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Machine monitoring is key to enhancing the performance of a manufacturing system. Though both traditional and smart sensors can monitor machine health, smart sensors which have onboard processor offer certain advantages. In case of smart sensors the burden of sensor data processing is distributed where as it is centralized in traditional sensors case. This research investigates if the performance of a manufacturing system can be improved by monitoring machines through smart sensors. This study is conducted on a simulation model of a flow-line manufacturing system integrated with smart sensors. The model represents machines as agents. Taking sensor-based information into consideration, machine agents negotiate with one another to arrive at a machine maintenance schedule just-in-time to avert machine failures. Simulation results indicate that smart sensors can significantly increase both the uptime efficiency and the production rate of the flow-line manufacturing system.