Just in time or just in case? An explanatory model with informational and incentive effects

Abstract

There is extensive literature on the benefits of manufacturing control arising from minimal inventory policies of just in time (JIT). Operations management literature has focused on controlling set-up, lead and changeover times to streamline the operations and achieve low optimal inventory levels. Our paper first expands these models to include information and incentive effects. We then develop a model in which JIT focuses attention on process imbalances and derive the compensation contract that induces managers to be more creative in managing the process. We show that the loss of controllability decreases the benefits of JIT and increase the benefits of traditional buffer inventory. If, as on 11 September 2001, the loss or gain of controllability occurs quickly and unexpectedly, organizations need to develop the agility to switch between minimal inventory and buffer inventory systems