Engstrom Auto Mirror Plant - Motivating in Good Times and Bad

Human Behavior in Organizations

February 25, 2018

Engstrom Auto Mirror Plant:

Motivating in Good Times and Bad

Engstrom Auto Mirror is a family-owned plant located in Richmond, Indiana that manufactures mirrors for cars and trucks. Ron Bent the plant manager was hired after the previous plant manager resigned in 1998. The previous plant manager experienced plant performance issues, which led to his resignation. In the late 1990s the plant was having a difficult time. The industry was experiencing a downturn.  Sales revenues and employee productivity were down, and the plant elected to retool and install new production technology in response. The former plant manager was technologically challenged, and had an “old school” management style.  He distrusted his unionized UAW work force.  

When Ron Bent took over as Plant Manager, one of the first things he did in 1999 was to implement a Scanlon Plan, which was a bonus incentive plan designed to increase labor productivity and promote cost saving techniques.  Ron Bent was familiar with the Scanlon plan from his previous employer at a camshaft production plant. The Scanlon Plan was intended to promote good communications between management and employees. The plan was designed to incentivize group goals.  The Scanlon Plan set up a screening committee for suggestions. The performance ratio that bonuses would be based upon, was actual labor cost divided by the sale value of production (not actual sales).  This was the “Base Ratio”.  If actual labor costs divided by production value were less than the Base Ratio, the difference would be put into a bonus pool, to be shared - 75% to employees and 25% to the company.

 Under the Plan, management could change the Base Ratio only under certain limited conditions - depending on changes in factors such as sales, wages, subcontracting and technology. The hardest part of the Plan implementation was setting the Base Ratio. The actual average the company experienced was 44%, but the company elected to set the Base Ratio at 38%. Tensions at the plant eased. At the same time, the plant achieved higher profits, consistent quality standards, and employees loved it. Employees really liked the two-way communication, and employees felt they had a stake in the company, even though very few suggestions actually resulted in actual cost savings.  After implementing new plant technology and then the Scanlon Plan, productivity and quality were good and bonuses were paid each month for many years.

Over time, enthusiasm for the Plan went down.  The company had previously received hundreds of suggestions each year, and later received only fifty a year. Bonuses were no longer seen as an incentive - they were expected.   Productivity and quality were down, and the employees began to mistrust management. The 2005 economic downturn then caused sales volume to go down.  Employees were no longer getting their expected bonuses.  The plant experienced additional quality and production delays. In 2006, forty-six people were laid off.  Troubled times had come back to the plant.

The Base Ratio was adjusted four times over a five-year period down to 32.6%.  Due to the organizational issues the company was experiencing, the company missed a ship date and was forced to air freight at an exorbitant cost, an order to their large and important customer – Toyota.  

Some of the organizational issues facing the company that plant manager Ron Bent needs to address include:

1. Distrust of the bonus calculations.  The employees felt the formula used to develop the ratio are made up by the accounting department to best suit the company. Prior to the Scanlon Plan, the company measured production success by calculating the total units produced. However, under the Scanlon Plan many factors were considered, such as returned products, sales mix, overtime, and the length of the month.  Employees felt they had no control over many of those factors.
2. Question of fairness.  Employees felt that the Scanlon Plan was not a one-size fits all plan for employees. The employees wanted their supervisors to receive a reduced bonus because they believed managers were not working as “hard” as the line employees, and because the supervisors were already being paid more than the manufacturing employees.
3. Lack of Employee suggestions.  Previously there were hundreds of employee’s suggestions each year, but now there was only fifty. Due to the Scanlon Plan worker enthusiasm and job satisfaction decreased. Workers stop providing feedback to management about their job because they felt disenfranchised, which led to decreased productivity and quality issues on the manufacturing floor.
4. The Scanlon Plan needs to be revised.  The Scanlon Plan in its early stages worked well, but ultimately deteriorated to the point where employees have not seen a bonus in seven months. The plan needs to be overhauled, with employee feedback to develop a new plan that would be fair to all employees. This overhaul with help solve the issues of low morale and low productivity.

In many ways, the problems the company was experiencing in 2006, were similar to the problems the company had in the 1990’s.  Business cycles repeat themselves. In the 1990s the company implanted new technology along with the Scanlon Plan. Productivity probably went up due to the new technology and not necessarily due to the Scanlon Plan bonuses. The two-way communication and improved employee morale likely also caused productivity increases. The Scanlon Plan bonuses probably happened due to the improved morale and better communication. The bonuses were the effect, not the cause. Another issue is that is that the current Scanlon Plan which only promotes labor savings does not drive company performance in areas that matter most – which are probably sales, on time shipments, and superior quality control. I doubt the reason the organization is not functioning well is only because of the Scanlon Plan.

...