Questions to Consider

What are three main differences between the JIT and traditional manufacturing systems?
What is the beneficial aspect of value-chain linkages?

JIT and the Balanced Scorecard:

Linking Manufacturing Control to Management Control

Just-in-Time manufacturing techniques can be made more effective by controlling them with the scorecard approach.

BY B. DOUGLAS CLINTON, CPA,
AND KO-CHENG HSU, CPA

Lybrand Gold Medal

The Just-in-Time (JIT) philosophy was adopted by American companies to control manufacturing. The Balanced Scorecard concept was developed to help management control overall operations. What we propose here is linking the two techniques to increase the effectiveness of both.

The Balanced Scorecard meets a critical need for management information that has as yet been unsatisfied by other approaches. (See sidebar.) Financial accounting measures lag performance because they are historical in nature, by definition reporting on activities that already have occurred. For this reason, they are irrelevant in guiding managers in their quest to improve current and future operations.

Second, the creation of value is not measured by financial accounting metrics. Because the nature of these metrics is to report on only the costs of past actions, little indication is provided of what value investors and other stakeholders will place on the actions of management to change future events, especially those considered to be long-term. Investment in employee training programs is a prime example because although traditional measures show the cost of training, the benefits are not directly quantified.

Third, managers need to understand what factors drive success in their organizationsagain something that traditional financial measures do not help managers do.

Fourth, the Balanced Scorecard, as described by Norton and Kaplan, does more than measure. That is, if constructed properly, a Balanced Scorecard can communicate, provide feedback, create learning, and align strategic objectives with daily operational control.¹

Changes in technology and the competitive environment are shaping analysis techniques, information gathering mechanisms, and the way decisions are framed. Management's job is to accommodate these changes with new managerial control systems to measure and evaluate operating performance and to provide timely and appropriate information for managerial decision making. Nowhere has a more dramatic example of radical change been displayed than by companies adopting and implementing the Just-in-Time (JIT) philosophy. That is why before constructing a Balanced Scorecard for companies implementing or using JIT, management carefully must consider the uniqueness of the manufacturing environment and the management control system. There are many important differences in approach between a traditional manufacturing environment and a JIT environment that would indicate unique considerations when the Balanced Scorecard is employed in a JIT context.

A PROBLEM OF INCONGRUENCE

After investigating the success of Japanese companies, American companies implemented JIT manufacturing systems with mixed success in the United States. The conversion from a traditional process to JIT has had profound effects on both manufacturing systems and organizations as a whole. In emulating Japanese techniques, American firms adopted what they believed was the essence of the method while ignoring areas directly affected by the change. Herein lies the problem. Changing the manufacturing process in a radical way without changing the management control system can create an incongruent state that results in inconsistent performance evaluation and dysfunctional behavior. Properly matching attributes of manufacturing control with management control is necessary to avoid this problem.

Studies of JIT implementations have indicated that movements from traditional systems to JIT typically have not caused significant alterations in existing performance measurement systems. Furthermore, basic control and support systems frequently were not put in place prior to the adoption of the new technology, and changes in performance measurement systems often have tended to be reactive in nature.²Accordingly, suggesting a proper linking of the manufacturing system with its drivers of performance requires an understanding of the differences between traditional and JIT manufacturing systems. From that vantage point, differences in management control among the systems can be examined appropriately.

MANUFACTURING CONTROL

JIT can be described as a set of manufacturing techniques and concepts or a philosophy of doing business that minimizes inventory levels and enjoys the commensurate effects of doing so. Generally, JIT manufacturing is more oriented to broad-based effectiveness, while traditional manufacturing systems tend to emphasize efficiency.

JIT exposes production problems because there is no buffer stock of inventory. If a part on the line is discovered to be defective, and therefore unusable, then the production line must be stopped because there is no additional excess inventory to replace it. JIT would require that the problem be addressed immediately so that production could resume and similar problems could be avoided in the future. Accordingly, JIT is quality oriented and emphasizes simplifying the process and preventing problems. If we compare JIT manufacturing methods with traditional manufacturing methods, typical differences in three areas are highlighted, implying the need for changes in management control.

The first difference impacting management control is that JIT focuses more on the manufacturing process. Consistent with the quality emphasis

in JIT systems, expectations actually are predicted to change as quality improvescontinuous improvement is assumed. Moreover, defects are prevented by line workers rather than appraised by a separate quality assurance department. Emphasis is on nonfinancial measures and controlling activities and transactions. Flexibility is considered to be more important than automation and efficiency.

