Armco, Inc.: Midwestern Steel Division Case Study

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The Rolling and Finishing department was responsible for making parts to specification and ensuring the quality of the finished products. This required testing for physical properties and useful life. If products did not pass these tests they were rejected. The units used for quality control were not sellable, so these are costs. In addition to regular cost control aspects such as labor, energy, and maintenance, this department also has to account for lost costs due to yield losses.

A manufacturing plant consists of several pieces or large, complex machinery, which all require a considerable amount of maintenance to remain fully operational. The maintenance department is tasked with keeping the plant running but also keeping costs to a minimum to do so. Cost reduction is especially important here since the maintenance department accounts for 40% of the hourly workers in the plant, so labor costs are necessarily high.

2. How were managers controlling performance with the old system? What were thestrengths and weaknesses of the old system?

Salaried employees were offered incentive awards based on performance evaluations done by their direct supervisors. These evaluations were generally based on three measures of performance but were often very subjective since the old system did not provide specific measures of success for each department. The old system consisted mostly of the Operations Statistics Report and focused on safety and cost performance. The most essential measure of cost performance was the “Cost Above.” This is the measure by which most operations managers gauged the success of their department.

One of the strengths of the old system was that it was familiar. Management was accustomed to it and had learned how to look at it and glean what information they deemed important. Some managers liked the large amounts of detailed information available. It provided five-year history, monthly and year-to-date actuals/objectives/variances. The cost per net ton was a good measure as well.

There were many weaknesses with the system, however. Although some management liked the amount of data on the reports, it was excessive for being the primary report. The report should be tailored for each department. Another weakness is the fact that it was not issued until the 15th of the following month. If there had been a problem during the month, it may go unnoticed for almost a whole other month. This report used the same accounting information used for official reporting. This means that the costs were allocated and altered in a way that was not truly indicative of actual events for the past month, which could be misleading.

3. What were the key features of the new system and what improvements did itpromise?

As described by Rob Cushman and Bob Nenni, the system provided two major improvements. One was that it was designed so that managers could focus on a few major objectives rather than the plant as a whole. Then if a problem is discovered, the excess detail will be provided. Another was that it would provide more quantitative measures for performance evaluations such as quality, schedule achievement, safety, and cost control. This is aided by the fact that cost reports would include only what that manager’s group could directly control.

The new performance evaluation system consisted of ten key performance measures: heats per week, tons per man hour, disabling injury index, total quality index, spending, maintenance performance, cash flow, product mix, inventory days on hand, sales prices minus cost of net metal. Each measure was further broken down into components and the design group determined which components specifically affected each management group in order to provide reports tailored to each manager. This new system no longer utilized the Cost Above measure, making managers much less concentrated on cost details throughout the plant. Instead, costs were broken down by what was specifically spent by that group rather than what was spent by that whole section of the plant.

4. What are the weaknesses of the new system?

There are two remaining issues detailed in this case study. One was a question of how to evaluate the performance of managers when numbers were distorted due to factors beyond their control. If power losses cause the melt shop to miss their heat/week average goals and thus hurt the production of the rest of the plant, should that be reflected on their performance evaluations? This is one way in which having an evaluation based purely on numbers and outputs is at a disadvantage, where it would usually normalize evaluations and take out chances of personal favor altering it. However, surely there would be a way to prorate and correct expected goals for the weeks affected to account for uncontrollable circumstances.

Another issue is how much of salaried compensation is made up of incentives. It was not determined how much would be a fixed salary and how much would be an incentive based on exemplary performance. This is important to determine; if an employee works hard and gets double the output that his coworker does but then only gets an extra 2% for an incentive, he will likely be less inclined to continue working so hard.

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