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Journal of Operations Management 21 (2003) 383404

An examination of the relationships between JIT and


financial performance
Rosemary R. Fullerton a, , Cheryl S. McWatters b , Chris Fawson c
a

b
c

School of Accountancy, Utah State University, Logan, UT 84322-3540, USA


Faculty of Management, McGill University, Montreal, Que., Canada H3A 1G5
Department of Economics, Utah State University, Logan, UT 84322-9500, USA
Received 20 September 2001; accepted 21 November 2002

Abstract
Despite abundant information explaining the expected benefits from successful just-in-time (JIT) implementation, only
tenuous validation of the linkage between financial performance and JIT exists. Managers act rationally in implementing
JIT if they are convinced that JIT enhances firm performance. From both a cross-sectional and longitudinal perspective, this
survey study of 253 US manufacturing firms finds significant statistical relationships between measures of profitability and
the degree of specific JIT practices used. The evidence provides empirical support to the premise that firms that implement
and maintain JIT manufacturing systems will reap sustainable rewards as measured by improved financial performance.
2003 Elsevier Science B.V. All rights reserved.
Keywords: Just-in-time/kanban; Empirical research methods; Accounting/operations interface

1. Introduction
Over the last two decades, just-in-time (JIT) and
other world-class manufacturing (WCM) practices
have been scrutinized and championed around the
globe, as firms seek to attain and sustain competitive
advantage. The economic benefits of these techniques
must be real and long lasting to warrant their application, given the costs and challenges in their implementation. Lower production costs, higher and faster
throughput, better product quality, and on-time delivery of finished goods are benefits from successful
implementation of a JIT system that are documented
in the literature (e.g. Goyal and Deshmukh, 1992;
Nakamura et al., 1998; Norris, 1992; Orth et al.,
Corresponding author. Tel.: +1-435-797-2332;
fax: +1-435-797-1475.
E-mail address: rfullerton@b202.usu.edu (R.R. Fullerton).

1990). Increased profitability is often assumed as an


outcome of JIT, yet Johnson and Kaplan (1989) note
a frequent disparity between improved operations and
financial performance.
Empirical studies that examine the direct relationship between JIT implementation and financial performance have reported mixed results (Balakrishnan
et al., 1996; Callen et al., 2000; Huson and Nanda,
1995; Inman and Mehra, 1993; Kinney and Wempe,
2002). Moreover, Japanese transplant manufacturing firms that employ JIT methods consistently have
shown lower profitability in the short term than their
counterpart domestic US firms (Nakamura et al.,
1998). Cooper (1995) argues that this difference results from the Japanese preference for stability, longterm reliability, and growth. Supporting this view,
Johnson and Brms (2000) demonstrate how Toyotas
stable performance relates to its manufacturing strategies that foster growth and stability over the long run,

0272-6963/03/$ see front matter 2003 Elsevier Science B.V. All rights reserved.
doi:10.1016/S0272-6963(03)00002-0

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R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

as opposed to the achievement of short-run financial


targets. Investment returns from JIT adoption are not
immediately observable, due to the long-run nature
of its implementation process. This phenomenon may
provide a partial explanation of limited empirical
validation for a direct association between financial
performance and JIT adoption.
The purpose of this study is to evaluate empirically whether the degree to which a firm implements
a combination of JIT practices systematically affects
that firms financial performance. The focus on the degree of JIT implementation underscores the notion of
complementarity, which suggests that a firm adapting to environmental change will be most likely to
find profitable new activities in areas that are complementary to the newly increased activities (Milgrom
and Roberts, 1995, p. 186). In response to a changing
environment, a firms coherent set of modifications
to strategy, structure, and process is plausibly associated with increasing income levels (Milgrom and
Roberts, 1995, p. 192).
The empirical evaluation is done using a twopronged approach. First, data from 253 US manufacturing firms are examined to determine the static
relationship between firm profitability and the degree
of JIT implementation in terms of various JIT practices. These practices represent a measurable set of
JIT elements suggested in prior research as indicative
of JIT. Second, the sample is stratified to focus on
the subset of firms that self-identify as JIT adopters
and that have a sufficient pre-JIT and post-JIT implementation history to evaluate the time-dependent
effects of JIT adoption levels on firm profitability.
This longitudinal perspective takes into consideration
the traditional annual performance measures that may
be askew in the first year or two after implementing
a major business-level strategic change such as JIT.
This study contributes to the literature in four areas. First, the key contribution is its additional insight
into the uncertain relationship between a firms financial performance and its adoption of a comprehensive
JIT system. The study augments the growing body
of empirical evidence by its careful documentation of
the various JIT-implementation schemes used by firms
and their link to financial performance. This contribution is derived from both a static cross-sectional comparison of firms that have adopted different degrees of
world-class JIT manufacturing practices, and a longi-

tudinal setting that allows time for conventional profitability indicators to reflect more fully adjustments by
firms that formally have implemented a JIT strategy.
Second, the current study further resolves the differing results of Balakrishnan et al. (1996) and Kinney
and Wempe (2002). Both of these studies classified
their sample firms as either JIT or non-JIT and focused on the impact of JIT adoption on return on
assets (ROA). The current study presents additional
evidence of JITs positive influence on ROA. In contrast to these prior studies, this research examines the
degree of JIT implementation by capturing the extent to which sample firms have adopted a combination of JIT elements. These data allow for a more
comprehensive assessment of JIT implementation and
its effect on financial performance. Third, the study
uses publicly reported financial data to test the association between financial performance and the degree of JIT implementation. This approach extends the
work of Inman and Mehra (1993), which relied upon
survey respondents self-evaluation of financial success. Finally, firm-specific responses are collated with
their publicly available financial information from the
COMPUSTAT database. Balakrishnan et al. (1996)
and Kinney and Wempe (2002) relied solely on publicly available data. Callen et al. (2000), which classified its sample as either JIT or non-JIT adopters, is the
only other known study to combine both public and
private data to assess the financial benefits achieved
from implementing JIT.
2. JIT adoption and financial performance
2.1. Definition and benefits of JIT
Manufacturing capabilities can be used as a strategic, competitive weapon (Hayes and Wheelwright,
1984). Voss (1995) discussed three major manufacturing strategic paradigms, one of which is best
practices. This paradigm is supported by the concept of WCM. Embodied within WCM is the JIT
manufacturing philosophy, which emphasizes excellence through the continuous elimination of waste
and improvement in productivity. Much more than the
narrow notion of reduced inventory and optimal batch
size (Blackburn, 1991; White and Prybutok, 2001;
Yasin et al., 1997), JIT is the genesis of time-based

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

competition that provides manufacturing with flexibility and speed essential to meet global competition
(Blackburn, 1991). For JIT to be most beneficial, it
must be accepted as an organizational philosophy
(Yasin et al., 1997, p. 462), and be aligned with a
firms key success factors.
The lack of a universal definition of JIT reflects
some remaining confusion over what exactly it comprises (Mia, 2000). This inability to explain systematically and theoretically JIT manufacturing methods
may be due to JITs emphasis on practice and implementation (Monden, 1998, p. 458). Descriptions
in the literature generally include a broad-based production system that incorporates the manufacturing
practices of efficient material flow, improved quality,
and increased employment involvement (White and
Prybutok, 2001, p. 113). Mehra and Inman (1992,
p. 172) proposed that JIT was both a vendor strategy
and a production strategy . . . that strives to achieve
excellence in manufacturing by reducing setup times
. . . through the use of group technology, cross-training
of employees, and sound preventive maintenance.
Most published research over the past two decades
has been field studies or anecdotal evidence gleaned
from surveys with small samples that attempt to validate empirically the benefits of JIT adoption. The most
consistent benefit from JIT adoption found in the empirical studies is a reduction in inventory levels and/or
an increase in inventory turns (Balakrishnan et al.,
1996; Billesbach, 1991; Billesbach and Hayen, 1994;
Crawford and Cox, 1990; Droge and Germain, 1998;
Fullerton and McWatters, 2001; Gilbert, 1990; Huson
and Nanda, 1995; Im and Lee, 1989; Norris et al.,
1994). Other evidence purports improvements in productivity, customer response time, and product quality,
along with decreases in scrap and rework, production
costs, lead times, setup times, and space requirements.
Monden (1998, p. 13) stated that the main purpose for
the continuous improvement efforts of JIT was to increase profits by reducing costs through completely
eliminating waste. Thus, implementing the lean principles of JIT is an increasingly important competitive
tool (Conner, 2001).
2.2. JIT and profitability
The result by which any business in a market
economy must be measured is the ability to make

