Wednesday, September 14, 2016

Manufacturing plant incentives...

The below excerpt is from Driven to Succeed: How Frank Hasenfratz Grew Linamar from Guelph to Global, and given the incentive system that was copied, may also make the book The Magna Man an interesting read.
Each plant operated as an independent profit centre headed by a general manager aided by a small management team — called a plant operating committee — that included corporate finance, cash management, material, and marketing. That independence allowed each plant to book new orders, pare costs, and run incentive programs to reward quality work and productivity gains. As part of their compensation, general managers received a salary plus a portion of the plant’s annual profits so they would feel and act like entrepreneurs with a stake in Linamar’s success. “If a general manager of any one plant doesn’t know every employee personally, and any work-related or personal problems that employee may have, then he’s not going to be with us very long,” said Frank. 
Frank copied the plant size and management incentive plan from another immigrant in the auto parts business, Frank Stronach. Like Frank Hasenfratz, Stronach was a tool-and-die maker who came to Canada, in his case from Austria, in 1954. He started Magna in 1957 and by 1986 had 11,000 employees at ninety plants. “I’ve always been a big admirer of Frank Stronach. He’s a genius the way he set up his plants as stand-alone profit centres. We have duplicated that all the way,” said Frank. “I like his business model and he attracts a lot of good people. The best come from the bottom up.”

Related excerpt, and mental model, from the gold standard of books on mental models and wisdom, Peter Bevelin's Seeking Wisdom: From Darwin to Munger:
“We increased production volume but employee focus, service, and motivation went down.” 
At some point the disadvantages of business size may eat into the advantages. For example, increased costs and investments, per-unit cost increases, systems become too complicated, bureaucracy and inefficiency, etc.
People’s behavior may change when we change the scale of a group. What works well in a group of one size may not work at all in a group of another size. Garrett Hardin illustrates this as he examines the religious Hutterite communities in the northwestern U.S.:
As a colony grows in size, the propensity of the individual to claim a share of production “according to his needs” increases, while his eagerness to work “according to his ability” diminishes. The effectiveness of the overseers (preachers or bosses) also diminishes. Then, as shrinking increases, those less inclined to “goof off” begin to envy the brotherhood of drones, whom they presently join. 
The Hutterites learned that scale or the number of people in each decision unit is important. Up to 150 people per colony, the system can be managed by the force of shame. Above this size an appeal to conscience loses its effectiveness and individuals begin to need more than they contribute. Studies show that groups of about 150 individuals are common in clans of hunter-gatherers, and military units.