The Incentive Value of Inventory and Cross‐training in Modern Manufacturing

Venky Nagar, Madhav V. Rajan and Richard Saouma

Journal of Accounting Research, 2009, vol. 47, issue 4, 991-1025

Abstract: This paper shows that major components of modern manufacturing processes, such as inventory management and cross‐training, play a significant control role. In our model, workers possess information that is critical to efficient ongoing operations. An organizational design that motivates workers to optimally apply this information leverages both the production schedule and worker–management communication. Management's use of these controls results in work‐in‐process (WIP) inventory that appears excessive from a pure job‐scheduling perspective, but is optimal when control issues are considered. Empirical work testing pure job‐scheduling theories of modern manufacturing practices has yielded mixed results. We provide control‐related interpretations for these empirical findings, and also provide novel predictions regarding the link between inventory levels and the nature of operational information asymmetries. Overall, our model highlights the importance of recognizing both control and scheduling issues when analyzing production processes.

Date: 2009
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