385

enough profit to renew itself (Womack and Jones,


1996, p. 121). The general assumption in the literature has been that JIT implementation translates into
higher profitability. JIT is expected to improve firm
performance and competitiveness through an even
production flow of small lot sizes integrating schedule
stability, product quality, short setup times, preventive
maintenance, and efficient process layout (Chapman
and Carter, 1990; Foster and Horngren, 1987; Hall and
Jackson, 1992). Moreover, these production improvements are assumed to bring both indirect and direct
financial savings (Anderson et al., 1989; Kaplan and
Atkinson, 1989). In theory, JIT improves profitability
due to its impact on the two interdependent components of ROA: asset turnover, which measures sales
relative to investment; and return on sales (ROS),
which measures income relative to sales (Kinney and
Wempe, 2002). JIT is expected to improve ROA in a
number of ways. First, asset turnover should increase,
as JIT frees up assets and capital. A smaller asset
base increases ROA. Second, lower inventory levels
reduce the asset base, improving asset turnover in the
short term. Third, fewer buffer inventories motivate
the elimination of non-value-added activities (such
as dealing with defects and stock-outs) that have a
negative impact on the profit margin (Alles et al.,
1995). As emphasized by Balakrishnan et al. (1996,
pp. 185186), these effects are not necessarily automatic, and can be offsetting, especially in the short
term. For example, firms may be required to invest in
additional training and capital expenditures to accommodate a JIT environment. Training costs initially
reduce the profit margin, but are expected to improve
long-run productivity. Capital expenditures increase
the asset base and depreciation expense in the short
run, thus affecting both components of ROA.
Despite the expected impacts, few studies have adequately tested the presumed relationship between JIT
and improved financial performance. In the first survey study to directly link JIT adoption to enhanced
firm profitability, Inman and Mehra (1993) found a
significant correlation between self-reported improvements in profitability and the adoption of JIT practices.
Balakrishnan et al. (1996) compared the profitability
of JIT and non-JIT firms. When using the broad categorization of JIT and non-JIT firms to make profitability comparisons, their study found no differences
in ROA. However, in sub-sample stratifications where

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R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

firms were characterized by high or low customer


concentrations and different cost structures, JIT firms
that had low customer concentrations exhibited significantly higher ROA than non-JIT firms. In an extension of Balakrishnan et al., Kinney and Wempe (2002)
compared the profitability of JIT to non-JIT firms in
a similar matched-pairs research design. In contrast,
their results showed that in the three post-JIT adoption years tested, ROA fell significantly less for the
JIT firms than for the non-JIT firms. They concluded
that JIT positively affected adopters profitability, and
that their conflicting evidence perhaps resulted from
a larger sample, whose sample firms were also proportionately larger in size. Both studies relied upon
publicly-available sources for JIT classification and
adoption year.
Callen et al. (2000) surveyed 100 Canadian plants
from the auto parts and electronic industries, classifying the plants as either JIT or non-JIT. Their
cross-sectional, multivariate analyses showed that JIT
implementation led to higher profit and contribution
margins and lower variable costs. In their 1995 longitudinal study of 55 JIT firms, Huson and Nanda
reported that JIT implementation increased firm performance. Examining a period of 4 years before and
after JIT adoption, they found that despite a decrease
in post-JIT adoption earnings per share and gross
profit margins, the decrease appeared to be less than
if the firms had not adopted JIT.
2.3. Research hypotheses
Milgrom and Roberts (1995, p. 191) demonstrated how modern manufacturing features similar to those measured in this study are mutually
complementary and the move towards adopting
them is a profit-maximizing response for firms. They
further pointed out that a firms strategy and structure
must move in a coherent pattern to meet the needs of
a changing environment. If JIT is not implemented as
part of a systematic and comprehensive transformation of production and operation procedures, and only
a few of the new, advanced manufacturing elements
reach optimal levels, the full benefits of change might
be diminished. Negative results also might ensue.
Many organizations have chosen not to embrace JIT
processes as part of their management and production strategies. While the JIT business model is not

appropriate in all firms, its non-adoption by others


also suggests that the costs of JIT may outweigh the
perceived realizable benefits. Even if management
considers these advanced manufacturing practices to
be cost beneficial, the organizational-change process
to adapt to new environmental conditions is slow,
painful, and uncertain (Milgrom and Roberts, 1995,
p. 180).
The reported results from prior research are inconclusive, but suggest cautious optimism about the relationship between JIT implementation and enhanced
financial performance. With careful attention to data
construct and model structure, this study provides evidence related to the tenuous relationship of JIT implementation and financial performance through two
testable hypotheses. Hypothesis H1 is evaluated using
a cross-sectional comparison of firms that have identified themselves as being engaged in various stages
of JIT process implementation, from no intention to
implement certain JIT practices to a full JIT adoption.
H1 . Firms that have implemented a higher degree of
JIT practices will experience higher profitability.
For the sample respondents that identified themselves as formally adopting JIT, it is assumed that integration of JIT methods into a companys operations is
a gradual, long-term and time-consuming process. It is
also assumed that JIT firms adopting a more comprehensive set of JIT practices will experience better performance over time. As such, hypothesis H2 is tested
using a pooled, cross-sectional regression model that
acknowledges the time-dependent adjustment process
inherent in the adoption of JIT management practices.
H2 . JIT firms that have implemented a higher degree
of JIT practices will experience higher profitability
over time than JIT firms that have implemented a lower
degree of JIT practices.

3. Research method
3.1. Survey and sample design
To test the research hypotheses, a five-page survey instrument was designed to collect specific information about the manufacturing operations, product

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

costing methods, information and incentive systems,


JIT practices employed, perceived results from JIT
implementation, and characteristics of the respondent
firms. The majority of questions were either categorical or interval Likert scales. To evaluate the survey
instrument for readability, completeness, and clarity, a
limited pretest was conducted by soliciting feedback
from several business professors and managers of five
manufacturing firms who were familiar with JIT practices. Appropriate changes were made to reflect their
comments and suggestions.
The sample of firms used to collect data was identified through a two-stage process. First, to ascertain
firms that were practicing JIT, an extensive search of
industry literature identified a sample of 169 US manufacturing firms that had implemented JIT. This sample was combined with a random sample of 600 firms
obtained from the Compaq Disclosure database that
included both JIT and non-JIT manufacturing firms using various degrees of JIT practices. All sample firms
were required to pass the following screen: a primary
two-digit SIC code within the manufacturing ranges
of 2039, sales between US$ 2 million and US$ 2 billion, significant manufacturing operations in the US,
and inclusion in the COMPUSTAT database. After accounting for duplications arising from firms that were
common to both the JIT-specific sample and the random sample and eliminating firms that did not meet
the preliminary screening criteria, 447 firms were included in the final sample.

