Firm performance under just-in-time and traditional proxies for profit maximization

When the profit function is too complex to maximize directly, firms must rely on some other performance criterion to guide work station activity. Simplification is achieved by emphasizing either flow or stock management. Flow management seeks to ensure that no work station is “starved” by available inputs. Stock management seeks to minimize inventories. This paper develops a model to assess the performance of these two approaches for a firm that can carry both input and output inventories. The model includes shocks to both demand and production and the possibility of a stockout is explicitly reflected in the optimization problem. Stock management dominates flow management when carrying costs are sufficiently large. When carrying costs are moderate, the strategy of simply ignoring shocks to demand and capacity dominates both stock and flow management. The flow-management approach is superior only when carrying costs are very small.