Current system does lack an incentive for productivity

Job is just a low wage, dead-end, unattractive “punishment tour,” with extremely high turnover

Turnover rate is terrible (50 Vs 400%)!

For a 250 person work force, this is a 400% turnover rate (1,000/250).

Piece-rate may make sense

Freddie's Position - POINTS TO CONSIDER

A piece rate also has some serious problems at least for beginners (8 units)???

Measured on a per hour basis the pay increase may be > 13%

13% calculation ($4.35/3.85) assumes no

increase in productivity

At 2.0 hours per unit rise is 30% ($5/3.85)

At 1.6 hours per unit, the hourly raise is

62% ($6.25/3.85).

Freddie's argument is not internally consistent.

a. Increased productivity to 2.0 hours/unit implies

average worker has been on the job between 14

and 22 days

b. If the turnover were to decline

dramatically, the productivity should improve to

around 1.6 hours/unit, which would make the

hourly pay rate about $6.25/hr. ($10/1.6). This

is well beyond the “13% raise” being requested.

A $10 piece rate is not likely to be a simple panacea for the turnover problem

The $10 proposal is likely to result in more than a 13% increase in labor cost

Assumption of higher productivity

2.1 hrs Vs 2.3 hrs

Lack of incentive for productive

employees

Higher wage may enhance profit

Salary reform is a must as turnover is 8

times of industry

Expected production at highest productivity

253,750 hours x 2 = 507,500 hours ÷ 1.6 hours/unit = 317,000 units per year

Loss of revenue on the differential

Contribution per labour hour may be a consideration

Saved Training & Outfitting

- Under question??????

Turnover is not the only issue……

Average worker stays

52/4 = 13 weeks

Beyond 5th week production – 17-20

units

Average tenure = 13 weeks = ~520 hoursIf the learning curve were followed:

170 hours = 64 units

350 hours = 219 units (350 ÷ 1.6)

Total Production = 283 units (64 + 219)

Average productivity would be 520/283 = 1.84 hours per unit

Actual average productivity is 2.3 hours per unit (253,750 hours ÷ 110,000 units)

If learning curve productivity could be achieved, throughput could rise by 60,000 units a year with no improvement in turnover!

Tenure Persons Goal Actual Total

1st Week *10 8 7 70

2nd Week 09 14 12 108

3rd Week 08 17 15 120

4th Week 07 20 18 126

5th Week 06 24 18 108

6th -16th Week 72 25 18 1296

>16th Week 10 26 26 260

03

125 2148

Annual 2148*52*2

219096

Protect new worker & reward performer

May be a mix of time & piece rate

$4 per hour during first 4 weeks

Piece rate after that

$9-10 seems ok In 5th week productivity = 40/24 units =

1.67

Rate per hour = 9/1.67 = 5.4 (35% bonus)

$10 can be offered to employees with highest efficiency

Hourly rate amounts to $ (10/1.6)= 6.25

Hourly raise is around 60%

Output Labor Cost

Till 4th Week

34 $160/week

484 (34*160) = 5440

5th Week 6 $9/Piece (6*24) = 144 1296

6th -16th Week

72 $9/Piece (72*25)= 1800

16200

>16th Week

10 $10/Piece (10*27) = 270

2700

Per week 2698 25636

Per Annum (2698*2*52)280592

25636*2*52)2666144

Differential 280562-22000060562

2666144-1954000712144

Differential Contribution

=712144/60562 $11.75

Current Revenue/unit = 3.85*2.3*1.2*100/24 = $44.275

Incremental Cost per Unit:Labour = $11.75+20% = 14.10Material = $11.75 = 11.75

Contribution per unit = $ 18.425

Additional Profit = 60000*18.425 = $1115855

The problem:

Not labor cost but low production

Achieving full learning curve:

could increase productivity with no improvement in turnover

The business:

could afford to pay a lot more in total labor cost if it could generate a lot more

Turnover is certainly terrible but can be improved a lot

High turnover is a “fact of life” but possible to reduce

No room in this business for higher prices, but improved productivity based on the known learning curve may provide a solution