387

During the first 4 months of 1997, initial telephone


contacts explaining the purpose of the research were
made with the sample firms. Receptionists were asked
either to provide a name or to direct the call to the
appropriate executive. The sample firm executives
were contacted personally, then faxed or mailed the
pre-tested survey instrument. To improve the response
rate, each sample firm was contacted a maximum of
three times over a period of 6 weeks. Out of the 447
firms surveyed, 254 returned completed survey instruments, for an overall response rate of 56.8%. One
of the returned surveys was unusable. The differences
in the means for responding (US$ 404 million) and
non-responding (US$ 380 million) firm sales were
not statistically significant. In addition, an ANOVA
comparing the means of the industry SIC codes (represented as dummy variables) for the non-responding
and responding firms showed no statistical differences. Thus, a response bias related to either firm size
or industry is not evident.
Respondents had titles equivalent to the Vice President of Operations, the Director of Manufacturing, or
the Plant Manager. The respondents averaged 17 years
of management experience, including 9 years in management with their current firm. Data from 253 valid
survey responses were collated with firm-level financial data obtained from the COMPUSTAT database. A
distribution of survey respondents by SIC classification is presented in Table 1. Firms that responded to the
survey are represented predominantly (72%) by four

Table 1
Distribution of two-digit SIC codes for sample firms
Industry

JIT firms frequency

20:
22:
25:
26:
27:
28:
30:
33:
34:
35:
36:
37:
38:
39:

1
2
5
1
1
4
3
3
7
17
24
6
20
1

6
3
1
1
0
20
2
12
7
24
37
5
35
5

7
5
6
2
1
24
5
15
14
41
61
11
55
6

2.8
2.0
2.4
0.8
0.4
9.5
2.0
5.9
5.5
16.2
24.1
4.3
21.7
2.3

95

158

253

100.0

food
textiles
furniture & fixtures
paper & allied products
printing/publishing
chemicals & allied products
rubber products
primary metals
fabricated metals
industrial machinery
electronics
motor vehicles & accessories
instrumentation
other manufacturing

Total

Non-JIT firms frequency

Sample frequency

Sample percent

388

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

industries: chemicals and allied products (SIC-28), industrial machinery (SIC-35), electronics (SIC-36), and
instrumentation (SIC-38). This distribution was similar to the total sample distribution. Ninety-five out of
the 253 firms in the cross-sectional sample identified
themselves as JIT firms and supplied their year of JIT
adoption.
To be included in the JIT sample used for the pooled
data analysis required to evaluate hypothesis H2 , a
firm had to first self-identify itself as having formally
implemented JIT, and then have financial (COMPUSTAT) data available for 2 years prior to the JIT adoption year and 3 years post-adoption. This time frame
is consistent with the prior research of Balakrishnan
et al. (1996) and Kinney and Wempe (2002). Their
work suggested that the majority of any direct effects
from JIT implementation would be captured in the 3
years following a firms adoption year. Therefore, only
firms that had implemented JIT before 1995 could be
included in this sample, reducing the number of firms
in the pooled analysis to 54, for a total of 324 observations (54 firms 6 years).
3.2. Measures of firm profitability
Three variants of profitability measures are obtained
from the COMPUSTAT database and used as the dependent variable for hypotheses testing: return on assets, return on sales, and cash flow margin (CFL),
which is measured as the ratio of income net of extraordinary items, depreciation, and amortization, to
sales.
3.3. Measures of the degree of JIT
implementation
In order to determine if JIT processes affect firm
profitability, the JIT independent variables are constructed to measure the extent to which a firm adopted
specific JIT practices. The prior literature suggests
that unsatisfactory results from JIT are associated with
incomplete and ineffective implementations (Clode,
1993; Daniel and Reitsperger, 1991; Gilbert, 1990;
Goyal and Deshmukh, 1992; Milgrom and Roberts,
1995). The potential synergic benefits are not fully realized until all elements of a JIT system are integrated
(White and Prybutok, 2001, p. 114). Often companies
identify themselves as JIT firms without a full un-

derstanding of what constitutes JIT practice, and with


only minimal efforts at changing their operations (see
Ransom, 2001).
One objective of this study is to determine what specific JIT elements are related to financial performance,
rather than to examine JIT implementation as an either/or proposition. Thus, it was necessary to delineate a set of measurable manufacturing practices that
reflect JIT. Although a universal set of JIT elements
remains to be specified within the research literature
(Davy et al., 1992; White and Ruch, 1990), different
practices deemed important to successful JIT adoption
are suggested in several studies (Koufteros et al., 1998;
Mehra and Inman, 1992; Moshavi, 1990; Sakakibara
et al., 1993; Spencer and Guide, 1995; Yasin et al.,
1997). White and Ruch (1990) found 10 consensus JIT
elements identified in the work of established JIT authors (e.g. Hall, Hay, Monden, Schonberger, Shingo,
and Suzaki). Described in previous research as encompassing JIT practices, these consensus elements
are used by White (1993), White et al. (1999), White
and Prybutok (2001), and Fullerton and McWatters
(2001, 2002) as JIT indicators. Although not all inclusive, these 10 practices are considered representative
of a comprehensive JIT implementation for the purposes of this study. They are designated as follows: focused factory, group technology, reduced setup times,
total productive maintenance, multi-function employees, uniform workload, kanban, JIT purchasing, total quality control, and quality circles. Definitions for
each of these practices, which were supplied to survey respondents, along with post-1990 research literature that supports their inclusion as part of a JIT
manufacturing environment are presented in Table 2.
As explained in the survey instrument, the term focused factory is consistent with the APICS definition
(1995) of a factory that focuses on simplifying its organizational structure and operations to coincide with
the firms competitive strategy. It is not restricted to
Skinners (1974) more narrow definition of a plant
that focuses explicitly on one task. The term uniform
workload refers to balancing the daily flow of work
through manufacturing operations.
Using the above-noted JIT indicators, 11 survey
questions asked respondents to identify their firms
degree of JIT implementation on the basis of a
six-point Likert scale, ranging from no intention of
implementing the identified JIT practice to its being

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

389

Table 2
JIT practices defined with literature support
JIT element

Definition

Referencesa

Focused factory

A production strategy that is based on corporate strategy. It centers


around simplifying the organizational structure, reducing the numbers of
products or processes, and minimizing the complexities of physical
constraints.

25, 10, 1316

Group technology

Collecting and organizing common concepts, principles, problems, and


tasks. It avoids unnecessary duplication through standardization. It
includes sequencing similar parts through the same machine and
creating manufacturing cells for processing.

18, 1018

Reduced setup times

Reduction of the time and costs involved in changing tooling and other
aspects required in moving from producing one product to another. This
reduces lot sizes and the need for buffer inventories.

15, 718

Total productive maintenance

Rigorous, regularly scheduled preventive maintenance and machine


replacement programs. Operators are actively responsible for the
maintenance of their machines.

17, 9, 1116, 18

Multi-function employees

Extended training of employees on several different machines and in


various tasks.

24, 7, 8, 10, 1216

Uniform workload

Reduction of the fluctuations of the daily workload through line


balancing, level schedules, stable cycle rates, and market-paced final
assembly rates.

15, 810, 1317

Kanban

A card or information system that is used to pull the necessary parts


into each operation as they are needed.

16, 811, 1317

JIT purchasing

A supplier participation and partnership program. Receiving just the


right parts just when they are needed. Suppliers, lot sizes, and
paperwork are reduced.

2, 3, 5, 6, 9, 10, 1215, 17

Total quality control

Quality is established as the top priority of the production system.


Involvement in quality effort required by all aspects of the organization.
Implementation of statistical quality control methods is an integral part
of establishing both process and product quality.

14, 6, 8, 1217

Quality circles

Small groups are formed from employees doing similar tasks. The
groups are created to encourage employee participation in problem
solving and decision making.

2, 7, 8, 1316

The following references are examples of literature that identify the specified element as part of a JIT production system: 1. Conner,
2001; 2. Davy et al., 1992; 3. Fullerton and McWatters, 2001; 4. Fullerton and McWatters, 2002; 5. Jusko, 1999; 6. Koufteros et al., 1998;
7. Mehra and Inman, 1992; 8. Monden, 1998; 9. Moshavi, 1990; 10. Sahin, 2000; 11. Sakakibara et al., 1993; 12. Spencer and Guide,
1995; 13. White and Ruch, 1990; 14. White, 1993; 15. White et al., 1999; 16. White and Prybutok, 2001; 17. Womack and Jones, 1996;
18. Yasin et al., 1997.

fully implemented. The questionnaire had two


questions representing total quality control: one for
process quality and one for product quality. In order to
investigate the possibility of a more parsimonious representation for JIT adoption in the empirical model, a
principal-components-based exploratory factor analysis was conducted across the 11 JIT categories to
identify common structural characteristics. Three

components of JIT implementation, with eigenvalues


greater than 1.0, were extracted from the orthogonally
rotated factor matrix, representing 63% of the total
variance in the data (refer to Table 3 for results of the
factor analysis). All of the 11 elements loaded greater
than 0.50 onto one of the three constructs, except for
quality circles, which was eliminated from further
testing.

