Are You Brave Enough to "Pay for Performance"  |  JANUARY 2016 
Greetings!

 
Many companies are worried about paying for performance because they are concerned that: 1) quality will suffer, and 2) it can inhibit teamwork.  Our case study for this e-newsletter shows how to balance quality versus throughput, and teamwork versus individual contribution. Designing a pay-for-performance system that everyone believes in is hard work, but as this case study will show, the results can be well worth the effort for both the employees and employer.  You will see an increase in company-wide profits and employees' average pay, but also a rise in customer quality ratings. 

Sincerely,
Mitch Millstein, Ph.D.
 
IN THIS ISSUE
Optimal Velocity has Launched
Professor Mitch
Pay for Performance

WHAT OUR CLIENTS
ARE SAYING

"Streamlining this process created extra time for each Sales Rep, allowing them to spend more time with Customers and increase the value we add. Profit margins are up 40 percent!"

~ Jeff Reitz, President - Central States Bus
SPOTLIGHT ON
A TEAM MEMBER


Mitch Millstein, Ph.D.
President

* Expert in Lean and Supply Chain Management
* Founder of Three Companies
* Researcher in:
1) Inventory Optimization
2) Supply Chain Performance Measures
3) Cellular Mfg.
Optimal Velocity has Launched!  

 
With the help of many of you I have launched my Software Service company, Optimal Velocity.  

You may be wondering, "what is the difference between Optimal and Supply?"  Optimal Velocity was founded to solve business challenges by combining optimization and predictive analytics as a software service. 

Our first product, the Inventory Optimizer™ sets target inventory levels to maximize fulfilled profit and control inventory investment.  Contact me if you are interested (mitch@optvelocity.com, or just check out the web site (www.optvelocity.com).  
Professor Mitch has Joined UMSL Faculty

 
Starting in October of last year I joined the faculty as a 1/2 time professor.  My special mission is to connect UMSL's Department of Logistics, Operations & Supply Chain Management with regional businesses.  

We have formed an Advisory Board to make sure our graduates are ready to work in St. Louis based companies, and our research is used and useful.  

For those companies that are trying to develop their talent pipeline of recent college graduates, this is a great investment of your time.   
Pay-for-Performance: Quality & Throughput
The leadership of an industrial laundry company tasked us with creating a performance incentive system that balanced quality and throughput. For many years they used a throughput-based incentive system that paid people more if they produced more.  However, it was clear that quality was suffering.   The existing incentive system focused too much on getting product out-the-door and not enough on quality going to the customer. 
 
Choosing the Implementation Team.  The people chosen to implement this project were mostly human resource managers, including the HR manager from each site (5 total sites across three states).  In addition, we had one plant manager, an industrial engineer and a corporate training manager. I had never worked with a process improvement team made up of mostly HR professionals, but it quickly became clear that this was a great idea. The HR managers are on the front-line of explaining how the new performance incentive system would work.
Defining Quality. Using Supply Velocity's Performance Scorecard template, we determined that quality included: 1) shipping clean and functional garments, 2) making sure customers receive everything they ordered, and 3) giving the customer a direct voice through a customer feedback survey. The results of these three measures were combined into a single quality metric that, increased or decreased the entire facility's hourly pay. 
Gotta do the Time Studies.  You cannot have an effective throughput incentive with outdated time standards that people don't trust.  To get the time-standards correct, we conducted over 200 time studies for 82 job functions. We time studied each job function 2 to 3 times to calculate an average and ensure that outliers were not included in the new standards.
Bonus - Best Practices Identified.  While conducting time studies, we identified 27 practices that significantly reduced the time required to complete a job. These more effective practices became action items for the team to implement across all five facilities. 
How Long Does this Take? Given the complexity of this project I thought we would leave you with a feel for the duration.  In the industrial laundry company's case, implementation of our pay-for-performance incentive system took nine months in total.  Three months from initiation to go-live (including time studies),1 month to design the incentive, 2 months to implement supporting IT systems, 1 month for testing, and 2 months for employee education.
How is the Pay Inventive Calculated?  If a facility hits 100% on their quality goal every employee gets $1 added to their hourly pay rate.  There are three tiers of the throughput incentive: 100% of standard, 115% of standard and 130% of standard.  Each tier is worth an additional $0.75 added to hourly pay.  Therefore a production operator can achieve a $3.25 hourly pay rate increase, on top of the base pay for their job class. 
 
For more information, or if you want us to help you create a pay-for-performance incentive system, send Mitch an email (mitch@supplyvelocity.com).