Armco, Inc. was a producer of stainless, electrical, carbon steels, and steel products in the United States. In 1990, it was the sixth-largest steel manufacturer in the country. The company’s largest entity was Kansas City Works, which was part of Armco’s Midwestern Steel Division. In 1990, Kansas City Works contributed around $250 million in sales from $550 million of Armco’s steel division net sales.
Kansas City Works produced two primary products: grinding media and carbon wire rod. Grinding media were steel balls used for crushing ore in mining operations while carbon wire rod was used to make shopping carts, coat hangers and other similar items.
Armco was recognized as the leading supplier of grinding media in the United States due to its durability and low complaint rate compared to competitors. Carbon wire rods, on the other hand, were a commodity product. Armco’s production of carbon wire rods was not cost-competitive due to outdated technologies, but it helped cover some fixed costs of the plant. The Kansas City Works was not a low-cost manufacturer, as its infrastructure was inefficient and designed for five times more employees than currently working there.
The salaried employees at the Works were eligible for cash incentive awards based on their performance evaluations, which were conducted by the division president. The amount of the award ranged from 5-30% of their annual salary, depending on their individual organizational level.
Prior to changes made in 1991, cost control and safety were the primary measurements used to evaluate the performance of cost center managers and plant superiors. The key measure for cost performance was a summary called Cost Above,” which measured the additional cost per ton of steel at each production stage.
The cost and its details were reported to the managers as an Operating Statistics Report, which was produced on the 15th day following each month-end. In January 1991, the management of Armco’s Midwestern Kansas City Works implemented a new performance measurement system. The system aimed to provide better management focus on important matters, earlier problem warnings, and improved commitment to achieve objectives. The new system introduced ten key performance measures for the Kansas City Works.
There were various factors that were taken into consideration, such as heats per week, tons per man hour, disabling injury index, spending, maintenance performance, cash flow, product mix, inventory days on hand and sales price minus cost of net metal. However, the new system eliminated Cost Above measure which was a significant change. Additionally, production managers were no longer considered as the cost center and the cost detail in the new performance reports was reduced. They only need to report spending by employees in their organizations. The main issue faced during this process was related to the transition and implementation from the old system to the new one.
The changes that top management wanted to institute and integrate were met with dissatisfaction and resistance to change. Another issue concerns performance evaluation and incentives. Specifically, how should managers’ performances be evaluated in situations where the outcome is influenced by uncontrollable events? The final issue concerns compensation – how much of the total compensation should be provided as a fixed salary, and how much should be paid as a reward for exemplary individual performance?
Analysis of Drawbacks (Weaknesses) in Old Performance Measurement Systems:
- The reports were generated 15 days following each month-end, which meant there was a time lag that prevented managers from taking immediate corrective actions.
- The reports generated contained too much information and were not easy to read and understand. Even Gary Downey, the melting shop manager, admitted that some information was too detailed and unnecessary.
- The performance evaluation was not standardized, allowing for subjective evaluations by supervisors. Managers were more focused on their subunits rather than the performance of the entire company as a whole.
- The system is inefficient because managers spend more time explaining why changes in costs were caused by problems with the accounting system rather than fixing the problems.
Strengths of the old performance measurement systems:
- Managers knew everything that went into the cost of their products.
- The employees were already familiar with the system.
- The system was capable of providing managers with information about the objectives they were expected to meet as a division.
Weaknesses of the New Performance Measurement Systems:
There were no numbers showing the budgeted spending targets, making it impossible to compare them to their current spending status.
The unfamiliarity of the managers with the new system complicated its implementation.
Strengths of the new performance measurement systems:
There is a need for more reliable and acceptable measurements to assess employee performance.
It was more effective and efficient in reducing the non-value-adding inventory valuation for the accounting division from 60% to 20%. If implemented effectively, it can maximize the company’s profit.
Recommendation
Regarding the issues with the implementation of the new system, it is recommended that top management in Kansas City consider reintroducing it along with a more intensive education and training program for managers, as well as a longer transition period. It is crucial for managers to fully comprehend the workings and benefits of the new measurement system in order for them to accept it.
When evaluating managers’ performance in uncontrollable situations, it is important for top management to exclude the time when such situations occur. Evaluation should only be conducted under normal production circumstances. For instance, if there were two transformer failures in different weeks within a year, productivity should not be considered in the evaluation method. Instead, only the average of 48 weeks of production should be counted.
For issues regarding employee compensation, the top management should establish a standardized performance evaluation system. This can be done by setting a target quota for employees to achieve extra compensation or incentives. Even if they do not reach the quota, employees should still receive at least the standard/basic salary payment for workers in the industry. Those who exceed the target quota should receive compensation based on how far they surpass it, and special awards or acknowledgements should be given to the most productive employees. This system is intended to motivate and increase employee morale.