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Table 3
Factor analysis (VARIMAX rotation), factor loadings for JIT variablesa
Cronbachs alpha
correlation coefficients

Factor 1 (M) JIT


manufacturing
0.831

Focused factory
Group technology
Reduced setup times
Productive maintenance
Multi-function employees
Uniform work load
Product quality improvement
Process quality improvement
Kanban system
JIT purchasing

0.740
0.770
0.706
0.668
0.501
0.731

Factor 2 (Q)
JIT quality
0.898b

Factor 3 (U) JIT


unique
0.524b

0.917
0.902
0.820
0.825

Note: n = 253.
a All loadings in excess of 0.300 are shown.
b Significant at P < 0.001.

The three resulting JIT factors are similar to those


identified in Davy et al. (1992), which were defined
as operating structure and control, quality implementation, and product scheduling. The first factor,
a manufacturing dimension, is comprised primarily
of indicators that explain the extent to which companies have implemented advanced manufacturing
techniques associated with JIT: focused factory, group
technology, reduced setup times, productive maintenance, multi-function employees, and uniform work
loads. This factor demonstrates the interrelatedness
of the streamlining components of an advanced manufacturing system. Standardization of tasks in a cellular type of balanced, continuous flow, where setup
times are minimal, works well in a focused factory
in which employees are cross-trained and responsible
for the maintenance of their machines (Sahin, 2000).
The second JIT factor represents a quality dimension
comprised of indicators that explain the extent to
which companies have implemented procedures for
improving product and process quality. Good quality
management and productive maintenance are keys to
JIT survival, with quality often referred to as the cornerstone of JIT (Banker et al., 1993; Imai, 1998; Sim
and Killough, 1998; Swanson and Lankford, 1998;
Young et al., 1988). The third factor is a uniquely
JIT dimension. It identifies JIT practices that describe
the extent to which companies have implemented
JIT purchasing and kanban. These two elements are
representative of the unique JIT practices related to

product scheduling, purchasing and delivering the


right quantities at the right time. The likelihood is low
that companies that are not fully committed to a JIT
program would adopt these practices. A description
of the specific survey questions1 that support these
JIT factors is found in Appendix A.
The factor solutions for the defined constructs support the construct validity of the survey instrument.
Multiple-question loadings for each factor in excess
of 0.50 demonstrate convergent validity (see Bagozzi
and Yi, 1988). In addition, discriminant validity is
supported, since none of the questions in the factor
analyses have loadings in excess of 0.30 on more
than one factor. In order to further test the construct
validity of the resulting constructs, the factor structures were cross validated through the use of split
samples (firms either declared as having implemented
JIT or those that had not). Similar loadings in the
cross-validation samples verified the initial underlying
patterns. Cronbachs alpha (1951) (or correlation coefficients where the construct has only two variables)
is used as the coefficient of reliability for testing the
internal consistency of the constructs validated by the
factor analysis. The correlation coefficients are significant, and the alpha coefficient exceeds the standard
of 0.70 for established constructs (Nunnally, 1978), as
shown in Table 3.
1 Note: a copy of the questionnaire can be obtained from the
leading author.

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

3.4. Control variables


In addition to the JIT-specific dimensions identified
above, the model includes four variables (inventory
margin, product life cycle, innovation, and organizational structure) to control for non-JIT factors that are
most likely to influence profitability. The literature
discusses the strong relationship between inventory
and JIT. The general inference is that lower inventory
levels are a consequence, rather than a determinant of
JIT (Chapman and Carter, 1990; Davy et al., 1992;
Green et al., 1992; Hall, 1987; White and Ruch, 1990).
Droge and Germain (1998) determined that the levels
of JIT and inventory consistently have an inverse relationship, regardless of the contextual environment.
Moreover, as demonstrated by Cachon and Fisher
(1997), reducing inventories should have a positive
effect on profitability. Minimizing inventory frees up
working capital and reduces warehousing costs. These
lower costs increase cash flows and profitability ratios,
such as ROA, which measure profit margins against
assets.
To validate the relationship between JIT practices
and inventory levels, a separate regression was run
with inventory margin as the dependent variable and
JIT practices as the independent variables. Results
demonstrated a strongly significant inverse relationship as expected (not shown). Inventory margin (IY)
is included in the regression models to control for reduced inventory effects on profitability created from
the implementation of JIT. This measure representing
total inventory divided by net sales is obtained from
the COMPUSTAT database.
Hofer and Schendel (1978, p. 98) suggested that
the most fundamental variable in determining an appropriate business strategy is the stage of the product life cycle (PLC), which identifies four stages
through which products travel: introduction, growth,
maturity, and decline. A firms strategic responses are
related to the stage of the product life cycle in which
the majority of its production is occurring (Williams
et al., 1995). Early in the growth cycle, new technology and growth take precedence over profit (Nevens
et al., 1998). Firms with well-established main products have more stable profits than those firms whose
products are in the initial production stages. Thus, mature products are expected to be at the peak of their
earning power (Comiskey and Mulford, 1993; Nevens

391

et al., 1998; Yasukata and Kobayashi, 2001). To determine the PLC of the respondent firms, the survey
instrument asked the respondents to select in which
stage of the PLC, based on their main products, would
they classify their firm: introductory, growth, maturity,
or other. The responses were coded as 1 if the respondent firm answered maturity stage, and 0 if otherwise (introductory, growth, or other). This dummy
variable was used as a control variable for PLC.
Innovation is critical to the strategy of successful
organizations. Entrepreneurial actions, if supported by
top management and implemented effectively, help
firms to create wealth by staying ahead of the competition (Ireland et al., 2001). By effectively evaluating
and understanding their market place, technologically
adept and innovative firms have increased sales and
profits (Judd, 2000; Sivadas and Dwyer, 2000). Ittner
and Larcker (1997) reported that innovation had a significant effect on profitability. However, the impact
was industry specific. Innovation (IN) is measured by a
firms response to the five-point Likert-scaled question
on the survey instrument as to whether the firm was
a leader or a follower in product technology, product
design, and process design (Ittner and Larcker, 1997).
Organizational structure also can influence a
firms ability to be flexible and make major operational changes. Decentralization refers to the level
of decision-making authority that is found in a firm
(Aiken and Hage, 1968). If a firm is highly centralized, employees will be much less involved in decision making and organizational changes than if it is
more decentralized. Decentralization allows firms to
take better advantage of and respond more quickly to
opportunities and events through decision making at
the level of day-to-day activities (Sabath et al., 2001).
Woodwards (1980) seminal work demonstrated that
organizational success was contingent upon the right
combination of organizational structure and manufacturing technology. More recent studies have reported
inconclusive results as to the relationships among JIT,
decentralization, and firm performance (Claycomb
et al., 1999; Germain et al., 1994). Kalagnanam
and Lindsay (1998) showed how adapting more organic (decentralized) organizational structures led
to greater performance benefits from JIT adoption.
Additionally, Alles et al. (1995) displayed how JIT
adoption and changes in the organizational structure
have complementary effects, especially as JIT makes

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R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

the production process more transparent. The firms


organizational structure is identified by responses to
questions on decentralization, measured by five-point
Likert-scales.
A description of the specific survey questions that
support the control variables of innovation and organizational structure is found in Appendix A. In addition,
the six survey questions related to firm innovation and
organizational structure were reduced and summarized
using factor analysis. These converged into the two
anticipated distinct factors (IN and S) with eigenvalues in excess of 1.0, accounting for 66% of the total
variance in the data. Refer to Table 4 for the rotated
factor solution.
While some firms may have implemented certain
JIT practices, they may not identify themselves specifically as a JIT firm. One contribution of this study is that
it tests the financial effects from implementing specific JIT elements, rather than assuming each firm is
either completely representative of a JIT firm or not. It
is important, therefore, that these individual measures
capture the JIT concept as understood in the manufacturing environment. In addition to identifying the degree of implementation of the individual JIT practices,
respondents were asked to indicate whether or not (yes

Table 4
Factor analysis (VARIMAX rotation) factor loadings for control
variablesa
Cronbachs alpha

