design, but also in the research and implementation of JIT systems and the accompanying changes. The results of this survey support the belief that the implementation of a JIT system is accompanied by the use of non-traditional performance measures that also “encourage and support a lean manufacturing environment”.
____________________________________________________
Related summaries:
Deluzio, M. C. 1993. Management accounting in a just-in-time environment. Journal of Cost Management (Winter): 6-15. (Summary).
Foster, G. and C. T. Horngren. 1987. Cost accounting and cost management in a JIT environment. Management Accounting (June): 19-25. (Summary).
Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).
Kalagnanam, S. S. and R. M. Lindsay. 1998. The use of organic models of control in JIT firms: Generalising Woodward's findings to modern manufacturing practices. Accounting, Organizations and Society 24(1): 1-30. (Summary).
Kapanowski, G. 2016. Lean fundamentals for accountants. Cost Management (January/February): 5-14. (Summary).
Lee, J. Y. and J. K. Winch. 1998. From push to pull: Management's control system modification for manufacturing change. Advances in Management Accounting (6): 75-92. (Summary).
Lessner, J. 1989. Performance measurement in a just-in-time environment: Can traditional performance measurements still be used? Journal of Cost Management (Fall): 23-28. (Summary).
Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. LeanConceptsandTermsSummary.htm
Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web. JohnsonBromsGraphicsNotes.htm
Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. LeanAccounting.htm
McIlhattan, R. D. 1987. How cost management systems can support the JIT philosophy. Management Accounting (September): 20-26. (Summary).
O'Brien, J. and K. Sivaramakrishnan. 1994. Accounting for JIT: A cycle time-based approach. Journal of Cost Management (Fall): 63-70. (Summary).
Patell, J. M. 1987. Adapting a Cost accounting system to just-in-time manufacturing: The Hewlett-Packard Personal Office Computer Division. Accounting & Management Field Study Perspectives, edited by William J. Bruns, Jr. and R. S. Kaplan. Harvard Business School Press: 229-267. (Summary).
Swenson, D. W. and J. Cassidy. 1993. The effect of JIT on management accounting. Journal of Cost Management (Spring): 39-47. (Summary).
Vollmann, T. 1990. Changing manufacturing performance measurements. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 53-62. (Summary).