engstorm case

IPMI – International Business School – IndonesiaLeading Organization Dynamics - Andre Vincent Wenas,MM,MBA.

ENGSTORM AUTO MIRROR PLANTMotivating in Good Times and Bad

By Muhammad Hanif IPMI EMBA 15221023Leading Organization Dynamic


1948 Engstorm Auto Mirror created and enjoyed successful profit

Engstrom Auto Mirror plant A privately owned business manufacturing mirrors for trucks and automobiles employed over 200 people in Indiana location. by late 1990s Engstorm redesigning new production line with new technology, these transition was not smooth and increasing long production delay, create unprofitability.1998 Ront Bent from camshaft production plant Hired

Dec 1999 Scanlon Plan is introduced and were voted by 81% Employees and signed Scanlon Bonus Agreement.

ENGSTORM STORY


Workers were motivated by the bonuses (Scanlon Plan ) to increase their productivity, thus saving the plant from its problem

Since 1999, workers at the plant have received bonuses based on the Scanlon Bonus Plan, which paid a percentage of all labor savings each month

On 2006, 46 employees were lay off. During this year employees had not received a bonus in seven months. Employees had become dissatisfied with the Scanlon Plan

However, in 2007, the plant once again faced issues of unproductivity and low profits. By this year Joe Haley hired.


The Scanlon Plan Adoption• Developed in 1930s by Joseph Scanlon , the heart of the plan is the

concept of participative management.• The three plan components:

• Submission of suggestions for improvement by employees at all levels.

• Structure of the company committees that evaluate the suggestions

• Then sharing of the fruits of increased productivity through monthly bonuses.

• Employees signed a Scanlon Bonus Plan Agreement at Engstrom

• The strategy was to start with the total sales revenues generated during a specified period and then establish a percentage of that total as a standard or normative cost of labor, including managerial support.

e.g. A ratio of 0.50 to 1 would mean that the normative payroll cost was 50% of total sales revenue—and that employees would be paid a bonus for any month in which the payroll cost was less than 50% of total sales revenue (with the size of the bonus based on the percentage of savings achieved).

Basic Ratio = 𝑵𝒐𝒓𝒎𝒂𝒕𝒊𝒗𝒆 𝑷𝒂𝒚𝒓𝒐𝒍𝒍 𝒄𝒐𝒔𝒕/ 𝑻𝒐𝒕𝒂𝒍 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒖𝒆


• Employees suggest ways to improve productivity at the plant.

• Eight production committees, each composed of a supervisor and two elected employee representatives, review the suggestions, passing along disputed suggestions or suggestions costing more than a specified amount to the screening committee.

• The screening committee determines how to handle all these suggestions passed from the production committees and also reviews the monthly bonus calculations from plant management. This committee is composed of:• Five employees elected from the production

committees• Four management representatives appointed by the

plant manager• The plant manager

The Scanlon Plan Adoption

Suggestion Plan Process


Sample bonus calculation:

a. Management adjusted this value for returns, increases, or decreases in inventory—number is not equivalent to shipments.

b. The normal total labor cost is 38% of the sales value of production, or 38¢ for each $1 of product produced at sales value

c. 25% set aside before bonus distribution to form a reserve to cover deficit months.

d. Actual payroll minus payroll for employees on paid nonworking days (vacation, holidays, jury duty, etc.) or on job less than 60 days

a Sales Value USD 4,000,000 b Allow payroll at 38% USD 1,520,000 a x 38%c Actual Payroll USD 1,280,000 d Scanlon Bunus Poll USD 240,000 b - ce Set Aside as reserve 25% USD 60,000 d x 25%f Bonus Balance USD 180,000 d - eg Company Shares 25% USD 45,000 f x 25%h Employee Share 75% USD 135,000 f x 75%i Participating Payroll USD 1,260,000 j Bonus % (empl share / participating payroll) USD 10.7% h / i


Scanlon Plan

Increase productivi

ty

Increase Revenue

Increase Bonus ENGSTORM

Scanlon Plan Process

Pros• Win-win contract• Eliciting active employee inputs

for improvement• Increasing communication at all

level• Participation of workers• Improving product quality

Cons• Protect low performers • Complexity & fluctuation of the

base ratio • Management-labor conflict- lack

of honesty • Inelasticity for market and

economy changes • Workers began to perceive the

bonus as part of their regular paycheck rather than a reward, which reduces the durability of plan's results


What ‘s the point of having bonus plan if no bonus paid for months ?

Distrust of bonus calculations: • company might be “playing with” the numbers ?• suspicious whenever the management team changed the ratio,

which occurred four times between 2000 and 2005 (the final reduction was to 32.6%).

Question of fairness • “supervisors should have received a reduced bonus- they are not

working as hard as we are.”

• No reason to replace Scanlon Plan

• Had they though of it narrowly as a bonus plan instead of broader opportunity to build diff cultures ?

• Had he and his top managers done everything they could to make scanlon sustainable process ?

• Was there something else he was missing ?

Issues on Employee’s Side

Issues on Engstorm Side


PROB

LEM

Suspicious

Moral Down

Distrust

Management vs EmployeesProductivity

LowRevenues

DownCulture Change

Endanger Engstorm Fam

ily PlantAnd If Nothing change

They might close the plant

Although there are many different issues at the Engstrom plant, the main concern to be addressed is

that the management is not motivating the employees.


Suggestion

Committee Action

Ideally• Productivit

y• Revenue• Bonuses

Facts• Productivit

y• Revenue• Bonuses

Problem Chains

Suspected area of promblem

INCREASEDECREASE


Filter all suggestion, Improve screening committee and monitor action plan

Professional Development Plan for employees' career path

Long term plan for staff perform a consistently and progressively growing contribution to the company to build up Loyalty

Engstrom should create a modified Scanlon Plan that clearly relates bonuses to increased productivity,

Action Should be Taken


THANK YOU

engstorm case

Leadership & Management