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道,领导也。领导必需要不断呼唤,教导下属以及以身作则。下属的过和错皆因领导懒惰。

 
 
 

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Chapter 28: Piece-rate productivity incentive scheme  

2012-06-24 11:21:20|  分类: Buffer Mentality |  标签: |举报 |字号 订阅

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“Eric, you have given me a very thorough explanation of several productivity indicators that were set with buffer mentality in mind. Yes, I do agree with you, every one of these productivity indicators were chosen to show that the incumbent manager is doing very well when in actual fact, he is not.

You too, had shared with me how to set up an effective productivity indicator based on the earned-hour concept described in chapter 3. Now my question is, ‘What is next?’” asked John.

I replied, “There is a need to implement a productivity incentive scheme to encourage the workers to keep working at their normal pace and to immediately highlight problem or issue that adversely impacts their productivity as an when it occurs. However, the use a productivity incentive scheme to motivate workers had quietly been dropped out of favor. You might be a little surprised. But nobody had ever asked me why it is no longer in favor. Of course, the answer is none other than. ‘it is not effective’. What else can it be?”

“Curiously I want to know your opinion. I have seen it passing on like a fad. At one time it was catching on like wild fires. Now, it is almost dead. I hardly hear of anyone still using the productivity incentive scheme on the American soil. It is taken for granted to be something you either must be doing or do not. I guess most companies do not,” said John.

“You are right, John. Most companies discontinued with the productivity incentive scheme (if they had implemented one) simply because it has become a de-motivating scheme instead of a productivity incentive scheme,” I lamented.

John was surprised, “Why is it so? A productivity incentive scheme if not applied correctly will degenerate into a de-motivating scheme? This is something new to me.”

I explained, “Well, there are two reasons.

One, very few companies use the earned-hour method as a basis to compute the productivity incentive. The earned hour for the day divided by the available hours a worker put in multiplied by 100% equals to an efficiency measurement. This is the best measurement to determine the worker’s productivity. Based on this computation, a performance-based remuneration is paid out every week (shorter interval is preferred) or at the end of the month (the longest periodic interval for it to be effective).

Two, almost everyone thought that having implemented a good productivity incentive scheme is all they need to do. This is absolutely wrong. Few realized that that merely having a productivity incentive scheme is not good enough. There is the most important missing elements that answers why most companies discontinued with the productivity incentive scheme despite they had implemented one with high hopes.”

John interrupted me, “This is precisely what I want to know. I want to know the reason why a productivity incentive scheme degenerates into a de-motivating scheme which then provides the answer to why most companies dropped their productivity incentive scheme.”

“John, pardon me again. I have to share with you a very long-winded explanation in order to bring out what this missing element is, would you mind?” I asked John.  

John replied, “No, not at all. This is an interesting subject. I want to know everything about it.”

I began my explanation, “What makes an industrial nation much more advanced economically than an agricultural nation? The reason is really simple.

A farmer would be busy perhaps, only for 3 months in a year. At other time he waits for the crops to grow to maturity before he finally reaps his rewards from the yields of the land h toiled. The actual number of working days in a year is fairly short and the farmer is forced to be idle for a large part of a calendar year. The efficiency of a farmer is extremely low and low efficiency leads to low economic benefits.

However, in a factory environment, the situation is totally different. Perennially, the factory has no shortage of customer orders. Factory workers have to work six days a week throughout a 52-week year. Their productivity of course, will be many times higher than farming. Moreover, the factory manager continuously pushes his workers to work hard.

On a comparative scale, a factory worker who works non-stop for 8 hours a shift will produce higher productivity than a worker in another factory who works less than 8 hours a shift. You may argue why two workers who work in two different factories, though both put in the same amount of 8-hour shift of work, they produce different level of output or productivity.

The answer is their efficiency could be world apart. And the reason for this huge difference is simply. The availability of work load definitely varies between these two factories. The work load is totally dependent on how the factory managers run his operations.

What is most important in running a highly efficient operation is to make sure there is available work load for the workers to work non-stop for the full 8-hour shift. The piece-rate incentive scheme is useless if it is not supported by a production planning system that ensures that the workers have enough jobs on hand to occupy their full 8-hour shift.

Of course, if given half the work load, the productivity of he workers will be 50% and therefore, the workers will not even get a single cent of incentive. This is the root cause of the piece-rate remuneration incentive scheme downgrading itself into a de-motivating factor.”

John interrupted, “I see. A production planning system that you had mentioned to me the standard time[1] used in the planning rate is a crucial missing element.”

“Yes,” I said, “All factory owners from Taiwan and Hong Kong use the piece-rate remuneration system to reward their workers. Like-wise, this is an effective tool widely used by many private-run factories in China – ‘the factory of the world’ to induce their workforces to maintain a high level of productivity. Workers working in these factories seem to be very happy with this remuneration system. It is almost taken for granted in this part of the world that what it takes to achieve high productivity is to implement a piece-rate remuneration system.