Second, JIT promotes a stable workforce. Workers typically are not specialized in a dedicated production task but are trained to perform various production duties. Communication and teamwork among workers are encouraged as a means of identifying and resolving problems. Workers often are salaried and empowered to report and resolve problems as they arise. If the process is not going as quickly as needed in a particular area, then workers converge on that area. A spirit of cooperation and companywide loyalty is supported.

Third, the supplier base used with JIT is much smaller than with traditional systems and often consists of certified vendors. These suppliers are certified (i.e., contractually required) to provide timely deliveries of goods at a high-quality level. A partnership relationship with suppliers is encouraged, and suppliers often are invited to the plant to help them understand the needs of the manufacturer. Long-term contracts involving a minimum amount of paperwork are pursued.

MANAGEMENT CONTROL

These three areas highlight differences in manufacturing that require different treatment in the management control system to be effective (see Table 1). With a JIT system, defect prevention becomes more important than appraisal, and workers are rewarded for pointing out and solving problems rather than hiding them.

Managers are rewarded for minimizing investment by explicitly imputing inventory investment into the performance evaluation scorecard. Moreover, control over activitiesrather than costsis stressed while maintaining a long-term organization-based approach to evaluation.

A JIT system would suggest that performance expectations should be constantly changing under the assumption of continuous improvement. In addition, quality should be evaluated, not on the basis of specifications but on the basis of meeting and exceeding customer needs and wants. With traditional systems, minimization of defects discovered is rewarded as is the minimization of cost per unit. JIT workers, however, are encouraged to stop the production line to prevent defects, point out problems, or otherwise improve the process. Long production runs are irrelevant in a flexible JIT environment. Therefore, minimizing setup time for production changeovers is rewarded. Prevention of defects is emphasized along with the minimization of nonvalue-added activities. Here the product versus process emphasis is extended to customer relations. That is, traditional systems identify appropriate customers with the marketing of products produced, while JIT identifies products to produce as desired by customers.

Traditional systems schedule production based on worker expertise and running large batches, while JIT systems schedule production based on achieving flexibility to meet customer orders. JIT rewards workers based on their ability to work cooperatively as a team in adapting to the flexibility required in satisfying customers. Where traditional systems emphasize planning, budgeting, and scheduling, JIT emphasizes communication and workers helping each other with urgent demands.

Using certified supplier relationships simplifies supplier relations, ensures that quality and delivery levels are attained, and minimizes transaction cost and paperwork. Activity analysis is appropriate with JIT to determine effectiveness. Activity analysis also is helpful in developing relevant management control metrics.

LINKING MANUFACTURING CONTROL TO MANAGEMENT CONTROL

JIT manufacturing control activities can be mapped to their related drivers, which double as the metrics that would be used for management control in the Balanced Scorecard (see Figure 1A). The manufacturing control factors

are presented in the three areas of

(1) process, (2) workforce, and (3) suppliers as discussed previously.

Although several Balanced Scorecard metrics are suggested here, these performance measures should not be considered generic for any JIT operation. Each company must develop its own metrics based on its own individual strategy. Moreover, the metrics used should be well-thought-out to ensure that they can be linked to strategic objectives and linked together in such a way that they reinforce each other. Kaplan suggests a heuristic for evaluating the veracity of the linkage: "You should be able to look at your measures and infer the business strategy the company is intending to use to get to breakthrough performance."³ That is, the measures themselves should obviate the strategy intended. For this reason, the metrics should be fairly specific. For example, for the manufacturing control activity "increase flexibility" (shown in Figure 1A), the driver should be somewhat more specific than "respond quickly to changes." The ability to minimize setup and changeover time, as shown, would be a more reasonable metric to drive manufacturing flexibility and provide a specific indicator of the company's ability to perform in that area.

The time horizon for each metric (Figure 1A) reflects the importance of considering the time dimension in assessing how each metric meets strategic objectives and how the metrics are linked together. Each measure should be time sequenced in its linkages to other measures to avoid the nonbeneficial lag problem associated with most financial accounting measures and to indicate its purpose clearly. The time element should vary in application to suit the needs of the company. One way to break this element down would be in

(1) short-term specific causes or primary drivers of the control factor, (2) evaluation in intermediate indicators of time, and (3) long-term validations in terms of time.⁴ Most of the items shown in Figure 1A reflect metrics with short-term time horizons.

