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Many of the performance measurement measures used under a traditional accounting system are not useful in a JIT environment, while new measures can be implemented that take advantage of the unique characteristics of this system.
(i) One of the key measurements in a traditional system is machine utilization. This is used to ensure that every asset a company purchases is being thoroughly utilized. It is particularly important in cases where there has been a large investment in automation or large, high-speed machinery, since these items are quite expensive and should be used to the utmost.
However, making machine utilization a key measurement; forces production managers in the direction of manufacturing as much product as possible in order to show a high level of machine utilization, which can result in large amount of inventory piling up in the warehouse. This is not a desirable end result in a JIT environment, where producing only what is actually needed is the underlying rule. Also, machine cells in a JIT system tend to be smaller and less costly than the highly automated (and expensive) juggernauts used in more traditional systems, so there is less need to justify the investment in these smaller machines by proving that they have been heavily used. In short, machine utilization measurements can be discarded under JIT environment.
(ii) Another inappropriate measurement is any type of piece rate tracking for each employee. This is a common measure in the textile industry, where employees are paid extra if they exceed certain production volume targets. However, a JIT system focuses on producing only what is needed, so an employee who has incentives to create vast piles of parts is producing contrary to the rules of the system. Accordingly, any piece rate system must be eliminated and replaced with measures that focus instead on the quality of output or the number of employee suggestions for improving the system, which are much more important outcomes in a JIT system.
(iii) Any type of direct labour efficiency tracking is highly inappropriate in a JIT system. It is a key measurement in more traditional systems, where employee time and productivity are closely monitored and measured. However, a JIT system does not focus on how fast an employee works—only on the quality of the products manufactured. Also, labour variance measurements require considerable employee time tracking, which forces workers to fill in a time sheet, punch a clock, or use a bar coding system to track what they are doing and what job they are working on. All this labour tracking is a non-value-added activity, which is something a JIT system strives to avoid as an unnecessary activity. Consequently, the cost accounting staff should advocate the complete elimination of all labour variance measurements.
(iv) Installing a JIT system does not mean that there should be a complete elimination of variance or operational measures. There are still several measures that are highly relevant to operations.
