Advanced Manufacturing and Two Ways to Reward Agility
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Modern factory floors fascinate me. There’s something about the clang and whoosh of the myriad machines, the hum of an overhead crane gliding along its tracks, the intricate yellow lines demarcating where it’s safe to walk and the ambiguous chemical aroma punctuating the air with hints of solvents or grease or paint or maybe all of them mixed together.
There’s something about the delicate dance of interdependent and interconnected parts and processes that somehow—amazingly—produce that which we and the entire world outside the factory walls often takes for granted.
When I’m in a factory, I still get the same sense of wonder and curiosity that I had when I was 8 or 9 years old, touring the Rohm and Haas plant in Louisville, Ky. And this week, I had the opportunity to visit one of Cleveland’s (and Ohio’s, for that matter) oldest and largest manufacturing firms: Lincoln Electric.
Although it’s old (founded in 1895) and large (about 10,000 total employees, $2.5 billion in revenue), Lincoln Electric has a distinct track record of innovative practices within the realms of strategy execution and incentive systems designed to channel its employees' motivation and effort.
It’s not surprising that it has long served as a case study for Harvard Business School.
But what I found most intriguing was how Lincoln Electric has structured agility—the capability to sense and respond to change—into two distinct parts of its measurement and evaluation systems.
First, Lincoln Electric’s managers systematically assess and rate their employees’ flexibility. These ratings—along with ratings on dimensions of teamwork and dependability, safety, quality and contributing to improvement efforts by providing recommendations—form what’s known as the employee’s “report card.” And this report card plays an important role in determining the employees’ bonuses, so it’s meaningful.
The feature of Lincoln Electric’s incentive system that’s probably most well-known is its piecework pay structure. For many workers, that means they get paid based upon how many items they actually produce—no hourly wage, no salary. This creates a powerful motive for workers to work quickly and efficiently. To ensure quality, mistakes matter. If an item fails any aspect of a quality check, the same employee (or group of employees) who put it together must fix the problem.
Many aspects of this system are intriguing, but what I like about the flexibility component of the report card at Lincoln Electric is that it’s strategic in nature. That’s because Lincoln Electric is a low-volume, high-mix manufacturer. Simply put, they make many different types of products in quantities that often vary. This has allowed them to meet their customers’ often-diverse needs, but it also means that they need their employees to become proficient in more than one area of expertise. They need their employees to be willing and able to jump in and help in other areas if needed. This is critical to maintaining their business model, and it’s critical for employee behavior. As such, including this type of flexibility (which I’d argue is closer to agility) is part of the evaluation and incentive structure sends a clear signal to their employees in terms of what’s expected and rewarded.
Second, Lincoln Electric’s commitment to agility extends to its supply chain. Not surprisingly, to support its diverse array of products, Lincoln Electric depends heavily on high-quality materials. And because their production volume is often variable, they depend not only on having high-quality materials, but also upon having those materials available in variable quantities. As such, Lincoln Electric requires flexibility from its suppliers.
And just like it does with its employees, Lincoln Electric systematically assesses the flexibility of its suppliers. This occurs as part of periodic evaluations in which its supply-chain leaders rate each supplier on a number of dimensions as part of an overall scorecard. Furthermore, Lincoln Electric works with its suppliers to ensure they have contingency plans in place to help them manage the unexpected—because that which affects the suppliers will certainly affect Lincoln Electric.
There’s surely much more detail and nuance involved in both Lincon Electric’s commitment to employee and supply-chain agility, but I think one big lesson that applies to organizations everywhere is this:
If you truly value an aspect of behavior, it’s not enough to talk about it. You must take the next step and measure it—and reward it.
This sounds simple enough, but I’m continually surprised by firms that hope for certain outcomes or changes in behavior yet are unwilling to systematically measure and incentivize those very same outcomes or behaviors.
Many companies claim to value agility, flexibility, responsiveness or nimbleness. But never forget—hope and expectations and slogans and posters and speeches won’t necessarily influence what people actually do. To create alignment between behaviors and strategy, the right incentives must exist.
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About Ben Baran
Ben Baran, Ph.D., is probably one of the few people in the world who is equally comfortable in a university classroom, a corporate boardroom and in full body armor carrying a U.S. government-issued M4 assault rifle. Visit: www.benbaran.com.