Gainsharing can be a big step toward staying competitive
August 8, 2006
Arco Industries Inc. bought a 15-year-old, 500-ton Tranemo hydraulic punching press with an antiquated control system. For about one-quarter the cost of a new press, Arco was able to rejuvenate an obsolete press by providing it with contemporary levels of control and productivity.
U.S. metal stampers are slow to accept the reality that free trade is now a mainstay of our foreign relations programs. Our tradition of protecting national industries behind walls of tariffs, quotas, and similar restraints of trade has eroded at an ever faster rate since post-World War II, when the U.S. reluctantly accepted the economic and political consequences of being the world's only economic superpower.
U.S. industry felt the jolt of Japanese competition in the 1980s. Now U.S. metal stampings producers face the even greater threat of foreign competition from mainland China. They must adopt more stringent policies to ensure more efficient operations.
In 2004 Americans imported about $14.5 million worth of metal stampings, an increase of more than 100 percent from 2000, when metal stampings imported from China totaled $5.9 million. That growth of imports severely strains many companies in the industry.
The U.S. government eased China's entrance into the World Trade Organization in 2000 and allowed China to export to the U.S. under most-favored-nation status. Urging China to become a more democratic nation with a free-market economy has become one of our major foreign policy efforts.
China's trade surplus with the U.S. continued to balloon in 2005 and is expected to approach a record $200 billion this year. China's exports to the U.S. are six times its U.S. imports. The U.S. Department of Commerce estimates that the Chinese economy will grow at 9 percent annually for the next 20 years, compared with 3 percent to 4 percent for the U.S.
Alan Greenspan, former chairman of the Federal Reserve System, has been hammering away on industry to become more efficient and boost worker productivity. Cutting costs — and prices — is the only way American industry can maintain profits and market share. However, Greenspan assumes that all manufacturers understand what worker productivity means, how to measure it, and how to improve it.
In 2003 George Mason University published a study covering four southeastern states that found many manufacturers with 250 employees or fewer really do not know how to measure their productivity.
What does productivity actually mean? The simplest definition is increasing output for each hour worked.
Assume, for example, that in June a manufacturer produced 20,000, 10-pound boxes of metal stampings for the automotive industry (output). Doing so required 87 employees to work a total of 15,200 hours, including considerable overtime at premium pay (input).
Simply stated, that means each employee produced 1.32 boxes of metal stampings for each hour worked. That's productivity: the ratio of quantity of units produced to the labor per unit of time. If each employee was paid $10 an hour, then the direct wage cost of each box of output was $7.58 ($10 /1.32 boxes).
Suppose that two months later, in August, after a company program to increase productivity, the plant's same 87 employees produced the same 20,000 boxes, but this time they required only 13,900 hours worked, with no expensive overtime. That is a savings of 1,300 hours, or 8.5 percent. Each employee averaged 1.44, 10-lb. boxes of metal stampings every hour worked. That is a 9 percent increase in productivity (0.12 /1.32 = 9 percent) without any additional labor cost.
If employees were still paid $10 an hour, the direct wage cost per box fell to $6.94 each. Lowering per-unit labor costs enables the metal stampings producer either to reduce price and maintain margin, or maintain the original price and increase the profit margin. Either alternative will enable the company to maintain its profit margin and still compete with Chinese or other foreign products.
Of course, this example oversimplifies the productivity problem. Realistically, companies produce not one but many items, so a variety of products or models may be coming down multiple production lines at any one time. The total output in any month might be a heterogeneous mixture of several items, each requiring differing numbers of labor-hours worked.
Trying to ascertain overall productivity becomes a complex task. For this reason, many companies have given up trying to determine exact productivity every month, and they merely guess at some rough total or how to increase it.
Achieving higher productivity requires more than exhorting the work force to do better, to work more carefully to curtail quality errors, and to be more efficient to boost production. Somehow employees have to be rewarded for such careful, consistent efforts. But where does that reward come from?
In the month of August, the example company produced 20,000, 10-lb. boxes of metal stampings in fewer hours (13,900) than it took to produce the same number of boxes in the previous month. That gain of 1,300 hours was equal to a savings of $13,000 in direct wage cost. If that $13,000 gain were split 50/50 with the work force, giving $6,500 that month to the employees as a bonus and retaining the other $6,500 in savings to the company, everybody would come out ahead.
This is a self-funded method of rewarding the work force and the company for the improved performance without increasing total cost. This sharing of the gain now is technically known as a gainsharing plan.
Gainsharing was originally devised in the 1930s, during the Great Depression. It evolved after World War II, when farsighted executives began worrying about Washington's growing internationalist trade tendencies, quite a reversal from previous decades. In today's global economy, gainsharing can be an important tool for remaining competitive.
Another option for busy executives is to hire outside experts to customize a gainsharing plan for their company. The design basics should include finding a common denominator to measure productivity month by month, determining the proper level of reward for the work force for its higher productivity and quality efforts, orienting managers on their responsibilities under the plan, and educating the work force in its role in making the plan a financial success for everyone.
A.A. Imberman is chairman of Imberman and DeForest Inc., 990 Grove St., Evanston, IL 60201, 847-733-0071, fax 847-733-0074, firstname.lastname@example.org, www.imbdef.com.