THE INTERACTION EFFECTS OF LEAN PRODUCTION MANUFACTURING PRACTICES, COMPENSATION, AND INFORMATION SYSTEMS ON PRODUCTION COSTS: A RECURSIVE PARTITIONING MODEL

The study re-examines if lean production manufacturing practices (i.e. TQM and JIT) interact with the compensation system (incentive vs. fixed compensation plans) and information system (i.e. attention directing goals and performance feedback) to reduce production costs (in terms of manufacturing and warranty costs) using a recursive partitioning model. Decision trees (i.e. recursive partitioning algorithm using Chi-square Automatic Interaction Detection or CHAID) are constructed on data from 77 U.S. manufacturing firms in the electronics industry. Overall, the “decision tree” results show significant interaction effects. In particular, the study found that better manufacturing performance (i.e. lower production costs) can be achieved when lean production manufacturing practices such as TQM and JIT are used along with incentive compensation plans. Also, synergies do result from combining TQM/JIT with more frequent performance feedback along with attention directing goals. These findings suggest that if organisational infrastructure and management control systems are not aligned with manufacturing practices, then the potential benefits of lean manufacturing (i.e. TQM and JIT) may not be fully realised.

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