The Profitability-Risk Tradeoff of Just-in-time Manufacturing

The Profitability-Risk Tradeoff of Just-in-time Manufacturing

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Unformatted text preview: The Profitability-Risk Tradeoff of Just-in-time Manufacturing Technologies by Jeffrey L. Callen*, Mindy Morel** and Chris Fader*** March, 2001 *University of Toronto **Hebrew University ***University of Waterloo We wish to thank our colleagues at the University of Toronto and the Hebrew University for comments on an earlier draft. ABSTRACT Qualitative survey studies and a recent quantitative study by Callen, Fader and Krinsky (2000) indicate that JIT manufacturing is more profitable than conventional non-JIT manufacturing. This study tests the null hypothesis that the excess profitability of JIT manufacturing just compensates for the additional operational risks of the JIT technology relative to conventional manufacturing. An often-suggested alternative hypothesis is that JIT manufacturing dominates conventional manufacturing in reducing costs and increasing revenues and that risk is not at issue. The multivariate results unambiguously reject the null hypothesis. We find that although the JIT plants in our sample are more profitable than non-JIT plants even after adjusting for operating risk, profitability is inversely related to risk, especially for JIT plants . Key Words: Financial/economic analysis, Just-in-time/Kanban 1 1. Introduction Conventional wisdom, based almost exclusively on survey data, suggests that Just-In-Time (JIT) manufacturing in the North American context conveys substantial financial benefits. These benefits include reduced costs of inventory investment, materials handling, and plant and warehouse space, and increased revenues from the competitive advantage of lower manufacturing lead times and customer satisfaction from higher quality products. 1 In one of the few studies to date to use quantitative (as well as qualitative) plant-level data, Callen, Fader and Krinsky (2000) (hereinafter CFK) find in fact that JIT manufacturing is associated with greater productivity in work-in-process and finished goods inventory usage, lower average total and average variable costs, and higher profits. 2 1 Qualitative surveys include Billeshbach (1991), Mehra and Inman (1992) , White (1993), and Deshpande and Goldhar (1995). 2 Flynn, Sakakibara and Schroeder (1995) also use plant level quantitative data but they limit their analysis a priori to world class JIT plants and are thus subject to self-selection bias. Huson and Nanda (1995) and Balakrishnan, Linsmeier and Venkatachalam (1996) use firm level rather than plant level quantitative data. Unfortunately, their selection proceduresbased on annual accounting reports, news extracts, and trade journal casesfail to exclude multi-plant firms that often consist of JIT and non-JIT plants operating simultaneously....
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This note was uploaded on 04/29/2009 for the course CBS 456765 taught by Professor Paul during the Three '09 term at Curtin.

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The Profitability-Risk Tradeoff of Just-in-time Manufacturing

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