Organizational structure
Overall company
Individual operations
Individual departments

Factor 1 (S)
organizational
structure
0.793

Factor 2 (IN)
innovation
0.677

0.703
0.877
0.844

Firms innovation strategy in


Product technology
Process design
Product design

0.763
0.604
0.815

Note: n = 253.
a All loadings in excess of 0.300 are shown.

or no) they had formally implemented JIT. Descriptive


statistics depicting the means for the variables tested
in the model for the total sample, self-identified JIT,
and non-JIT firms are shown in Table 5. Statistical differences between the means of the JIT and non-JIT
firms are also indicated. The ANOVA comparison of
the means between the JIT and non-JIT firms consistently shows highly significant differences for the

Table 5
Descriptive statistics for model variables and comparison of means between JIT firms and non-JIT firms
Full sample means

JIT firms means

Non-JIT firms means

ANOVA F-value

Significant F

measuresa

Profitability
Return on sales (ROS)
Return on assets (ROA)
Cash flow margin (CFL)
JIT variablesb
JIT manufacturing (M)
JIT quality (Q)
JIT unique (U)
Control variables
Organizational structure (S)c
Innovation (IN)d
Product life cycle stage (P)e
Inventory margin (IY)a
Firm size (net sales)a

5.071
1.490
0.801

1.294
6.212
5.051

8.907
1.357
4.351

3.287
4.310
3.264

0.071
0.039
0.072

3.412
4.665
3.233

4.055
5.026
4.263

3.020
4.446
2.606

54.975
17.809
114.106

0.000
0.000
0.000

2.860
3.694
0.494
17.649

3.075
3.940
0.473
14.483

2.731
3.543
0.506
19.570

7.391
14.467
0.257
11.115

0.007
0.000
0.613
0.001

465.276

800.109

264.489

19.801

0.000

Notes: n = 253.
a Information provided from COMPUSTAT database.
b Possible responses: no intention = 1; considering = 2; beginning = 3; partially = 4; substantially = 5; fully = 6.
c Possible responses: highly centralized = 1, . . . , 2, . . . , 3, . . . , 4, . . . , 5 = highly decentralized.
d Possible responses: follower = 1, . . . , 2, . . . , 3, . . . , 4, . . . , 5 = leader.
e Possible responses: 1 = mature; 0 = introductory, growth, and other.

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

JIT variables, suggesting that the JIT measures are


representative of JIT practices. Significance also exists in the profitability measures when examining the
firms as either JIT or non-JIT firms. This result is in
agreement with the findings of Kinney and Wempe
(2002).

4. Research results and discussion


4.1. Cross-sectional model tests and results
The empirical model of the relationship between
the degree of JIT implementation and firm profitability in this study draws upon the relationships theorized
and described by Milgrom and Roberts (1995). Their
framework analyzes the relationships and impact on
firm performance of the various parts of the manufacturing system. They suggest that organizations often
experience a simultaneous shift in competitive strategy
along with various elements of organizational design
when they move from mass production to JIT/TQM
manufacturing. In addition, synergies, or complementarities, often arise with clusters of these elements that
improve overall performance. . . (Sim and Killough,
1998, pp. 328329). Tests of hypotheses are formulated in the context of restrictions placed on coefficients in multiple linear regression models (MLR).
The cross-sectional model used to evaluate hypothesis
H1 is presented as follows:
JIT
JIT
JIT
C
i,j = 0,j + 1,j
Mi + 2,j
Qi + 3,j
Ui + 1,j
Si
C
C
C
+ 2,j
INi + 3,j
Pi + 4,j
IYi + i

where i,j is the jth measure of profitability (ROA,


ROS, CFL) for the ith firm, Mi the JIT manufacturing
measure for the ith firm, Qi the JIT quality measure
for the ith firm, Ui the JIT unique measure for the ith
firm, Si the organizational structure measure for the
ith firm, INi the innovation measure for the ith firm, Pi
the product life cycle dummy variable for the ith firm,
IYi the inventory margin measure for the ith firm.
The external data of profitability and inventory measures for the cross-sectional model corresponded to
the 1997 internal data collected. To partition the control variables from the explanatory variables, hierarchical multiple linear regressions were run independently for each of the profitability measures. In each

393

regression, the four control variables were first entered


into the equation. Step two added the JIT independent
variables and contributes to the understanding of the
discrete impact of their explained variances.
Before estimating the model, tests of potential multicollinearity among the set of independent variables
were performed. The variance inflation factor (VIF)
was used to evaluate evidence of collinearity. None
of the VIFs exceeded 2.0, which is well below the
conventional critical value of 10 at which point multicollinearity becomes problematic (Neter et al., 1983).
An examination of the tolerance of the variables and
the condition indices associated with the eigenvalues
also support the lack of collinearity. Probability plots
and the KolmogorovSmirnov (Smirnov, 1948) test
demonstrated that the data were normally distributed.
In addition, the models had similar results when outliers were excluded from the testing.
Based on the F-statistic, each of the MLR equations
is significant at a 0.01 level of significance. The adjusted R2 for the three performance measures ranges
from 10.1% for ROA to 13.6% for CFL, indicating
that other significant measures affecting firm performance have not been captured in the equations. Both
the control variables and the JIT variables make a significant separate contribution to the model, although
the JIT variables contribute less than one-third to the
explained variances (refer to Table 6).
4.1.1. JIT explanatory variables
The empirical results presented in Table 6 are generally consistent across all three profitability measures
and demonstrate support for hypothesis H1 . Although
the majority of the explained variances is from the
control variables, JIT variables make a significant
contribution to each of the models, suggesting that
the relationship between JIT implementation and
financial performance is robust across different indicators of firm profitability. The JIT manufacturing
variable makes a significant contribution to the profitability measures. These results substantiate the conclusions of Inman and Mehra (1993) and Kinney and
Wempe (2002), but contradict some of the findings
of Balakrishnan et al. (1996), which found no differences between the financial performances of JIT and
non-JIT firms unless controlled by other variables.
The unexpected inverse relationships found between quality and profitability provide additional

394

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

Table 6
Regression results for the relationship between JIT practices and
firm profitability
ROS (j = 1)

ROA (j = 2)

CFL (j = 3)

Constant: t

0.449

0.266

0.493

Step 1
R2
F

0.118
7.659

0.090
5.650

0.125
8.164

4.290
2.312

6.799
3.082

Organizational structure
C
7.089
S: 1,j
S: t
2.960
Innovation strategy
C
5.873
IN: 2,j
IN: t
2.004

2.009
0.885

5.119
1.902

Product life cycle


C
P: 3,j
P: t

10.383
2.179

8.579
2.324

9.790
2.232

Inventory margin
C
IY: 4,j
IY: t

0.470
2.718

0.354
2.642

0.463
2.913

Step 2
R2
Change in R2
F

0.157
0.039
3.480

0.128
0.038
3.325

0.162
0.037
3.308

JIT manufacturing practices


JIT
M: 1,j
6.183
M: t
2.542

4.545
2.409

5.943
2.661

JIT quality practices


JIT
Q: 2,j
5.446
Q: t
2.375

4.018
2.260

4.454
2.088

1.358
0.992

1.029
0.634

0.101
4.752

0.136
6.224

JIT unique practices


JIT
U: 3,j
U: t

1.509
0.855

Overall model statistics


Adjusted R2
0.131
F value
6.010
Note: n = 253.
P < 0.10.
P < 0.05.
P < 0.01.

