In 2010, media giant BSkyB won a five-year High Court legal dispute with IT company EDS who, BSkyB claimed, were unable to meet a contractual obligation to provide a customer relationship management (CRM) system. The case cost EDS dear – to the tune of some £318 million, a salutary reminder of the importance of remaining realistic when negotiating contracts with customers. Derek Brown, owner of Database Design Ltd and a 35-year veteran of the manufacturing industry, explains how, while on a much smaller scale, his own company fell foul of an unrealistic supply agreement and what he did to turn the situation around.
My company had been manufacturing clock cases for clock makers for six years. One the company’s largest and longest established customers placed an order with us for 40,000 clock cases at £3 each. The contract was awarded to us on the basis that we deliver all 40,000 within 16 working weeks from date of order. The value of the order represented the total of our previous years output. Suitable materials were purchased for the first month’s production, approximately £15,000 worth of raw material.
Working closely with the works manager, who was sure that we could indeed deliver on time, in the first two weeks with seven employees working a 50 hour week the total output of finished clock cases was exactly 387 units. This meant that we were a staggeringly long way from what was required. With the loss of the first two weeks, we now had to manufacture nearly 3,000 clock cases per week.
This placed the company in a serious situation. Having purchased a huge amount of material, the total value of production was less than £1,200 - it was quite obvious that within a very short period of time the company was going to collapse.
Clearly, continuing what was already being done would not create the dramatic change that was needed. With little option I gathered the seven employees together and made the situation clear to all concerned. The responsibility for solving the problem was put completely in their hands and it was made clear that this was a request for help not a demand or threat and there would be a financial reward for them if they got it right.
They decided to put three workers on a night shift cutting and preparing materials, and four staff on day shift assembling components. They made a production line for assembly. (One large sheet of thick plywood with four workstations, two each side bolted to a workbench. The products went around the table clockwise one at a time and straight into a box. Using this system, the highest productivity was 725 clock cases per day boxed up and loaded into the van for delivery.
When workers are placed in a situation where they have both control and responsibility, (and where there is a financial incentive) invariably they will increase performance significantly. If you want to experience the power of this you need to trial it in a small none critical area of your business. Here are the guidelines:
- Tell all staff about the trial and explain that if it is successful it will be rolled out steadily to other areas.
- If you don’t do this other staff will be suspicious and may become deliberately uncooperative.
- Any financial benefit to workers absolutely must be strictly based on what the company wants from them. However, care must be taken: pay a bonus on volume of output and you’ll get a high volume of substandard product. Pay a bonus on quality and you will lose out on volume. Any bonus must be paid for what the company makes profit from i.e. quality product of sufficient quantity delivered on time with good service throughout. This has the additional benefit of bringing all areas of the business together. “We only get the bonus if we all do a good job”
- Any bonus must be incremental. Having a “yes you get it, no you don’t” threshold can be demoralising to the point where staff feel that management have contrived to ensure that they don’t get a bonus. If this feeling is widespread they will not cooperate in future.
- You cannot refuse a bonus if external forces contrive to halt or reduce output. If the workers are on track to succeed and a vital component for assembly does not arrive, workers are not at fault. Make absolutely sure that any bonus paid to workers is only increased or reduced by factors that they control
- The staff must have the option to opt out of this plan if the trial does not work for them. It’s not a good idea to force this onto your staff. It will only cause resentment.
If you want the ultimate system, get your workforce to design it. Give them the overall plan; for example, you want to increase productivity by 50 percent within 10 months at a linear rate of five percent per month. An ideal bonus is a very low base line, so they will definitely get something and 10 percent of the additional contribution. (Contribution in this sense is output minus material content. In other words by workers increasing contribution their bonus is, say 10 percent of that additional contribution and the company’s gain is 10 times the bonus paid.)
Workers know that you are not going to hand them money on a plate. Ask them what they think is fair and what failsafe systems they would put in place to protect the company from wastage, non-conformity, poor performance from individuals etc. You will be surprised at their candour and fairness.
Above all, be generous. Remember: for every £1 you pay in bonus the company gets £9 contribution in return. Mess with this and you can lose all you have gained overnight.