During the first two or three months our labor costs were almost 50% above the target. We were spending $16 per $100 of goods instead of $11. Since there were no supervisors, I played the role of foreman and cheerleader. When the employees had a good week, we analyzed why they had been more efficient; when they had a bad week, we looked for reasons.
As we went along, I shared as much information as I dared to. Every week I would tape a sheet of paper with three numbers on it to a metal post: the past week's production, our direct labor cost, and the percentage of labor to production. I avoided talking about profits -- or the lack of them -- for fear that employees would think the business was going to fail. Instead, I talked about cash flow and performance relative to plan, both of which, I explained, were right on target.
After we'd been at it for about four months, people could see signs of improvement. By then, we had 10 or 11 production employees, and labor costs had dropped to about 13%. There were still peaks and valleys, but employees, for the most part, were encouraged. I'd walk through the plant, and they would always have ideas for streamlining production. They would say, "What about moving these components from here to there?" or, "Why don't we produce parts in bigger batches?" My role as cheerleader and foreman began to diminish.
As we moved into the summer of 1988, however, we lost some of our momentum. In June we had a surge of about $300,000 in orders, representing more than 40% of the $700,000 in production we had planned for the entire year. Our people, who were working a lot of overtime already, couldn't keep up, so we had to bring in six new employees. They weren't trained, of course, so our efficiency suffered. That was a big psychological setback for the people who thought they were closing in on their bonuses. But we had no choice: we had to satisfy our customer.
For about three months we were running three shifts. We had 18 people working in production and 4 others (including myself) backing them up. I gave out small raises in an effort to encourage the employees who had been trying so hard, increasing their base pay from $6 an hour to $6.75. Ironically, the increases added to the payroll cost, which made it somewhat harder for people to qualify for the bonus. But since there hadn't been any bonuses yet, nobody cared.
It was a tough summer. Among other things, it was brutally hot, and the plant had no air-conditioning. Morale was low. Two of the original employees got called back by companies from which they had been laid off, and they left, taking jobs that paid about $10 an hour. They said they had lost confidence about hitting the bonus targets anytime soon. Frankly, so had a lot of other people. Whenever employees expressed their doubts to me, I would take them through the numbers again. We would look at the improvement in performance since the spring. Now that they were getting more efficient, I said, they had to learn how to think beyond the task at hand, to order materials in advance so they wouldn't run out.
In early fall the situation began to improve. We caught up on production and could eliminate our third shift. Because it was by far the least efficient one, we thereby lowered our labor costs significantly. That brought us down to 10 production people. By October they were working in the bonus zone. Week after week labor came in below the 11% target, running from 9% to 10.4%. I kept setting aside money to pay out at the end of the quarter. As people saw the total rising, they were thrilled, and so was I.
But after seven straight weeks in the bonus zone, something happened: we stopped shipping goods. In itself, that was not a problem. We had to have periods during which we could build up our inventory of standard goods so we could handle the special orders with a minimum of disruption. It was all part of the plan.
However, employees saw the inventory accumulating, and they got nervous. Talk of layoffs spread through the plant. I tried to address the employees' fears, explaining why we needed a reserve of finished products. Nobody, I told them, was going to be laid off. But no matter what I said, people were scared by the sight of growing inventory. In response, they started working less efficiently. By the end of the quarter the bonus was wiped out.
As you might expect, this turn of events deflated a lot of employees. They knew they had had the money in their hands, and they had blown it. For my part, I really wanted them to earn a bonus. To the extent that the inventory had thrown them off, I felt partly responsible for their failure to get it. I also believed that when they finally saw a bonus check, it would motivate them tremendously.
So just before Christmas I called the employees together. I told them I would pay the bonus based on their performance in the first seven weeks of the quarter. I said we would never do this again, but I wanted them to know we were really serious about the system. Then I handed out the checks. Under the formula we'd worked out, the bonuses averaged $372 a person.
It worked. During 1989 we paid out a bonus check every quarter, and the employees earned every cent. The bonus payments, which averaged $340 in the first quarter, grew to an average of $771 in the last quarter. Granted, our sales increased from $1 million to about $1.4 million, which played a role. But most of the increase was the result of rising productivity. We were doing more work with 11 people than we had done the previous year with as many as 18.
As time went on I could see the change in employees' attitudes. Before we were making bonus payments, workers didn't seem to care if we spent money on overtime because of a production snag. It was the company's nickel, not theirs. But once they crossed into bonus territory, they saw that production problems were costing them money, and they became very diligent about finding ways to improve.
Meanwhile, they were operating increasingly on their own. We would just give them a general overview of our production needs for the following week, and they'd take it from there. They knew that the faster the work got done, the more they stood to make. To speed up the process, they began telling one another how many parts they needed, when, and in what order. Some would even come in early to lay out their parts on pallets. We tried to help them save time by putting phones at each workstation, so an employee could call a vendor directly if, say, a machine malfunctioned.
