Boosting Productivity and Quality in Manufacturing Matthew Goodfellow

INTRODUCTION

Many industries have difficulty moti­vating the work force to improve pro­ductivity and quality while meeting tighter delivery dates and ever-chang­ing customer needs. To achieve their goals, companies often institute indi­vidual incentive systems, such as pay­ing bonuses for output above a certain standard.

However, individual-based incentive systems have some drawbacks, because they can pit one employee against an­other. For example, some employees may hoard supplies in order to ensure their own production, consequently delaying others. In addition, unforeseeable ma­chine downtime creates tension among the workers and complicates the matter of bonus pay calculations.

THE GAIN·SHARING GROUP BONUS PLAN

In recent years, an incentive plan has been developed that has proven suc­cessful in motivating workers to pro­duce high-quality parts while cutting unit costs. It is a group bonus plan known as gain sharing.

Gain sharing is based on a company's record of the previous one or two years. The central question is "What percent­age of gross income went to direct labor cost, including supervision and mainte­nance?" Suppose records show that a company's shipments were worth $1 million a month and direct labor cost was 15% of that figure. Suppose further that the company says, "If we work smarter on the next $1 million worth of shipments, and direct labor can be cut to 10%, that would save 5% in labor costs. That 5% gain, or $50,000 saved, will be split 50/50 between the work force and the company." This, in a nutshell, is the essence of gain sharing.

To look at it another way, suppose the last two years' records show that 100,000 standard hours were required to produce 10,000 units of varied output (or 10,000 kg of output, or $10,000 of sales). The company might say to the workforce, "If we work smarter on the next 10,000 units, perhaps we could cut production time from 100,000 hours to 80,000 hours." That 20,000 hour gain would represent a certain dollar amount that could be split between the work force and the com-

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pany. (Obviously, the cost of rejects, cus­tomer returns, and other unsalable units would come off the top).

The work force gain (Le., the value of half the time gained) is 10,000 hours, which represents 12.5% of the 80,000 actual hours worked during the period. The employees' share of the productiv­ity gain is then calculated as a percent­age ofthe actual hours worked multiplied by their hourly base rate of pay. For

In metal fabricating, gain sharing has shown itself to be a useful motivational plan, provided there is top management commitment and expert guidance for the first year.

instance, if an employee were earning $9 an hour, the rate would be multiplied by the 12.5% gain share, resulting in a $1.12 an hour bonus for that period. If the employee worked 173 hours during the month, he or she would receive a $194 gain-sharing bonus for the period. The company receives equal savings through the use of less labor and greater pro­ductivity. The gain-sharing bonus does not affect an employee's base earnings.

GAIN SHARING: A CASE HISTORY

For an example of gain sharing in practice, consider the case of a sheet metal fabricating plant in the Chicago area. The shop fabricates parts in lots of one to 1,000. A 1,400-square-meter building houses the main manufacturing area, with an adjoining welding shop in a 560-square-meter annex. The work force comprises 35 employees, 25 of whom are production workers.

Like other fabricators, the president decided to start his own business be­cause he saw a niche in the marketplace. His company's niche is the production of difficult parts reqUiring extremely tight tolerances or complexity. To pro­duce parts used in the electronics indus­try, for example, the company has

punched 1,100 holes in a single sheet of 0.127 rom Mylar. The company's cus­tomers include special machine build­ers; machine shops; kitchen equipment suppliers; the restaurant, electronic, and computer industries; and government contractors. About 40% of its products eventually wind up overseas through U.s. customers.

The shop can fabricate steel, alu­minum, stainless steel, copper-clad phenolic, plastic, and acrylic, as well as other metals. The equipment on the shop floor includes a 20-station computer numeric control turret punch press; a single-station punch press used prima­rily for prototype work; two 6.4 mm plate shears; 72- and 91-tonne press brakes that can maintain 0.127 mm tol­erances; roll forming machines; complete welding capabilities, induding metal inert-gas, tungsten inert-gas, and spot welding; and finishing and spray­painting capabilities.

In addition, the company has the ca­pability to take parts from design to completion at the shop. In the research and development department, the company uses AutoCAD and Metalsoft computer-aided design/ computer­aided manufacture (CAD/CAM) sys­tems with direct numerical control (DNe) link to the turret punch presses. The design capabilities are especially important, since 30% of the shop's business involves building prototypes.

The company's problem was main­taining tight tolerances in sheet metal fabricating, while improving produc­tivity and cutting labor cost. Also de­sired: curtailing rejects, scrap and cus­tomer returns.

After experimenting with statistical process control and statistical quality control-both of which generated more paper charts and reports than the com­pany could cope with-the company turned to gain sharing. An experienced consultant was involved in the plan­ning, installation, and implementation of the program.

