Optimal Incentive Schemes in Bottleneck Constrained Production Environments

This paper analyzes the design of incentives and control measures in a manufacturing setting. In the environment we consider, the output of one operation serves as the input for a second operation, where there is a bottleneck; inputs must be processed at both workstations to produce the final output. Thus, high production volume at the first operation does not translate into high benefits to the owner unless the output is subsequently processed at the second workstation. This is a familiar context in manufacturing management (Lawrence and Buss [1992]). Critics such as Goldratt [1990] argue that in these situations, typical cost accounting efficiency measurements motivate the nonbottleneck operation to produce output beyond the available capacity of the bottleneck resource, leading to waste and excess work-in-process inventories. However, workers at the nonbottleneck operation can be induced not to overproduce if restricting production is desired by the owner. We characterize management accounting practices and incentive arrangements that balance output production at nonbottleneck operations with the input demands of the bottleneck facility.