Gainsharing boosts performance.

What do Attala Foundry (Amcast), Campbell Chain (Brewer-Tichener), Crown Castings, Dover Corp., Duriron, Eaton Corp., Ellwood City Forge Corp., Empire Steel Castings, Harris Thomas Drop Forge, McGraw Edison, Metamold (Amcast), Rexnord, Richland Center Foundry, Rockwell International, TRW and Wheeltek (Amcast) have in common? They all use some form of gainsharing to improve productivity and quality.

The American Management Assn. (AMA) estimates that about 2000 companies are now using some form of gainsharing. The common element in all gainsharing plans is a no-nonsense plan for group improvements in productivity, quality or other company goals.

Simplifying Gainsharing

For example, a simplified version of gainsharing might involve a foundry manufacturer who needs a decrease in labor costs to achieve lower unit costs. An educational program is started to inform employees that lower unit costs would not only help the company, but would also increase their pay and provide more job security.

The company then sets certain realistic labor cost goals for the next month. Specifically, if the direct labor cost for the next month has been 20% of total cost and the work force can cut that to 15% on similar volume production in next month's output, the savings would be 5%. That 5% is a gain, representing a possible savings of $20,000 for the month. The $20,000 is split (often 50/50), with employees gaining $10,000 as a bonus and the company receiving the same amount.

Another example: a company seeking an improvement in productivity as measured by hours worked sets targets on next month's output. That projected volume of output, based on past standards of production, would ordinarily require X man-hours. If the work foce could turn out the same projected output next month in X hours minus 5%, that percentage would represent a gain. The gain, translated into dollars, is then split with the work force.

Consider a third example. A company wants to improve their quality level. That, in turn, would reflect itself in less scrap, fewer customer returns and less rework. On the basis of past performance, $1 million in output results in $40,000 of scrap, returns and rework. The company says if next month's $1 million production eventuates in only $20,000 in quality rejects, rework, etc., the $20,000 saved would be a gain to be split with the work force.

Where to Begin?

Gainsharing when properly designed and implemented, is a major contributor to a company's success. When poorly done or poorly supported by top management, gainsharing will fail. The list of gainsharing proponents in the manufacturing industry includes a variety of large and small companies.

Naturally, some questions arise. How is the standard of productivity or quality to be set? A careful investigation of past experience will show how many hours were required for given units of output, what proportion of total cost went for direct labor, and how much scrap, waste, rework, etc. were involved for every $1000 of output or shipments.

A typical base period is selected to serve as a standard. The fact that the past experience involves a combination of products not duplicated now presents no current problem. The common element--man-hours worked and dollars spent on labor, waste, etc.--can be distilled out and serve as a reliable standard. Expert guidance is helpful in this procedure.

Another Example

If production during a base period was 100,000 standard hours that were required to produce 10,000 units of output (10,000 lb of output or $10,000 of shipments), that period (month) is the benchmark or standard. Due to higher productivity or closer attention to quality, only 80,000 actual hours were required in the current period (month) to make 10,000 units of output. The result was a net gain of 20,000 hours.

Of that gain, 10,000 hours would be the employees' 50% share of the month's productivity gains, with the company also deriving a 50% gain. The total gained hours must be adjusted by product value or pounds or units that were scrapped after being counted as finished product.

The employees' total gain 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 of their actual hours worked, times their hourly pay rate.

For instance, if an employee is earning $7/hr, times the 12.5% gainshare, this figures out to a $0.87/hr bonus for that period. If this employee worked 173 hours during the month, he would receive a $150.05 gainsharing bonus. The company receives an equal savings using less labor.

Gainsharing bonuses do not affect a worker's base pay rate. That remains constant according to the contract (if there is one). Gainsharing base standards can be adjusted according to:

* capital expenditures above a fixed amount;

* a buy-back of productivity above a ceiling (often 160%);

* major technological changes;

* changes in government requirements.

Gainsharing Programs

A company sets a standard of productivity, quality, cost or material usage based upon past experience with initial guidance. The firm then sets a realistic target of productivity (or quality, etc.) that can be achieved by the entire work force serving as a team to improve operations. If the target is met within the set time period, the gain is translated monetarily and usually shared 50/50 by the employees and company.

There are about five or six commonly used gainsharing plans, including Scanlon, Jackson, Rucker, ImproShare and derivatives of each. ImproShare is probably one of the best engineered plans. Although these plans differ in details, they retain common elements of reference.

Why Note More?

If gainsharing is such a boon to many companies, why are there only about 2000 firms using some form of the plan? Part of the answer might be found in an independent study done for the AMA. In that study of a sample of 83 companies using some variety of gainsharing, it was found that about two-thirds had failed and were discontinued after a year or two. Some possible reasons for failure include:

Lack of top management support: "Gainsharing involves the hourly work force and supervisors. Top management can't be bothered with it."

Inadequate middle management involvement: "We've got our jobs to do, and gainsharing is not our responsibility. Let the hourly workers and supervisors make it work. We don't have time to devote to it."

Lack of training for first-level supervisors: "I don't see how things have changed. I'm supposed to manage my people differently. Nobody told me how to do that."

Inadequate assessment of suggestions and lack of feedback to hourly workers: "We get tired of making suggestions for improving this or that. We never seem to get any response or reaction, except the supervisor who keeps saying, 'We tried that years ago and it didn't work. Forget it.' Or, "We explained to our work force how the plan worked and we expected them to follow through. Unfortunately, it didn't come out that way."

Requirements for Success

In foundries where gainsharing has been a success, there have been consistent improvements in productivity, quality and cost containment, according to the AMA study. In addition, these companies reaped some collateral benefits. Besides improvements in plant performance, they averaged a 12% decrease in rejects, an 83% reduction in employee grievances, an 84% decline in absenteeism and a 69% drop in lost-time accidents. (See note below.)

What are the requirements for making gainsharing a success?

* Employ expert technical design of the basic gainsharing plan--the correctness of the standards and the realistic targets to be achieved. This design is not something that an executive can do in a spare hour. There are experts available to design gainsharing plans.

* Educate middle management, supervisors and hourly employees about their respective roles, responsibilities and rewards. This also requires expert guidance from experienced mentors before the company can take over.

* Management must be committed. Top management must serve as a perpetual motivator, acknowledging improvements and the achievement of target goals.

* Cooperation of middle management. What is needed is a quick evaluation of suggestions on newer, better, shorter and smarter ways of achieving the target goals. Obviously, not all suggestions are sound, but the cumulative effect of many small improvements is often quite large.

* Targets have to be realistic and achievable so there is a payoff consistent with the effort. Targets looking for a 50% gain productivity or a zero defect output or other large improvements gained instantly are set to fail. A gradual rising level of achievement combined with rising financial rewards, consistently month after month, seems to be ideal.