Each short-term manufacturing control activity should have at least one short-term driver that provides a clear cause-and-effect type of relationship to provide guidance for management action. Indeed, the most sensible metric to use will in many cases be derived directly from the management activity itself. For example, reducing paperwork is an objective of JIT systems that clearly would be driven by the amount of paper itself (i.e., the direct output of the activity). The number of invoices is an example of a measure derived from the activity that directly reflects a tangible output from management actions to reduce paperwork.

Other measures are better indicators of the indirect results of specific management activities, for example, employee satisfaction. This measure would be expected to result from such things as empowering workers and encouraging teamwork. Employee satisfaction is not a direct measure of either of these items (i.e., the degree to which employees are becoming empowered or participating with other workers in a manner that would reflect teamwork). Nevertheless, employee satisfaction is important and should be measured and linked back to the specific short-term drivers that are expected to produce it. These metrics can be referred to as intermediate indicators, and they likely are fewer in number than the metrics thought to reflect the primary short-term drivers of the manufacturing control activities.

The long-term validators are fewer in number than even the intermediate indicators. Only one such item is shown in Figure 1A, mostly for illustration purposesthat of inventory costs. Metrics in this category should reflect long-term expectations and are broader in scope and more fundamental to overall company goals. Reduction in inventory costs is a fundamental objective of JIT and could be used as a long-term validator of something you would expect to see with a changeover to JIT. Often, as in this case, the long-term validator-type metrics are financial measures, and it is here that companies can establish the link between intermediate and long-term performance metric categories and the more traditional overall financial indicators of effectiveness.

Panel A of Figure 2 shows how various metrics can be linked to each other by considering the time horizon of relevant activities. That is, a short-term metric is shown that relates to an intermediate indicator that in turn relates to a long-term validator metric. Studying these linkages reveals how each metric relates to the "big picture" strategy and provides a clear map for evaluating particular management actions. The value of specific activities can be assessed by linking them all the way from their short-term drivers through their intermediate indicators and ultimately to their long-term validation.

By considering the categories of the Balanced Scorecard and where specific management actions are likely to take place to achieve results, a company can conduct value-chain analysis. For the JIT manufacturing items discussed, most specific management actions are likely to be initiated in the production phase of the value chain. Although these actions must include top management support and involvement, and ultimately will affect other phases of value creation, identifying the value-chain phase where primary drivers of results occur is a worthwhile task. Knowing the primary areas where value creation is initiated is important to reinforcing those efforts and tracking them with suitable metrics. This effort also can facilitate using a responsibility accounting approach to monitoring the measures. For purposes of illustration involving the JIT items discussed here, making a distinction between production and upstream and downstream categories is sufficient. This can be shown as part of a Balanced Scorecard where the value-chain perspective is integrated.

Panel B of Figure 2 shows how metrics can be linked together through the value chain. In the panel, the upstream development and design metric number of new products is linked to the production phase process reliability metric. Arguably, the activities involved with increasing the number of new products will be intertwined inextricably with the reliability of the production process. Indeed, the employees responsible for value creation in these two groups likely will work together and be functionally dependent on each other for value creation in these areas. From there, the linkage is made to the distribution metric percent on-time delivery and on to the service phase metric number of warranty claims. Again, these metrics are related. In a JIT context process, reliability will greatly affect the percentage of on-time deliveries that are made

and ultimately the degree of warranty claims resulting from production defects (i.e., those caused by or arising as a result of an unreliable process).

The beneficial aspect of value-chain linkages is to facilitate an overall management assessment of value creation across functional categories. The old adage that a chaineven a value chainis only as strong as its weakest link is ever true with the Balanced Scorecard as well.

PUTTING IT ALL TOGETHER

Figure 1B shows a comprehensive presentation of an Integrated Balanced Scorecard. This format presents a "big picture" approach to linking JIT manufacturing control activities to management control metrics via the Balanced Scorecard. In addition to showing the drivers/metrics and their activity linkages, such a presentation emphasizes the time horizon, value-chain phase(s), and Balanced Scorecard categories for each management control metric. Figure 1B builds upon the Figure 1A presentation of activity-to-metric linkages and their respective time horizons

by adding the value-chain phases and scorecard categories as additional columns. Also added is a section for overall objectives which would be germane to a JIT context.

