Armco,Inc.

:MidwesternSteelDivision

1.Theoldperformancemeasurementsystemhadthefollowingproblems:

Itdidnotprovideinformationontheproductmixbeingproduced.Itprovideddataontotal
tonnageproduced,butdidnotbreakdownwhatwasproduced.

Thesystemcomparedactualtoobjectivebutdidnotprovidedataonwhatfactorscaused
variance.

Costswerenotbrokendownby:

oFixedcosts

oVariablecosts

oRelevantRange

Reportsweregeneratedonthe15thdayfollowingeachmonthend.Therefore,timelagwouldnot
allowthemanagerstotakeimmediatecorrectiveactions.

ItdidnotmeasureKeyPerformanceIndex(KPIs)foreachdepartment.

Thesystemdidnothighlightdatathatwasoutsidethenorm.

Between19851989,MeltShopmanhours(MH)havebeenreducedby20.4%but$/NThas
onlyreducedby8.4%

Reportsgeneratedbythesystemhadtoomuchinformationandnoteasytoread.Themeltshop
report(Exhibit3)alonehad46separateexpensecategories.GaryDowney,themeltingshop
manager,acknowledgedthatsomeoftheitemswerequitesmallindollarvalue.

Thesystemdidnotprovideinformationonbottlenecksrelatedtothemeltshop.

Thesystemalsodidnotprovideanyinformationonqualitycontrol.Itdidnotprovidebreakdown
onwhatpercentageofproductionmetqualitystandards,whatpercentagefailed,andwhat
percentageofitemsfailedacustomersqualitycontrolandwerereturned.

2.Theoperatingmanagersmayhavelikedtheoldsystemforthefollowingreasons:

Noonelikestobemovedoutoftheircomfortzone,especiallyaftersomanyyears.

Themanagershavebeenworkingwiththeoldsystemforaverylongtimeandtheyaremore
familiarusingtheoldsystem.

Themanagersmayhavethoughtthatthereportsfromtheoldsystemweremorerelatedtobudgets
whichtheywereexpectedtomeeteverymonth.

Onethingthatwillcatchthereadersattentionisthelatenessofthestatisticalreportswhichare
madeavailabletothemanagers.Thesereportswereavailableonlyafter15daysoftheclosing
month.
AIMCOsmanagementforgottoasktheoperationsmanagersthoughtsaboutwhichinformation
wasimportantandnecessarytobeincludedinthereport.

AIMCOmanagementcouldhaveintroducedthenewsystembytellingoperatingmanagersthat
theywillgetfaster,reliable,andimportantinformationinlesstime.

AnotherthingthatwillcatchthereadersattentioniswhenBobNenniobservedthatwhen
managersgettoomuchdata,theycaneasilygetunfocused.Thenewsystemissupposedtohelp
managersfocusonthefiveorsixthingsthatcausethe80%ofcosts,ratherthanworryaboutthe40
thatcause100%.

Herearesomedatagatheredaboutthemostimportantstrengthsandweaknessesfromtheold
system:

|Strengths||Weaknesses|

|1.Thesystemisabletoidentifyproblemsfromdifferentareas.||1.Reportsaredelivered15days
afterthemonthhasended.|

|2.Thesystemisabletogivemanagersinformationaboutthe||2.Thedatawasdividedbylocal
departments.|

|objectivetheywereexpectedtomeet.||3.Managersarenotabletousegraphicinformation.|

|3.Employeesarealreadyfamiliarwiththesystem.||4.Thedataisnotclearanditisdifficultto
readand|

|4.Monthtomonthtrends.||understand.|

|||5.Thesystemdoesnotgivethefixedandvariablecosts.|

|||6.Thesystemisnotabletogenerateinformationweekly.|

3.Thefollowingisanevaluationofthenewsystemandthewayitwasbeingimplemented:

Thenewsystemproposestofocusontendifferentmeasures.Eachmeasureisdirectlyrelatedwith
thedifferentareas,whichisaplus.

Eventhoughthemaintenanceperformancemeasureshavenotbeenclearlydefined,itshouldnot
beleftbehind,becauseitisveryimportantliketheotherdifferentitemsinthedesignofthenew
system.Itcouldbeusedtomeasurethequalityofworkandmoreimportantly,itcouldmeasurehow
tosavemoneyorcutdownonexpenses.

Havingaverydetailedperformancemeasuresareveryimportantinamanufacturingsitebecause
ofthelaborthatisbeingimplemented.

Also,itisareallygoodthatwiththenewsystem,productionmanagerswerenolongerheld
accountableforallthecostsincurred.Withthisnewmethod,theycouldnotblamelowlevel
employeesincasesomevariationsoccurwithdifferentexpenses.
Theimplementationoftheprocesswasdonesoquickly,thatthetopmanagerscouldnottrain
othermanagerstousethenewsystem.Andtheycouldnotintroducethenewsysteminastepby
stepformatsotheycanbemoreawaredaybydayonwhatisgoingtobechanginginthefuture.

Herearethechangesthatcanberecommendedforthenewsystem:

Specifythedifferentkindofcosts(fixedandvariable),sothatmanagerscanhaveanideaofthe
differencesandvariationsofeachtypeofcosts.

Implementthepropertrainingforthemanagers,sothattheydonotmakeanymistakeswhichcan
createproblemsforothers.

Elaboratethecorrectverificationofthedatasoitdoesnotcreatedifferencesofopinionsor
mistakesfromperiodtoperiod.

4.Thefirstissuewasabouthowtoevaluatemanagersperformancesinsituationswhere

thenumbersweredistortedbyuncontrollablefactors.SoRobCushmancouldtrytodo

thefollowing:

Callsomeenergycompaniesandaskthemtodiagnosethetransformerproblemfurtherandfigure
outifthereanyotherwaystofixtheproblempermanently.

Havesomebackupelectricalunits,suchasgenerators,justincasethepowerfailurecontinuesto
exist.

Seeifthereisapatterninthepowerfailures.Ifthereis,trytosetaschedulearoundthepowercut
andworkasfastanefficientaspossiblewhilepowerisstillavailable.

Thesecondwasanissueastowhethertoincreasetheproportionoftotalcompensation

thatwaslinkedtoindividualperformanceevaluations.AndRobCushmancouldfigure

thisoutbydoingthefollowing:

Createareportbasedsystemwheremanagerscanuseachecklistand/oracritiqueworksheetand
writedownwhattaskstheirteamhascompletedforthedayorweek.Asthemanagerscheckoffthe
duties,theycandeterminethetotalcompensationbasedon:

oIftheemployeesonthatteamwereproductiveandmettheirminimumdutiesbythedeadlines,
thentheyshouldreceivetherequiredtotalcompensationintheirfixedsalary.

oButiftheemployeesontheteamweremoreproductiveandtriedtoachievemaximumresults,
thentheyshouldberewardedextracompensationapartfromtheirsalary,likebonusesorsharesof
stock.Nonmonetaryrewardscouldalsobegivendependingonthepreferenceoftheemployee.