Is a piece-rate incentive scheme the secret to good labor management? The answer is ‘Yes’ if the workers are happy with what they earned at the end of the month, every month.

If the answer is negative, there is more to it than merely implementing a piece-rate remuneration scheme. What really makes the piece-rate scheme ticks?

The standard time for a specific piece of task is used to determine the piece-rate. For example, it takes a standard time of 2 seconds to finish a piece of the product for task A01. The daily wage for a worker is 30 Renminbi and a work day is 8-hour long. The piece rate therefore, is equal to the 30 Renminbi divided by 8 hours and further dived by 3,600 seconds an hour and multiplied by the standard time of 2 seconds. This gives 0.208 Renminbi per piece.

 

Piece Rate =          30RMB  x  2 seconds             = 0.208RMB/pc

                              8 hours x 3600 seconds

 

If a worker produces 14,400 pieces in one day, he earns 30 Renminbi.

Earning per worker/ day = 14,400 pc x 0.208 = 30 Renminbi.

If a worker working on task A01 finishes 15,000 pieces in a day, he earns 31.25 Renminbi. If produces only 13,000 pieces, he earns only 27.08 Renminbi for the day.

Therefore, the more goods a worker produces, the more take home pay he gets. Naturally, he is motivated to work harder, completing as many pieces of product as possible within the day.

The piece-rate formula is transparent how much he is going to get and that depends solely on how much goods he produced for the day. The workers feel it is a fair scheme. Every worker buys into it.

In the eyes of the bosses, this is a very good scheme too. They know they won’t be over-paying the workers. The less the workers produce, a proportionately lesser amount of wage will be paid out to them. The direct labor cost is therefore, directly linked to the number of pieces of goods the workers produced.

And since the factory owners have already factored in the workers’ pay as a fixed amount of direct labor cost per piece of goods they sell, they know their direct labor cost is predetermined and is strictly under control. There is no way they will lose money through paying out labor wage that exceeds the predetermined direct labor cost per unit of goods sold.

Controlling the direct labor cost is therefore, a key component of controlling the costs of production? But in the real world, things are not as simple as it seems to be.

First among all, there is a contention in the calculation of the piece-rate. The bosses may want a shorter standard time (the time taken to complete one piece of product) so that the workers get to work harder, producing more goods in order to earn the day’s target of say, 30 Renminbi.

On the other hand, the workers would want to fight for a longer standard time so that they can earn more than 30 Renminbi after putting in 8 hours of work at their normal working pace.

Of course, a mutually agreed upon piece rate is ideal for both the bosses and the workers. Both sides will be happy with one another. And it is not difficult to achieve this objectively.

Putting aside all the possible errors in determining the piece-rate, if a boss were to fiddle with the piece-rate to his favor, he will receive the wraths of the workers in a slightly different form. The workers are simply de-motivated and leave the company for greener pasture.

How does a worker know he is being cheated by his boss?

After putting in a hard day’s work, he expects to earn close to, if not more than, the daily wage rate. In a matter of a few days of receiving less than the daily wage rate despite having putting in his best, he feels cheated and starts to slow down his work pace. A good remuneration scheme can thus, easily turn into a de-motivating scheme. The more capable managers know they cannot cheat on this aspect.

He knows keeping a pool of low morale workers means low productivity. And of course, low productivity leads to low profitability for the company. In this situation, the boss stands to lose the most. No matter what happens in his factory, he got to pay for his overheads which could be many times the total labor cost. And lower productivity simply means the overheads cost per unit will be much higher than in a situation where his workers were working at 100% productivity level.

For this reason, most bosses assign a dedicated, impartial and well-trained worker to set the piece-rate for every single task. As far as he is concerned, he does not want his workers to feel cheated.

Besides having an objective and fair piece-rate for every single task, what else can cause the workers to lose morale?

Training can be one of them. An untrained or poorly trained worker certainly will not produce work at the speed used in the formula to determine the piece-rate. And usually, the formula makes use of a standard time that is set by observing the pace of an experienced worker. Untrained or poorly trained workers certainly work at a much slower pace than an experience worker. Hence, their income will be lower than the published 30 Renminbi per day.

Sometimes, it could be the volume of orders for a specific product. If the volume is low, a worker can hardly enjoy the fruits of his learning curve. When he is about to be efficient and able to produce at his optimum speed in the new task, the order quantity for the product runs out. He therefore, does not have the opportunity to put his newly learnt skills to good use. He has to switch to producing a new product and picking up on the learning curve again. With frequent switching of products, his productivity will not be optimum.

For a well-trained worker who excels in the task that he is doing, there is one other important factor that can adversely affect his morale: Not having been allocated enough work to occupy him for the full day. As you have read in chapter 12, “Speed losses”, a worker will reduce his speed in order to finish his work just in time by the end of the day. He does not want to be seen as having finished his work early and be seen as idling away the remaining time on hand before the day ends.