The addition of the overall section is provided as an illustration of how a firm would integrate broad measures of success to the more specific JIT considerations of process, workforce, and supplier relationships. The overall objectives, metrics, time horizons, and value-chain and scorecard categories used in this illustration are in some cases somewhat arbitrary. There are many possibilities in terms of different strategies and management perspectives regarding what metrics are appropriate, how they link to strategy, what time horizon is relevant, and where value would be primarily initiated or created. The items presented, however, are representative of a typical conceptualization that could be used. Again, the point to using the Balanced Scorecard as a management tool is not to adopt a specific set of metrics by cloning them from a particular list. The idea is to analyze each of these components and consider how they link to strategy and link together to support a meaningful continuous improvement and assessment effort.

Although the "overall" category items are presented in Figure 1B as activities similar to the Figure 1A manufacturing control items, because they are more broad they should be understood as having multiple drivers. Moreover, these drivers will occur at various levels. For this reason, the metrics associated with them often will be classified as intermediate indicators or long-term validators in terms of the time horizon. This section is where the more traditional financial accounting-based "validator-type" measures will be located. Even though traditional financial measures can be found here, they are by no means the only measures found here. Note that in the Figure 1B "Overall" section, only two of the eight measures presented fall into the financial category. Many "big picture," overall-type objectives are best measured by using nonfinancial metrics.

Previously it was mentioned that when categorizing metrics into the value chain, the primary location where value creation is initiated should be the method of classification. Although this rule of thumb is true, there are some activities that are inseparable within the value chain and some for which it would be dysfunctional to specify a particular value-chain phase. In the JIT context there are many activities for which production and engineering personnel work together. For example, the process reliability metric discussed earlier is highly influenced by both the diligence of the workforce and the initial design and subsequent changes made by industrial engineering. Therefore, both production and upstream phases should be considered.

Likewise, specifying a value-chain phase for broadly sweeping metrics such as "decreasing nonvalue-added activities" or "increasing employee satisfaction" would be to suggest that one set of workers adds value to the exclusion of others or that the company should be more concerned with the satisfaction of a particular subset of the company's employees. Indeed, all phases of the value chain are not only relevant to these activities but vital.

Clearly, there are activities that fall exclusively in the domain of particular phases of the value chain. In these cases, specifying the primary initiation of the value creation process is critically important to achieving success. Management can encourage viewing these value-chain phases as responsibility centers for the activities isolated in these areas and use the linked metrics for creating Balanced Scorecards for individual departments, divisions, or other segments. In this way, each department can be informed of its contribution to the success of the company and be evaluated accordingly.

The final column in the integrated table is the Balanced Scorecard category classification as conceptualized by Kaplan and Norton. Most of the items mentioned here will fall in the Internal Business Processes (IBP) category for JIT items because this area is where the most tangible changes from a traditional system will be initiated. Exceptions involve inventory cost, which is a "big picture" financial metric, items designed to measure workforce gains in the innovation and learning category, and those metrics targeted specifically at meeting and exceeding customer needs and wants.

The Balanced Scorecard, as illustrated, can be a useful tool in systematizing the management control system to accommodate radical changes in activities that are brought on by implementation of a JIT manufacturing system. Properly matching attributes of manufacturing control with management control is necessary to avoid dysfunctional results brought about by such sweeping changes. The Balanced Scorecard provides a context for conducting activity and measurement analysis, linking activities to the value chain, time phasing each metric for proper interpretation, and linking the elements together in an integrated and useful manner. This tool for management accounting change will benefit companies and their managers who desire to find a systematic way to analyze and control operations in a timely and relevant manner.

B. Douglas Clinton, CPA, Ph.D., is an assistant professor of accounting at Central Missouri State University in Warrensburg, Mo. He is a member of the Kansas City Chapter, through which this article was submitted.

Ko-Cheng Hsu, CPA, Ph.D., is an assistant professor of accounting at the University of South Alabama.

¹ Robert S. Kaplan and David P. Norton, "Strategic Learning and the Balanced Scorecard," Strategy and Leadership, September/October 1996. Robert S. Kaplan, "Devising a Balanced Scorecard Matched to Business Strategy," Planning Review, September/ October 1994.

² C. J. McNair, William Mosconi, and Thomas Norris, Meeting the Technology Challenge: Cost Accounting in a JIT Environment, National Association of Accountants, Montvale, N.J., 1988. Amal Kumar Naj, "Shifting Gears: Some Manufacturers Drop Efforts to Adopt Japanese Techniques," The Wall Street Journal, May 7, 1993. Richard J. Schonberger, World Class Manufacturing, The Free Press, New York, 1986.

³ Kaplan, Planning Review.

⁴ Robert G. Eccles and Philip J. Pyburn, "Creating a Comprehensive System to Measure Performance," Management Accounting, October 1992.