Star Manufacturing, manufacturer of Starlite brand small appliances, has a process engineering department (PED). The department’s major task has been to help the production departments improve their operating methods and processes.

For several years, Star Manufacturing has charged the cost of consulting services to the production departments based on a signed agreement between the managers involved. The agreement specifies the scope of the project, the predicted savings, and the number of consulting hours required.

The charge to the production departments is based on the costs to the engineering department of the services rendered. For example, senior engineer hours cost more per hour than junior engineer hours. An overhead cost is included. The agreement is really a “fixed-price” contract. That is, the production manager knows the total cost of the project in advance. A recent survey revealed that production managers have a high level of confidence in the engineers.

The PED department manager oversees the work of about 40 engineers and 10 technicians. She reports to the engineering manager, who reports to the vice president of manufacturing. The PED manager has the freedom to increase or decrease the number of engineers under her supervision. The PED manager’s performance evaluation is based on many factors including the annual incremental savings to the company in excess of the costs of operating the PED department.

The production departments are profit centers. Their goods are transferred to subsequent departments, such as a sales department or sales division, at prices that approximate market prices for similar products.

Top management is seriously considering a “no-charge” plan. That is, production departments would receive engineering services at absolutely no cost. Proponents of the new plan maintain that it would motivate the production managers to take better advantage of engineering talent. In all other respects, the new system would be unchanged from the present system.

1. Compare the present and proposed plans. What are their strong and weak points? In particular, will the PED manager tend to hire the “optimal” amount of engineering talent?

2. Which plan do you favor? Why?