It is possible to give your shop employees a raise and actually achieve more capacity through greater productivity and make more net profit for your company by implementing an effective productivity incentive program. However, most of the incentive programs (IP) that are touted in the component industry fail to achieve the desired results.
It’s important to emphasize the word “effective.” An IP is not effective if it does not actually increase productivity and lower costs consistently. According to industrial engineering consultants Mitch Fein and Fred Myers, most companies experience a more than 42% gain in productivity by properly measuring productivity, setting realistic goals, taking corrective action in response to unacceptable practices, and rewarding individuals. Three things are happening at once: The company’s costs are lowered, its total volume is increased, and the employees are rewarded for exceeding the average productivity level. Every company administrator should desire this mutually beneficial situation because it reduces the cost of labor and helps increase sales due to higher productivity.
In addition to profit gains, effective productivity IP have numerous benefits:
- Greater productivity output, which means greater capacity, which means more sales per day.
- More satisfied long-term employees, which means less employee turnover, which in turn means fewer mistakes by unskilled workers.
- Better utilization of existing assets will reduce pressure to invest in more equipment to meet current demands.
However, most IP programs fall far short of the intended and desired results. Why do so many component manufacturers (CMs) fail to understand why so many IP fail to achieve the desired results? To understand what defines an effective program, one must understand three key aspects.
First, individual employees’ efforts must be properly rewarded. To motivate individuals to exceed the average output, one must keep in mind the individuals’ perspectives. Common sense indicates that an individual has a greater influence over a small group of two to four people (build table) and has a much bigger impact on that small group than being one in a group of 30, where the efforts of one person often go unrecognized. When everyone is grouped into one large pool, individual employees realize that there is very little difference in impact between 100% and 70% effort. A bonus plan paid out once a year based on company profit sharing is not a productivity IP. I cannot emphasize enough that individuals, such as one person or single workstations such as an assembly table, are rewarded for their efforts.
Second, an individual small group’s productivity should be properly measured with clear, realistic goals that can be achieved daily. In other words, if the type of orders changes from large lumber, high quantity runs with only one setup (pole barn trusses) to orders with multiple setups, short quantity runs, and 2x4 chords (complex hip roof), the employees should still be able to achieve the daily incentive payout. This will mean that the board footage (BF) that is so commonly used will not and cannot work properly on an individual job basis. So many component manufacturers are too emotionally committed to BF and are just not thinking about the clear logic of the disconnection between BF and true productivity. As proper units of measurement for truss manufacturing, TDC recommends only MM, realistic expectancy, or scheduled units derived from properly timed studies. See “Estimating Truss Labor Using Board Footage Versus Proper Man-Minute Time Standard” to better understand time units.
Third, the last, but certainly not least, key aspect of an effective program is that the program has to be worthwhile for the employees. A good rule of thumb is at least an extra two to three dollars for every hour they achieve the incentive goals. Okay, some of you may be worried about paying the two to three dollars more every hour for meeting productivity gains. Every industrial engineer is taught that, when there is a dollar saved beyond the common output levels, the cost of labor savings should be split 50/50. That means, for every two dollars in savings, one goes to the employees and one goes to the company. Please remember that the two-dollar labor savings would not have been achieved if the employees did not go beyond the standard output levels. The end result is that you get more productivity, less labor cost because of the actual labor savings, and more profit margin dollars for every order in which they achieved the greater output.
If your company wants to implement an effective productivity incentive in your operation using proper MM, contact Todd Drummond Consulting (TDC)! Whether you are a new or longtime operation, save your company a great deal of time and money by getting professional lean manufacturing help and training. Be able to understand and implement all lean manufacturing tools with help from the number-one expert on reducing costs and improving productivity in all departments in our industry. TDC uses proven and practical lean manufacturing practices combined with industrial engineering principles. So, before you buy equipment, get TDC’s advice! TDC does not receive referral fees from any equipment or plate vendors, so you can trust TDC for unbiased vendor and equipment recommendations shaped only by customer experiences. Don’t take my word about TDC’s services, though. Read the public testimonials that so many current and past clients have been willing to give: https://todd-drummond.com/testimonials/.
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