Moral hazard and management control in just-in-time settings

In this paper, we model the management control and motivational aspects of Just-in-Time (JIT) production systems. Firms that implement JIT systems attempt to reduce work-in-process (VWP) inventories. Traditional inventory models, which balance the lost productivity from stockouts against the costs of carrying buffer stocks of inventory, have had limited success in explaining the benefits of JIT systems, perhaps because such models focus solely on material costs. In contrast, it is commonly claimed that the benefits of a JIT system do not come solely from reducing inventory-carrying costs (e.g., see Barrier [1992, p. 30]). In particular, Arthur [1994] and MacDuffie [1995] provide evidence that JIT systems are often accompanied by changes in the firm's human resource management policies. We model a multi-input production setting which integrates features of "standard" inventory models and "standard" principal-agent models to focus on the interaction between inventory and incentive issues. Specifically, we analyze how motivational issues with workers affect the optimal