Improving Plant Performance Through Gainsharing Woodruff Imberman

Gainsharing offers industry the op­portunity to improve plant performance and boost productivity while reducing costs attributed to poor quality (e.g., waste, spoilage, rejects, and customer returns). Today, there are approximately 2,500 companies using gainsharing, ac­cording to a stud y done by the American Management Association. Among the companies using the plan in their plant operations are such firms as Dresser Rand, Federal Mogul, Dover Rotary Lift, Gradall Company, Ingersoll-Rand, Mixer Systems, Proen Products, Rexnord, Webster Electric, Cincinnati Milacron, and a host of smaller com­panies.

Gainsharing is not an individual, piecework system. It is a group incen­tive, pay-for-performance wage sys­tem-a group bonus in which the entire factory workforce shares as a result of improving productivity above a certain level and decreasing rejects and rework. Moreover, while productivity gain is the object, the output must be a good prod­uct; rejects and customer returns are deducted from the output totals. Over a five-year period, the productivity gains should be close to 100 percent and the costs of rejects and rework greatly re­duced.

A successful gainsharing program re­lies on two factors-formula and train­ing. A sound formula based on a careful examination of the company's past per­formance is the level from which gain is measured and payout is made. There is no one-size-fits-all gainsharing plan; each program is custom made to fit an indi­vidual company's needs. Not only are productivity and quality factored into the formula, but other costs such as the cost of worker's compensation or the reduction in order-to-shipment lead times can also be added. And in order for the program to work, all levels of the workforce must be educated about their respective roles in gainsharing through proper training methods.

As an example of how gainsharing works, consider a company producing rigid and steering differential axles for tractors. From its records, the company determined that every $1,000,000 of good product output required 10,000 worker hours. Under gainsharing, the next $1,000,000 of axle output and shipment was produced with only 9,000 hours. If

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the average wage rate is $10 an hour, the 1,000 hours saved are worth $10,000. That is a gain to be shared equally be­tween the workforce and company.

Or consider a company that manu­factures heat exchangers for off-road construction equipment. An analysis found that the value added by manu­facturing was about 40 percent. That is, for every $1,000,000 of shipments, $400,000 represented value added by manufacturing. The remainder was ma­terials cost. A gainsharing program was set up to enable the workforce to work more efficiently, inspect heavy-bolted and soldered radiators carefully, reduce setup times, watch temperature controls, and speed up crating and shipping time. The workforce produced the next $1,000,000 of output with $450,000 in value added by manufacturing-a sav­ings of $50,000 to be divided between the workforce and the company.

Gainsharing is not an individual, piecework system. It is a group incentive, pay-for-performance wage system. In addition to helping reduce man­

ufacturing costs, gainsharing can also enable a company to cut costs due to poor quality. For example, a company producing rolling bearings with solid lubricant cages had small labor costs (about 10 percent), but high poor-qual­ity costs. An analysis of the company's records revealed that for every $1 ,000,000 in shipments, $200,000 was directly trace­able to the cost of spoilage, rejects, and customer returns. By establishing a gainsharing program, the workforce was able to provide proper thermal harden­ing of the antifriction compound and provide equipment maintenance more promptly. The cost of poor quality was cut to $150,000 in the next $1,000,000 of shipments and the gain of $50,000 was shared between the workforce and the company.

In a study reported by Chicago Busi­ness in April 1994, 110 plant managers in Michigan, Ohio, Indiana, Illinois, Wis­consin, and Minnesota were questioned

abou t their gainsharing programs. Forty managers reported productivity gains of 18-25 percent annually; 11 reported gains of less than ten percent; 17 re­ported poor results and discontinued the plan.

In 1991, a study by the u.s. General Accounting Office of 76 companies found that with gainsharing, the aver­age company improved productivity by 17 percent in the first year. Some ex­amples of successful gainsharing pro­grams are

• The Super Sack Manufacturing Cor­poration in Fannin County, Texas, which has improved productivity by 88.5 percent over five years, ac­cording to manufacturing vice presi­dent David Kellenberger.

• General Tire's 1,950-employeeplant in Mount Vernon, Illinois, where the plan has generated $30 million in savings over a five-year period­$20 million of which was paid outto workers in the form of bonuses, while the company profited by $10 million, said Floyd Brookman, co­ordinator of the program.

• Timken's Faircrest Steel Plant, where gainsharing targeted plant­wide improvements and replaced old incentive systems that paid only for individual piece-work opera­tions, said Tim Chapin, senior hu­man resources executive.

Another study done for the American Management Association found that companies with successful plans had ancillary benefits, as well. Besides im­proving productivity and quality, on­time deliveries rose to almost 100 per­cent. In addition, employee grievances dropped by 84 percent and absenteeism decreased by 61 percent.

Despite the success of gainsharing, some firms are still hesitant to adopt the program. One of the factors causing this is described by Peter Drucker in Manag­ing for the Future. He says, "Inertia has undermined more companies than in­competence, poor executives, or failure to manage finances well."

Woodruff Imberman is a consultant to management with Imberman and DeForest in Evanston, Illinois.

For more information contact Woodruff Im­berman, Imberman and Deforest, 1790 Ridge Avenue, Evanston, illinOiS, 60201; (708) 733-0071; fax (708) 733-0073.

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