Performance Measures and Control in JIT Production

In addition to their personal observations, managers use financial and nonfinancial measures to evaluate and control JIT production. We now describe these measures and indicate the effect JIT systems are expected to have on these measures.

1. Financial performance measures, such as the inventory turnover ratio$\left(\text{cost\ of\ goods\ sold}÷\text{average inventory}\right),$ which is expected to increase
2. Nonfinancial performance measures of inventory, quality, and time such as the following:
   • Number of days of inventory on hand, expected to decrease
   • Units produced per hour, expected to increase
   • $$\frac{\text{Number\ of\ units\ scrapped\ or\ requiring\ rework}}{\text{Total\ number\ of\ units\ started\ and\ completed}},\text{expected\ to\ decrease}$$
   • Manufacturing cycle time, expected to decrease
   • $$\frac{\text{Total\ setup\ time\ for\ machines}}{\text{Total\ manufacturing\ time}},\text{expected\ to\ decrease}$$

Personal observation and nonfinancial performance measures provide the most timely, intuitive, and easy-to-understand measures of manufacturing performance. Rapid, meaningful feedback is critical because the lack of inventories in a demand-pull system makes it urgent for managers to detect and solve problems quickly.