Results

Table I summarizes the gain-sharing experience of the sheet metal fabricator. The table presents the results for 1991, which was the fourth year of successful experience with gain sharing for this company. The experience of 1987 is the

JOM • August 1992

Table I. A Chicago Metal Fabricator's Calculations for Gain Sharing in 1991

Charged Standard Hours Hours

Period (1991) (1987)

1987 (Avg.) 52,307 52,307 1991 (By Month)

1 54,055 60,030 2 54,052 50,357 3 67,209 67,918 4 56,001 61,825 5 57,129 61,911 6 70,004 82,894 7 58,289 69,093 8 63,305 66,960 9 66,771 72,090 10 61,524 68,591 11 66,521 71,215 12 56,815 63,304

Total 731,675 796,188

standard against which later work was measured. In 1991, the plan paid work­ers an extra 3.5% every month, although four months showed a lesser gain. The surplus from months with a gain larger than 3.5% was "banked" to compensate for less productive months. The year­end surplus was paid out at Christmas.

In the table, charged hours are the current hours used to produce the cur­rent output. Standard hours are what the records show as the number of hours that would have been required to pro­duce the current output if productivity had not improved. (Those standard hours come from the company records for production in 1987, after allowance for rejects, customer returns, adjustment of standards due to introduction of new capital equipment, etc.) Current pro­ductivity improvements (if any) are shown as hours gained.

The difference between charged hours and standard hours shows the number of hours gained. In the first month, 5,975 hours were gained. Employees and the company each received 50% of that total (2,987.5 hours). In that month, the em­ployees gained 5.23% of their monthly wage, although only 3.5% was paid out. The rest was reserved for any month in which the 3.5% was not earned, a situa­tion that occurred in four months. The average monthly payout over the year was 4.13%.

For a semiskilled employee earning $9 per hour and working 2,080 hours per year (for an annual gross income of $18,700), the gain-sharing bonus would be 4.13% of $18,700, or $772.31 for the year-about $64 per month. A 4.13% gain share for each production worker means that an 8.26% gain in productiv­ity (compared to 1987) was achieved over the course of the year. That is a handsome improvement.

ELEMENTS OF SUCCESS

Gain sharing has not been a success in every company that has tried it. A study by the American Management Associa-

1992 August. JOM

Hours Gained Gain 100% 50% Share

0.00 0.00 0.00%

5,975 2,987.5 5.23% -3,695 -1,847.5 -3.14%

709 354.5 0.53% 5,824 2,912.0 4.92% 4,782 2,391.0 3.96%

12,890 6,445.0 8.68% 10,804 5,402.0 8.73% 3,655 1,827.5 2.74% 5,319 2,659.5 3.78% 7,067 3,533.5 5.37% 4,694 2,347.0 3.43% 6,489 3,244.5 5.32%

64,513 32,256.5 4.13%

tion of 83 companies with gain-sharing programs found that about two-thirds of the gain-sharing plans were flops. They lasted a year or at most two years and then died. Only one-third were highly successful, achieving not only consistently improving productivity and quality but certain collateral benefits: greatly reduced absenteeism, fewer grievances, vastly improved safety record, etc.

Based on the American Management Association's study, the success or fail­ure of a gain-sharing plan can be pre­dicted with confidence. The following elements are crucial: • Experienced design and imple­

mentation of the gain-sharing plan. That is, the standard for payout must be carefully researched, and the tar­gets must be realistic. To ask the work force to achieve a 100% pro­ductivity improvement or a zero defect level wi thin a month-or else no payout-is far removed from re­ality. Expert guidance is essential in researching past records and set­ting realistic standards.

• The work force-including su­pervisors, maintenance, and mid­dle managers-must be indoc­trinated about how best to function under gain sharing, whatisexpected of them, how to achieve productiv­ity and quality gains, and their re­wards. Supervisors need special training. In all this, expert guidance should be used.

• Top management must function as perpetual supporters of the pro­gram, thanking the work force for its efforts and praising the results.

Off-the-shelf gain-sharing plans in­clude the Scanlon, Jackson, Kearney, Rucker, and ImproShareplans. Each plan has several subvarieties. ImproShare is probably the best engineered of all the plans, but all have some praiseworthy features.

However, not every plan fits every situation. Depending on the products,

the manufacturing processes, the ma­chinery, and the materials, certain plans work better than others. While there are many gain-sharing plans pushed by various sponsors, only a few competent experts believe in tailoring the plan to best fit the particular company. Tailor­made gain-sharing plans have a high degree of success.

CONCLUSION

In metal fabricating, gain sharing has shown itself to be a useful motivational plan, provided there is top management commitment and expert guidance for the first year. Once the plan has been carefully researched, tested, installed, and implemented, the results should help to boost productivity and quality, im­prove on-time shipping records, and better the bottom line.

Matthew Goodfellow is the executive director of Univer­sity Research Center in Chicago. The center does no consulting, but it will provide the names ofrecommended gain sharing experts to readers who respond via the reader service card.

If you want more information on this subject, please circle reader service card number 58.

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