Armco Case Study - Costs Essay Example

Armco, Inc was producer of stainless, electrical, carbon steels, and steel products from United States - Armco Case Study introduction. It was the sixth largest steel manufacturer in the United States in 1990. Kansas City Works was by far the company’s largest entity in the Armco’s Midwestern Steel Division, contributing around $250M in sales from $550M of Armco’s steel division net sales in 1990. The 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, etc.

Armco was recognized as the leading supplier of grinding media in the United States because it was durable and less complains received compared to its competitors. Carbon wire rods on the other hand were a commodity product. The production in Armco was not cost competitive due to old technologies, however it helped to cover some fixed cost of the plant. The Kansas City Works was not a low-cost manufacturer. The Works had an inefficient plant infrastructure as it was designed to accommodate five times as many employees as were currently working there.

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The salaried employees in the Works were all eligible for cash inventive awards based on performance evaluation made by the division president, ranged 5-30% of the annual salary depends on the individual organization level. Before the changes in 1991, the measurements for performance of the cost center managers and superiors in plant were the cost control and safety. The key cost performance measure was a summary measure called “Cost Above” which was the cost added per ton of steel at each production stage.

Cost above and the details of it were reported to the managers as an Operating Statistics Report, produced 15th day following each month end. In January 1991, the management of the Kansas City Works of Armco’s Midwestern implemented a new performance measurement system that was designed to give better management focus on the things that are most important for them to worry about, earlier warning problems and improved commitment to achieve objectives. The new system introduced 10 new key performance measures for the Kansas City Works.

They were, 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. The most significant changes were the elimination of Cost Above measure in the new System. The production managers were no longer the cost center, and the cost detail in the new performance reports was reduced. They only need to report yhe spending by the employees in their organizations. Problems The first problem was regarding the transition and implementation process from the old system to the new system.

The changes in the system that top management wanted to institute and integrate were reacted by dissatisfaction and resistance to change. The next issue is regarding the performance evaluation and incentive which was how to evaluate managers’ performances in situations where the outcome of their performance was influenced by uncontrollable events. The last issue problematizes the amount of total compensation should be provided in fixed salary and the amount that should be paid as a compensation for employees that do exemplary individual performance.

Analysis Drawbacks (weaknesses) of the old performance measurement systems: * The reports were generated 15 day following each month end. That meant there were time lag that prevent the managers to take immediate corrective actions. * The reports generated had too much information and not easy to read and understand. Even Gary Downey, the melting shop manager admit that some information were too detailed and unnecessary. * The performance evaluation was not standardized. Therefore the evaluation could be done subjectively by the supervisor. Managers were more focused on their subunits rather than the performance of the entire company as a whole.

* The system is inefficient because managers spent more time to explain 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 capable to give the managers information about the objectives they were expected to meet as a division.

Weaknesses of the new performance measurement systems: * There were no numbers that shows the budgeted spending targets which made them unable to compare it to their cost /spending status. * Unfamiliarity of the managers towards the new system complicated the implementation of the new system. Strengths of the new performance measurement systems: * More reliable and acceptable measurements to measure the performances of the employees.

* It was more effective and efficient in a way it reduced the non-value-adding inventory valuation for the accounting division from 60% to 20%. If can be implemented effectively, can maximize the profit of the company. Recommendation 1. For the issues regarding the new system implementation, the top management in Kansas City could re-introduce the new performance measurement system along with a more intensive education and training program for the managers, as well as longer transition period. It is important that the managers understand the workings and benefits of the new measurement system for them to accept it. 2.

For the evaluation of managers’ performance under uncontrollable situation, we think that when the top management is doing the evaluation, they should put aside the time/ moment when the uncontrollable situation occur in the evaluation process. So they should only evaluate under normal circumstances of the production process. For example, if there were two transformer failures in two different weeks in one year, the top management should put aside the productivity in the evaluation method, so they only count for the average of the 48 weeks production. 3.

For the issues of compensation proportion for the employees, the top management should draft a standardized performance evaluation system by perhaps setting a target quota for the employees to achieve extra compensation or incentive. Even if they don’t reach the quota, they should still be given not below standard/basic salary payment for the workers in the industry. For those who reach the target quota should be given compensation based on how far they exceed the quota target and give special award or acknowledgement for the employee who is the most productive. This is meant to motivate and increase the spirit of the employees.

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