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Case Study 4: (25 Marks)

Alum Tubes Ltd manufactures aluminium cylinders that are used ina variety of products, such as scuba diving equipment and fireextinguishers. The company has just introduced a performancerelatedpay system in their smallest manufacturing plant. Employees willreceive bonuses, based on their work team exceeding the team’sperformance targets. At this stage only three of the four workteams will participate in the scheme. If this system works well, itwill be introduced into all of the company’s plants.

There are four teams, and each team has been given quarterlyperformance targets for (1) time taken in manufacturing cycle time,(2) material cost per unit and (3) production output (number ofunits produced). Two of the work teams are organised sequentially,that is, the output of Team A becomes the input for Team B. Teams Cand D both manufacture their product independently of the otherteams. However, teams C and D do share some equipment with Team B.Team D is not participating in the new performance-related payscheme. Team D has just introduced some new production technologyand therefore management believe the team is facing a steeplearning curve at present with this new technology, and the lack ofknowledge and experience would make it difficult for team D toachieve any performance targets at this stage.

A bonus pool of $10,000 has been set aside each quarter. Thisbonus is to be shared only among each of the participating teamsthat achieves their targets for the quarter and shared equallyamong the members of these successful teams.

The employees are excited by the new scheme. They can only gainby such a system. However, at the end of the second month, tempersstart to fray. Sam Smart, a member of Team B, takes his complaintsto the production manager, Adam Dolittle:

Sam: This new system is just not working. Team A is sabotagingour performance. How can we meet our performance targets when TeamA gives us faulty product to process? “They have skimped on thequality of materials, so it takes us much longer to complete ourpart of the manufacturing process because of the amount of re-workto fix the products. We have had a 15% increase in the number ofunits we have had to scrap due to materials defects, which reducesthe number of units we can make in a day!. This is made worse whenthe purchasing department orders our material far too late (as theycan purchase materials cheaper if bought in larger quantities, butthis makes delivery slower), so we have to wait around fordeliveries. Also, someone has been leaving the calibrator machinein such a mess, so we waste valuable time resetting the gaugesbefore we can use it. I am sure it is a member of Team C. Thesystem is not fair. The other two teams are making their targetsand we are not- and it is not our fault! Additionally, John Grump,a member of our team, is clearly not working to capacity- and hisrewards will be the same as ours!”

Adam was not sympathetic. He has just had to deal with adelegation from Team D who is upset because they cannot share inthe performance bonuses.

Adam: Calm down Sam. I am sure that you are exaggerating. Theseproblems will iron themselves out over the next few months. It isup to each team to manage its performance. Go away and deal withthese problems.

Requirements:

1. If Adam Dolittle is wrong, then what features of theperformance-related pay system are causing problems? Support youranswer with an explanation. 5 marks

2. Are the three performance measures appropriate for assessingperformance and awarding bonuses? Explain your answer. 4 marks

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Elin Hessel
Elin HesselLv2
28 Sep 2019

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