insight into the on-going and widespread debate on


the costs of quality. The JIT variable measuring the
implementation of quality practices is significant and
negative at the 0.05 level for all three profit equations.
While some early references espoused that quality is
free (Crosby, 1979), more recent studies suggest otherwise. Nakamura et al. (1998) discussed anecdotal

evidence that some firms have focused excessively on


quality programs without adequate consideration of
costs. Cammarano (1996) explained that companies
frequently lack the vision of the total manufacturing
process and concentrate on improving only one aspect, such as quality. They may achieve their goal
of improving quality at the expense of higher costs.
Safizadeh et al. (2000) examined specific trade-off
concepts in manufacturing strategies. Their findings
indicated a significant inverse relationship between
cost and quality.
The third explanatory JIT variable, JIT unique (U),
is most analogous to firms that have formally adopted
JIT. Its informational contribution to the model is inconsequential, showing no statistically significant association with measures of firm profitability. The differing results of the three JIT variables suggest that
certain JIT practices will have a greater influence on
profitability than will others.
4.1.2. Control variables
The results outlined in Table 6 show that the four
control variables account for the majority of the
explained variances, and each of them makes a significant contribution to the regression equations. As
expected, inventory level has a significant, negative
relationship with all of the profitability measures. One
of the strongest motivators for implementing JIT is to
reduce inventory and correspondingly to reduce costs.
The results in this study provide direct evidence that
lower inventory margins are associated with increased
financial performance.
As the regression results of Table 6 demonstrate,
both organizational structure and PLC have significant relationships to firm financial performance for
all three of the profitability measures. The firms that
are more decentralized and consider themselves to be
in the mature stage of the PLC perform better. As explained by Nevens et al. (1998), the profit model for a
mature firm works better in a more decentralized organizational structure where decision making is pushed
down the line to those managing operations. An intriguing result is the negative association of innovation
with the profit measures of ROS and CFL. This negative relationship could indicate that the sample firms
that are more stable and less willing to lead out with
risky and expensive innovations perform better. The
lack of top management support and/or ineffective

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

implementation of innovations also might lead to


failed efforts (Ireland et al., 2001). Alternatively, as
Schrage (2000) proposed, a glut of innovation currently exists, much of which hurts rather than boosts
a firms profit margin.
4.2. Time-series model tests and results
In order to analyze the time-dependent structure
of firm profitability as it relates to the implementation of JIT practices, a pooled cross-sectional,
time-series regression model is used to evaluate hypothesis H2 . Time-series data are rich and unique,
allowing for firm comparison to itself over time
(Bernhardt et al., 2000). To address concerns that
the data are likely to exhibit violations to the classical linear regression model assumptions of homoscedasticity and autocorrelation, a generalized
least squares (GLS) cross-sectionally heteroscedastic
and timewise autoregressive model (Kmenta, 1986)
is estimated. This approach, which is frequently used
in time-series studies (Droms and Walker, 1994;
Hill and Phan, 1991; Kashlak et al., 1998; Krishnan
and Largay, 2000), combines the assumptions made
about cross-sectional observations (regression disturbances are mutually independent, but heteroscedastic) with those made about time-series (disturbances
are autoregressive, but not heteroscedastic). The
observations are subjected to a double transformation for removing both autocorrelation and heteroscedasticity, before applying the conventional
ordinary least squares methodology (Kmenta, 1986,
p. 509).
To capture the linear relationships, as well as the
property of increasing (or decreasing) returns to the
degree of JIT implementation, hypothesis H2 is formulated in the context of a quadratic panel model specification as follows:
i,j,t =

5


0,k,j Dk +

k=0

5


5


JIT
1,k,j
Mi Dk

k=0
JIT
2,k,j
Qi Dk +

k=0

Dk +

5


JIT
3,k,j
Ui

k=0
5

k=0

JIT
4,k,j
Mi2 Dk +

5

k=0

JIT
5,k,j

Q2i Dk +
+

C
2,j
INi

5


395

JIT
C
6,k,j
Ui2 Dk + 1,j
Si

k=0
C
+ 3,j Pi

C
C
+ 4,j
IYi,t + 5,j
Ci + i,t

where i,j,t is the jth measure of profitability (ROA,


ROS, CFL)
 for the ith firm in period t (t = 1, . . . , 6),
1 when k = 0 or when k = t, t = 1, . . . , 5
Dk =
0 otherwise
and Ci is the Top Management Commitment index
for the ith firm. All other variables are as specified in
hypothesis H1 .
JIT implementation levels are not observed in every
sample period; therefore, the time-dependent structure
of JIT implementation processes is captured through
the specification of dummy variables D1 , D2 , D3 , D4 ,
and D5 . The dummy variables are used as indicators
of elapsed time surrounding the JIT adoption year. D1 ,
and D2 are indicators for the 2 years preceding adoption, D3 is an indicator of the year of adoption, and D4 ,
and D5 reflect the 2 years following JIT implementation. Year 6, which is the third year of post-JIT adoption, is the omitted variable benchmark, D0 , which
makes possible the dummy variable comparisons of
change in profitability levels over time. The quadratic
specification included in the model allows for identification of the turning point at which the marginal
return to implementing JIT is zero. If the quadratic
coefficients are significant, firms should expect that
marginal returns will not remain constant as the degree of JIT implementation changes. In this vein, the
quadratic model specification is critical in addressing
the question of whether, and how the degree of implementation of JIT practice affects firm profitability.
Successful implementation of JIT requires complete support of the firms top executives (Ahmed
et al., 1991). According to Willis and Suter (1989),
the project is doomed if top management does not
support the JIT philosophy. In any change effort,
management must be willing to devote the necessary
resources and provide the proper training and motivation for it to reap its potential benefits. The level of
top management commitment to JIT implementation
(C), as measured by a five-point Likert scale, is added
to the pooled model as a control variable. Only those
respondents who indicated that they formally had implemented JIT were asked to assess top-management
commitment; therefore, the latter could not be used

396

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

as a control variable in the full-sample cross-sectional


analysis. In addition, the four control variables used
in the cross-sectional model are included in the longitudinal analysis.
Results of the pooled cross-sectional, time-series
regression are shown in Tables 79. To facilitate interpretation of the regression results, two conventions
are used in reporting the time-related effects. First,
with the exception of the constant terms, for each
variable that interacts with a time dummy variable,
JIT + JIT , m =
the combined coefficients (i.e. m,0,j
m,k,j
1, . . . , 6; k = 1, . . . , 5; and j = 13) are reported,
along with their respective calculated t-statistics
(based on calculated standard errors from the variance/covariance matrix). This convention facilitates
the interpretation of the coefficients direct effect on
profitability, rather than their effect on profitability
relative to the omitted variable benchmark. Second, the turning-point statistics are reported for the
curvilinear effects. The turning-point statistics are
calculated by taking the derivative of the regression
equation with respect to the quadratic variable, setting
the derivative equal to zero and solving for the value
of the quadratic variable as shown in the following
JIT + JIT )/2(JIT + JIT ), m =
equation: (m,0,j
n,0,j
m,k,j
n,k,j
13; n = m + 3; k = 1, . . . , 5; and j = 13. This
provides the value of the variable where the slope
is zero (turning point). Investments in JIT practices
beyond this point will have increasing (decreasing)
returns if the coefficient is positive (negative). The
Buse Raw Moment R2 (Buse, 1973) is 0.499 for dependent variable ROS, 0.602 for dependent variable
ROA, and 0.710 for dependent variable CFL. The
DurbinWatson D-statistic, which is a standard measure for evaluating serial correlation, indicates that
the GLS estimation technique adequately corrected
for potential serial correlation.
4.2.1. JIT explanatory variables
Results for the three time-series regression models
show interesting and fairly consistent patterns among
the JIT explanatory variables. The JIT quality and
JIT unique indicators offer more statistical validity to
the model than the JIT manufacturing indicator. This
result is in contrast to the cross-sectional results in
which JIT manufacturing is generally significant. Coefficients on the quadratic JIT unique indicator provide the strongest argument for increasing marginal

returns to investment in JIT processes. Turning-point


values are generally smallest in the post-adoption year
3 for the JIT quality and JIT unique indicators. None
of the turning points in the post-adoption years for
investments in unique JIT practices exceed 4.0 on
the 6.0 scale. These declining turning-point values
suggest that firms are able to extract the benefits of
even modest implementations, as they gain experience with the JIT system. Thus, the trend results imply that the degree to which some JIT practices are
implemented have long-term consequences for firm
profitability.
Table 8 indicates that in the first year prior to JIT
adoption, those firms that had implemented a higher
degree of JIT manufacturing practices had significantly lower ROA than in the post-JIT adoption years.
Beyond that, no evidence exists that the degree to
which JIT firms have implemented JIT manufacturing
practices affects long-term financial returns.
The JIT quality variable exhibits the most significant linear relationship with firm profitability.
Interestingly, the statistically significant coefficients
demonstrate that higher investments in quality contribute to stronger profitability in the pre-implementation years. This divergent relationship ceases to exist
in post-adoption years, as indicated by insignificant
Q coefficients across all of the models. Specifically,
Table 8 shows that firms with higher implementation
degrees of quality practices had more positive ROAs
in the JIT pre-adoption and adoption years than in the
JIT post-adoption period. For the quadratic terms, a
significant relationship also exists between the degree
of JIT implementation and ROA in the years before
JIT adoption, but not after. As expected, the signs of
the quadratic term coefficients are the opposite of the
signs for the linear coefficients. Given the signs for
both the linear and quadratic Q coefficients, returns
from JIT quality investments are positive, but declining in both the degree of implementation and over
time. These results suggest that the costs incurred in
the first few years of implementing quality improvements may be such that they offset any potential
financial gains associated with JIT implementation.
In the cross-sectional, full sample results of hypothesis H1 , JIT unique demonstrated no significance.
However, the pooled time-series analysis shows
some financial improvement for those JIT firms that
have implemented higher degrees of kanban and

