ALLINISTRTUOMNENTS

Allison Instruments is a manufacturer of specialty medical instruments located ni south- em Ontario. Manufacturing involves two types of processes. First, individual workers produce the components for the medical instruments in batches of various sizes, using a variety ofmachine tools and equipment. Then other workers assemble the compo- nents into finished products. Assembly is done sequentially, with each product passing through four to six workstations before completion. Thequality of the products, which si crucial, depends on both the quality of the component parts that are produced and the qualityof the assembly process.

It is late January 2016 and the financial statements for 2015 have just been released.

They are grim. For the first time in the company's 50-year history, the firmhas shown a

loss. The company's chief executive officer believes a lot of this has to do with produc-

tion problems. The 2015 production reports indicate thatalthough the number of units

produced per employee showed aslight increase last year, thenumber of defectiveunits

reached an all-timehigh. In addition, there was ahigh rate ofwastage of raw materials and

other supplies. Although total sales (and therefore total production) are down from the

previous year, total labour costs are up. As a result, costs per unit are at an all-time high.

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APPENDIX

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Because you are an expert in human resources management, the CEO has asked for your help. As background for your work, the CEO briefs you on industry condi- tions. Until two years ago, the firm had enjoyed increasing sales over many years. It had also had increasing profits, with a record profit of over $3 million in 2012. However, ni the last two years, the medical instruments industry has become more competitive. High-qualitymedical instruments are now being produced by several Asian firms, two of which entered the Canadian market ni 2013. (Previously, the main competitors in the Canadian market were U.S. and European firms, but they are not much of a problem because their products are very high priced.)

Because of low labour costs, the Asian firms are able to price their products attractively; however, buyers initially held back, concerned about potential quality problems. So for a while, it appeared as if Alliston's customers (mainly hospitals and health clinics) would remain loyal, even though they were themselves under pressure to cut costs, due to budget cuts. But in late 2013, an Asian competitor madea major sales push by slashing prices, and this cut dramatically into Alliston's 2014 sales.In mid-2014, Allison laid off 50 employees. Although the firm had laid off employees from time totime in the past during production lulls, this was the largest layoff in company history.

To make up for the loss of sales, Allison added a number of new products to its line. (Over the years, t h e company had tended to stick with the same set of products, although new products were being put into use in the hospitals.) While some of these new products sold well, they didn't really make money, because production costs were higherdue tot h e need for new equipment and extensive employee training. Moreover, most employees preferred to work on the old products, so supervisors had to use a lot of pressure to get them to work on the newproducts.

Alliston's 250production workershave been unionized since the 1960s. In 2012,they staged a short but bitter strike. Because product demand was so high, the company did not want a long work stoppage, and the union was able to win significant wage increases for 2013 and 2014 (a two-year contract was signed. Since then, union-management relations, never very good, have been quite strained. Relations between supervisors and workers are no better. Supervisors complain about lazy workers who don't care if they do a good job or not, and workers complain about overbearing supervisors who allocate workunfairly and spend al their time watching and harassingemployees.

Interestingly, the employee turnover rate is low at Alliston. Pay at the firm is above average, and the benefits package, which increases with seniority, si very good, com- prising about 25 percent of total compensation. Comparable alternative employment opportunities in the area are quite scarce.

In late 2014, in an effort to increase efficiency, the firm persuaded the union to accept an incentive system in which employees would receive, in addition to their hourly wages, a bonus based on individual output, rather than an increase in base pay for 2015. A standard per-hourproduction rate for each item or assembly operation was established, based on estimated 2014 production levels. (However, because the firm had never kept detailed records, these standards were simply based on the estimates o fsupervisors.)

Under the new system, if production per hour for a particular item exceeds 2014 levels, the employee receives afixed sum foreach piece produced over that level, in addi- tion to the normal h o u r l ypay. Of course, employees do not receive a bonus for items that are not of satisfactory quality, and supervisors are expected to deduct these from the employee totals. However, there are no set standards for quality, and each supervisor seems to set different standards.

There seem to be many problems with this new paysystem. For example, workers complain that the production standards for some tasks are set too high and that they have no chance of earning a bonus on these items. Everybody tries to avoid these jobs, and productivity on them si poor. On the other hand, there are some jobs that every- body wants to do, because substantial bonuses can be earned, and productivity si up dramatically onthese jobs. But the net effect is that overallunits produced per employee have not really changed at all, while substantial sums are being paid out in bonuses.

In the past year, ten production workers have retired or quit and not been replaced, but this workforce reduction was made possible by the drop in sales during the year, not by increased productivity. However, this reduction in the workforce has been partly offset by the need to hire two additional supervisors to handle the increased needs for supervision, inspection, and administration of the bonus system, plus one additional full-time clerical person in the payroll department just tohandle the calculations for the new bonus system.

Supervisors have complained bitterly about the new system, saying it is placing additional pressure on them. They say it si causing increased conflict with emplovees because nobody wants the "bad" (i.e., poor-paying) jobs, and that employees resent it when these "bad" jobs are assigned to them. They find that employees don't care about quality as long as output meets minimum standards, nor do they care about the high wastage ofraw materials. Supervisors have to supervise more closelv to deal with these problems and try to keep quality and productivity up on the "bad" jobs.

And to top it off, supervisors are now making less money than some of the workers, since they are not eligible for the bonus system. The fact that none of the non-union employees received any pay increase last year does not help their mood, either. During the year, three experienced supervisors have quit. The firm had never had more than one or twosupervisors quit in a single vear before.

Although the union is generally opposed to individual performance pay plans, it had accepted this one in return for a clause in the collective agreement ensuring job security forthe current unionized workforce. Any workforce reductions occurring from greater efficiency will have to be achieved through attrition. Management had agreed to this condition because they did not expect to have to lay off employees. They had expected the new bonus system to reduce unit costs of production so that Allison could lower its prices and win back the business that had been lost.

It hasn't worked out that way. Financial data for the last four years are shown below. They indicate that sales peaked two years ago at $31 million and have since fallen to $24 million. Customers are complaining about product price and quality. However, the company cannot afford to reduce prices, because unit costs are so high. It is clear to management that something needs to be done, and quickly, but exactly what should be done is not so clear!

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YEAR 2 0 1 2

2013 2 0 1 4 2015

REVENUES $27,000,000 31,000,000 25,000,000 2 4 , 0 0 0 , 0 0 0

TOTAL MEOLPVSE

3 2 0 3 5 0 3 0 0 293

LABOUR COSTS

$9,000,000 12,000,000 11,000,000 12,000,000

OTHER

PRODUCTION

NET INCOME COSTS

OTHER COSTS

(LOSS) $13,500,000

$1,350,000

$3,150,000 15,500,000

1,550,000

$1,950,000 12,500,000

1,500,000

1 3 . 0 0 0 . 0 0 0

1,444,000

($2,444,000).

1. You are a team of top-notch compensation consultants hired by Alliston Instruments. Analyze the pay system at AllistonInstruments. Why is the new pay system apparently not working? Do you think that the individual production bonus system could work if some changes were made? What changes? Is the individual performance pay suitable for this company? If management insists on some type of individual performance pay system, what type would you recommend?

2. After analyzing the various options available, you have decided that a group pay plan would be beneficial to the organization. Select the specific group plan that would seem to work best, then design it, describing specifically how you would deal with the various design issues. When you are done, the plan should be ready for implementation.

3. Prepare a powerpoint presentation (up to 12 Slides) to document your findings and recommendations and be prepared to educate the CEO about Compensation and Total Rewards best practices.