Information and incentive effects of inventory in JIT production

This paper provides an economic rationale for modern manufacturing control practices such as the minimal inventories in Just in Time (JIT) systems, ze ro-defect policies, and continuous improvement. The popular and academic li terature contains descriptive studies on the mechanics of these systems and their perceived benefits. We use a model of production to analyze both inf ormational and incentive rationales for reduced inventories. A TIT-like env ironment of low inventory levels is optimal in our model because it helps w orkers to better observe and understand the production process and to think and act creatively to improve operational reliability and yields. Empirica l evidence using data obtained from 116 plants worldwide supports our concl usions about the effect of reduced inventories on process reliability, prod uct quality, and cost.