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

397

Table 7
Pooled cross-section time-series regression results for the relationship between JIT practices and return on sales
Control
variables
Constant
Constant: 0,k,1
Constant: t
JIT manufacturing practices
JIT
JIT
Ma : 1,0,1
+ 1,k,1
M: t
JIT
JIT
M2 a : 4,0,1
+ 4,k,1
M2 : t

Turning point
JIT quality practices
JIT
JIT
Qa : 2,0,1
+ 2,k,1
Q: t
JIT
JIT
+ 5,k,1
Q2 a : 5,0,1
Q2 : t

Pre 2 (k = 1)

JIT unique practices


JIT
JIT
Ua : 3,0,1
+ 3,k,1
U: t
JIT
JIT
U2 a : 6,0,1
+ 6,k,1
2
U :t

Turning point
Organizational structure
C
S: 1,1
S: t

0.22
0.47

Innovation strategy
C
IN: 2,1
IN: t

0.27
0.49

Product life cycle


C
P: 3,1
P: t

0.57
0.64

Inventory margin
C
IY: 4,1
IY: t

0.69
2.24

Adopt (k = 3)

Post 1 (k = 4)

Post 2 (k = 5)

Post 3 (k = 0)

8.79
0.46

7.80
0.43

6.61
0.39

3.47
0.23

6.75
0.56

7.42
0.47

0.73
0.09

2.11
0.28

2.90
0.39

1.10
0.16

3.86
0.60

2.90
0.61

0.11
0.18

0.28
0.53

0.22
0.42

0.11
0.20

0.48
0.88

0.25
0.43

3.39

3.73

6.50

5.11

4.05

5.73

11.00
1.99

7.04
1.37

8.30
1.75

3.84
0.84

4.57
0.97

4.07
0.80

0.79
1.42

0.91
1.65

0.43
0.78

0.46
0.83

0.48
0.84

1.11
1.95

Turning point

Pre 1 (k = 2)

4.95

4.46

4.54

4.44

4.95

4.28

6.87
1.11

6.59
1.09

6.68
1.17

5.01
0.95

0.26
0.06

5.84
1.57

0.81
1.86

0.76
1.81

0.79
1.90

0.66
1.58

0.20
0.47

0.79
1.84

4.26

4.35

4.23

3.80

0.66

3.68

Top management commitment


C
0.91
C: 5,1
C: t
1.64
DurbinWatson D-statistic
1.65
Buse Raw Moment R2
0.499
Model F statistic
6.17
Note: n = 324 (number of firms = 54; number of years for each firm = 6).
a For k = 0, the reported estimate is solely JIT , m = 1, . . . , 6.
m,0,1
P < 0.1.
P < 0.05.
P < 0.01.

398

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

Table 8
Pooled cross-section time-series regression results for the relationship between JIT practices and return on assets
Control
variables
Constant
Constant: 0,k,2
Constant: t
JIT manufacturing practices
JIT
JIT
+ 1,k,2
Ma : 1,0,2
M: t
JIT
JIT
+ 4,k,2
M2 a : 4,0,2
M2 : t

Pre 2 (k = 1) Pre 1 (k = 2) Adopt (k = 3) Post 1 (k = 4) Post 2 (k = 5) Post 3 (k = 0)

58.07
2.98

0.34
0.02

36.00
2.02

7.05
0.42

14.46
1.04

22.59
1.52

0.50
0.10

10.6
2.29

0.13
0.03

2.40
0.52

1.36
0.29

3.95
0.82

0.05
0.08

0.35
0.63

0.19
0.33

0.48
0.82

3.39

3.66

4.08

0.15
0.28

Turning point

1.61

JIT quality practices


JIT
JIT
Qa : 2,0,2
+ 2,k,2
Q: t
JIT
JIT
+ 5,k,2
Q2 a : 5,0,2
Q2 : t

Turning point
JIT unique practices
JIT
JIT
Ua : 3,0,2
+ 3,k,2
U: t
JIT
JIT
U2 a : 6,0,2
+ 6,k,2
2
U :t

Turning point
Organizational structure
C
S: 1,2
S: t

0.96
2.23

Innovation strategy
C
IN: 2,2
IN: t

0.09
0.16

Product life cycle


C
P: 3,2
P: t

0.34
0.41

Inventory margin
C
IY: 4,2
IY: t

12.79
3.6

Top management commitment


C
C: 5,2
C: t
DurbinWatson D-statistic
Buse Raw Moment R2
Model F statistic

1.41
2.50
3.77

N/A

19.09
4.71

9.45
2.35

11.38
2.87

1.53
0.39

4.70
1.18

0.22
0.05

2.00
4.44

1.17
2.65

1.32
3.04

0.02
0.04

0.33
0.76

0.29
0.64

4.76

4.02

4.30

7.12

0.38

4.62
1.25

11.12
3.33

5.85
1.76

2.72
0.82

2.63
0.79

5.19
1.41

0.61
1.43

1.29
3.33

0.70
1.82

0.39
1.02

0.10
0.26

0.76
1.80

3.77

4.30

4.18

3.46

13.09

3.40

0.73
1.79
1.63
0.620
9.64

Note: n = 324 (number of firms = 54; number of years for each firm = 6).
a For k = 0, the reported estimate is solely JIT , m = 1, . . . , 6.
m,0,2
P < 0.1.
P < 0.05.
P < 0.01.

N/A

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

399

Table 9
Pooled cross-section time-series regression results for the relationship between JIT practices and cash flow
Control
variables
Constant
Constant: 0,k,3
Constant: t
JIT manufacturing practices
JIT
JIT
Ma : 1,0,3
+ 1,k,3
M: t
JIT
JIT
M2 a : 4,0,3
+ 4,k,3
M2 : t

Turning point
JIT quality practices
JIT
JIT
Qa : 2,0,3
+ 2,k,3
Q: t
JIT
JIT
+ 5,k,3
Q2 a : 5,0,3
Q2 : t

Turning point

19.50
1.00

6.74
0.37

18.86
1.08

4.15
0.26

1.12
0.87

15.73
1.03

2.28
0.26

1.78
0.21

1.70
0.21

2.07
0.27

0.81
0.12

3.55
0.69

0.34
0.54

0.32
0.55

0.09
0.16

0.31
0.54

0.07
0.12

0.60
0.96

3.32

2.78

9.21

3.37

5.73

2.99

11.18
2.47

6.72
1.60

6.01
1.62

2.58
0.74

6.15
1.60

2.40
0.52

1.21
2.37

0.82
1.64

0.70
1.41

0.35
0.71

0.57
1.14

0.37
0.74

4.09

4.26

3.63

5.38

3.22

8.03
1.50

7.38
1.46

3.67
0.80

8.30
2.26

4.61

JIT unique practices


JIT
JIT
Ua : 3,0,3
+ 3,k,3
U: t

9.32
1.66

JIT
JIT
U2 a : 6,0,3
+ 6,k,3
2
U :t

Turning point
Organizational structure
C
S: 1,3
S: t
Innovation strategy
C
IN: 2,3
IN: t

Pre 2 (k = 1) Pre 1 (k = 2) Adopt (k = 3) Post 1 (k = 4) Post 2 (k = 5) Post 3 (k = 0)

10.44
1.89

1.08
2.49

1.23
2.94

0.98
2.37

0.96
2.32

0.64
1.52

1.09
2.52

4.32

4.23

4.08

3.83

2.89

3.82

0.25
0.63
0.76
1.34

Product life cycle


C
P: 3,3
P: t

0.46
0.50

Inventory margin
C
IY: 4,3
IY: t

1.92
0.53

Top management commitment


C
C: 5,3
0.78
C: t
1.48
DurbinWatson D-statistic
1.68
Buse Raw Moment R2
0.710
Model F statistic
15.13
Note: n = 324 (number of firms = 54; number of years for each firm = 6).
a For k = 0, the reported estimate is solelyJIT , m = 1, . . . , 6.
m,0,3
P < 0.1.
P < 0.05.
P < 0.01.