Of course, under these circumstances, he knows he is going to receive a take home pay that is much lower than the normal daily wage rate. He does not complain about the low volume of work assigned to him. He thinks that is what the company order book has for him. So he keeps to churning out goods at the slower pace, leading to low productivity.

In most situations, a worker will not complain that he was not given sufficient amount of jobs to occupy him for the entire 8 working hours of the day. He tends to accept the situation that demand for the company’s products fluctuates. Some days, or weeks or months, he will be very busy, working very hard and making good incomes. Other times, he knows he can slack (though effectively lowering his productivity) and earn much lesser wages.

He understands very well, ‘More work, more pay; less work, less pay.’ The whole ball game of productivity now turns out to be a different animal altogether. A bigger monster, it seems. The crux of the problem is not a simple question of whether the workers are positively motivated by a good piece-rate remuneration system or not.

The bigger problem is how to keep the workers fully occupied for the whole day. And to do this well, a broad range of managerial skills need to be deployed over the entire spectrum of production operations management.

So, low productivity cannot be simply blamed on the piece-rate system alone but rather on the management team who had failed the workers. A general manager cannot claim that he had done his best by merely implementing an accurate piece-rate remuneration system. Certainly, there are more things for him to do than merely implementing a productivity incentive scheme.

How can you tell that the management is failing in its duty in managing its operations well enough? Or more specifically, how do you know that the morale of the workers is low?”

John ponders for a long while. He said, “I had never given it a thought. Though I have been a plant manager for almost a decade, I did not pay notice to watch out the morale of the workers. I am terribly sorry for such negligence.” 

I continued to explain, “All you need to do is to collect the daily wage earned by all the workers over a month and compute the average daily wage for all these workers. Your account manager can get this number for you pretty fast.

If the average daily wage earned is close to the company-set daily wage rate, you can deduce that the workers are working at a high level of productivity consistently close to 100% productivity everyday, day after day.

If the average daily wage earned is far below the company set daily wage rate, the workers are simply working at a productivity level far below their full potential. Their productivity is certainly, low.

The piece-rate formula is a direct link between the income level and the productivity level. Low productivity leads to low earning. Low earning leads to low morale. And low morale leads to low productivity. It is a vicious cycle. And the culprit most likely turns out to be a poor production planning system. Something that you never had ever imagined to find the root cause is in the hands of the production planners. Everybody’s finger is pointing at he production manager.”

“This is precisely where I see the real strength in you. You are the best guru in the field of productivity. The best consultant in lean production system from Japan can’t hold a candle to you on this subject. Dave Cote must be most proud to have you on board Honeywell,” chuckled John.

“No, it is too soon to say that. I have yet to prove my worth,” I replied.

John straightened himself up and tried to recap the few pointers learnt so far. He illustrated, “So the key measurement of the effectiveness of a company that implements a piece-rate remuneration system is to compute the difference between the computed average daily wage earned by the workers and the company set daily wage rate. When this difference is significant, the workers’ morale is poor.

For example, if the average wage earned is only 25 Renminbi, the workers feels that they are losing 5 Renminbi every day. Over a month, they have lost a good 150 Renminbi (5 Renminbi times 30 days a month). So instead of making 900 Renminbi a month, the workers only earn an average of 750 Renminbi. This is a far cry from the promised 900 Renminbi a month.

Seen from a different perspective, the ratio of the gap in real take home average wage and the company-set wage rate will give you a very good estimate of the loss in productivity. In the above example, the difference of 5 Renminbi translates into a loss of 16.7% in productivity (5 Renminbi divided by 30 Renminbi). The effective productivity of the workers is therefore only 83.3% (100% minus 16.7%).”

I nodded my head and said, “John, the story doesn’t end with computing the difference in wage gap or productivity level or you are able to size up the workers’ morale. This number affects the workers several times more than you.

The information flow among workers is very dynamic. Armed with the information of their last drawn wages, workers from different companies compare earnings among them. If a worker from company A earns 750 Renminbi a month while a worker in company B earns 900 Renminbi a month, workers from company A will be unhappy and feel demoralized. They will ask for an opportunity to join company B.

When you lose workers, it is not the fault of the piece-rate remuneration system but rather your inability to keep your workers fully occupied.”

John interrupted, “Now I know it is not that simple in the implementation of a productivity incentive scheme. To ensure that the workers are fully loaded with jobs everyday is what that really matters.”

I summarized, “The management needs to know that implementing a piece-rate remuneration package for his workers is not good enough, it must do a lot more. The quantum of how much more to do depends on the gap between the stipulated daily wage rate and the average take home wage of the workers.

If this wage gap is narrow, the management is already quite effective. Keep it up.

If this gap is wide, the management is ineffective and had failed to keep the morale of the workers high. Naturally, the factory will suffer from low productivity and hence, poor profitability, if they are not already operating at a loss.”



[1] Please read chapter 3, ‘Planning rates’ of “Buffer mentality” by the same author.

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