400

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

JIT purchasing. Linear coefficients for variable U in


post-adoption year three are all negative, significantly
so for the cash-flow model. Although a negative relationship to profit exists for those firms that have implemented higher degrees of JIT unique practices, the
results suggest an improvement from a significantly
lower pre-adoption profitability level. In addition, the
quadratic coefficients are all positive and indicate
increasing marginal returns as the level of JIT implementation rises. Tables 79 show turning points
in the 3.43.8 range for post-adoption year 3, indicating rising returns to JIT unique investments over
time, even for modest implementation of JIT unique
practices.
4.2.2. Control variables
Except for inventory margins, the control variables are relatively unimportant contributors to the
time-dependent models (refer to Tables 79). Lower
inventory levels have a significant effect on ROA and
ROS, but not CFL. The insignificant results for the
cash-flow model may be related to inventory carrying
costs. Lower inventory levels would translate into
diminished space requirements for inventory storage.
These costs generally are expensed through depreciation. Decreasing depreciation expense over time
would influence profitability measures of ROA and
ROS, but would not affect cash flows directly.
The added control variable in hypothesis H2 is the
level of commitment to JIT by top management. The
coefficient is positive and significant only for the ROA
profitability model. Earlier descriptive survey studies
have found the lack of support from top management
to be a serious problem in the JIT implementation
process (Ansari and Modarress, 1986; Celley et al.,
1986; Im, 1989; Lee, 1997). An ANOVA examining
the relationship between JIT implementation and top
management support is significant to P < 0.01 for all
of the JIT variables (not shown). However, the degree
of commitment to JIT implementation by top management appears to have minimal effect on the three
selected measures of firm performance.

5. Summary
According to its proponents, JITs global management philosophy of waste elimination and continu-

ous improvement leads to more efficient operations.


Managers act rationally in adopting and supporting
JIT implementation when these operating efficiencies
translate into improved financial performance. The
principal objective of this research has been to determine, from both a static and time-dependent perspective, if JIT practices make a positive contribution to
firm profitability.
The results of hypothesis H1 provide empirical support to the premise that firms that implement higher
degrees of JIT manufacturing practices should outperform competitors who do not. A positive relationship exists between firm profitability and the degree to
which waste-reducing production practices, such as reduced setup times, preventive maintenance programs,
and uniform workloads, are implemented. These findings complement the views of Womack and Jones
(1996) that lean enterprises employing JIT manufacturing techniques are consistently more profitable than
their counterparts.
The research data indicate that the implementation
of a greater degree of JIT quality practices decreased
sample firm profitability. These results are not conclusive, since they may imply either that the degree of
implementation of JIT quality indicators reduces profitability, or that firms with low profitability recognize
their strategic disadvantage and increase their focus
on quality improvement by implementing JIT quality
processes. Schonberger (1986) and many other proponents of TQM claimed that the trade-off between quality and cost was a myth. TQM advocates contended
that leaders in cost reduction were also leaders in quality and vice versa. Hendricks and Singhal (1997) found
that after winning quality awards, TQM sample firms
outperformed non-TQM sample firms. Alternatively,
Hill (1993) described the demise of the Wallace Co.,
after sustaining unrecoverable losses from heavy expenditures on quality that had contributed previously
to its winning of the Malcolm Baldrige National Quality award. Rust et al. (1995) outlined an approach to
evaluate quality improvement efforts, noting the disparate validity of such investments.
The JIT unique measure demonstrates no significant relationship with profitability. The diverse contribution of the three JIT variables to profitability may
provide partial explanation for the inconsistent results
of earlier studies in which firms were classified as
either JIT or non-JIT. The examination of individual

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

components of JIT processes and their degree of implementation provides insights into which specific JIT
techniques affect firm financial performance.
The results of hypothesis H2 indicate increasing
marginal returns to long-term JIT investment, especially for unique JIT practices such as kanban and JIT
purchasing. In contrast, the insignificant association in
the full cross-sectional, static model suggests that the
benefits of these JIT practices are realized only over
time due to their higher implementation costs. Evidence from hypothesis H2 also suggests caution when
implementing product- and process-quality improvements, as potential trade-offs between cost and quality
can affect financial performance negatively. Reduced
firm profitability can ensue when those responsible for
quality costs are not accountable for overall production costs and the costs that they impose on other activities.
Specific limitations might reduce the generalizability and applicability of the research findings. First, a
necessary assumption in survey research is that the
respondents had sufficient knowledge to answer the
items, and that they answered the questions conscientiously and truthfully. Respondents might have been
unfamiliar with questionnaire terms used to describe
JIT methods, and reluctant to take the necessary time
to examine the attached glossary explaining the JIT
terminology. Second, an important element of this survey instrument is capturing the degree of JIT implementation. The 11 JIT indicators on the survey were
supported through a thorough study of JIT literature;
yet, they might not have been completely indicative of
actual company practices. Finally, while the majority
of the sample firms were selected through a random
process, as in Balakrishnan et al. (1996) and Kinney
and Wempe (2002), the identification of the JIT sample firms precluded random selection. The diversion
from completely random sample selection might make
the test sample non-representative of other US manufacturing firms.
This study explains a small subset of factors affecting financial performance. Future research extending the time-series to include additional years of
post-adoption data would provide fresh insights into
the sustainability of financial performance in a JIT
environment. Research is also necessary to capture
more fully the complementarities that exist amongst
JIT implementation and other organizational policies

401

and procedures, including the economic and environmental contexts that influence both the choice of different manufacturing strategies and their subsequent
impact on financial performance.
Acknowledgements
This paper is based on a portion of the first authors
doctoral dissertation completed at the University of
Utah. The valuable input from graduate committee faculty is gratefully acknowledged, as well as the comments from colleagues, reviewers, discussants, and
participants at the Management Accounting Research
Conference (January 2000) and the ASAC-ISAM Conference (July 2000).
Appendix A. Survey items measuring JIT
implementation factors and control variables
JIT manufacturinga
Indicate the extent to which your firm has
implemented the following techniques:
Focused factory
Group technology
Action plan to reduce setup times
Total productive maintenance
Multi-function employees
Uniform work load
JIT qualitya
Indicate the extent to which your firm has
implemented the following techniques:
Product quality improvement
Process quality improvement
JIT uniquea
Indicate the extent to which your firm has
implemented the following techniques:
Kanban system
JIT purchasing
Innovation strategyb
What most closely matches your firms
strategy related to innovation in:
Product technology?
Process design?
Product design?

402

R.R. Fullerton et al. / Journal of Operations Management 21 (2003) 383404

Appendix A. (Continued )
structurec

Organizational
What is the organizational structure
of your firms:
Overall company?
Individual operations?
Individual departments?
Possible responses: no intention = 1; considering = 2; beginning = 3; partially = 4; substantially
= 5; fully = 6.
b Possible responses: follower = 1, . . . , 2, . . . ,
3, . . . , 4, . . . , 5 = leader.
c Possible responses: highly centralized = 1, . . . ,
2, . . . , 3, . . . , 4, . . . , 5 = highly decentralized.
a

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