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In some manufacturing environments, having workers engage in just-in-time production quotas without any inventory stockpiling or project overhang to the next day can actually cause motivational problems and increase costs. The answer is to make sure employees’ pay is tied to their actual productivity—and that means allowing for bad days and, consequently, some inventory build-up.

The challenge with new, leaner manufacturing practices, say the investigators, is to rely on accurate, up-to-the-minute information about production conditions on any given day. Is equipment functioning properly? Have all supplies arrived? Much of that information is reported by workers on the factory floor—meaning it is in the hands of workers rather than managers. Proper control systems, the study shows, are crucial for motivating workers to use their localized information to further the firm’s best interests as opposed to their own.

“Say a worker is required to assemble a certain number of printers in a given day,” says Richard Saouma, PhD ’06, an assistant professor of accounting at UCLA and coauthor of the study. “To make the just-in-time work environment function well, you need to know how productive that person is going to be so you don’t end up with unused inventory lying around at the conclusion of the day. But if you ask him, ‘Are you going to be productive or not today?’ he may be tempted to just say ‘no,’ earning the same pay for less work. That results in less efficiency for the firm. You have to make sure it’s in his best interest to be honest.”

The paper, coauthored by Madhav Rajan, the Gregor G. Peterson Professor of Accounting in the Stanford Graduate School of Business, and Professor Venky Nagar of the University of Michigan, shows that aligning worker and corporate best interests can be managed through communications-based salary contracts. That is, workers’ pay should be based on how much inventory they request at the start of the day, as well as how much they ultimately complete. Work schedules are designed around what an employee requests, perhaps via a morning email, even though his actual productivity is not determined until the work begins.

“If the employee says, ‘Today all systems are go, and I’ll be very productive,’ then the manager sends additional work to the employee,” explains Saouma. “If it turns out the employee is not productive that day, a flexible control system would allow him not to complete the work. Allowing such flexibility and paying employees based on their initial requests combined with their actual completion rates empowers them to ‘communicate’ honestly how productive they think they’ll be at the start of the day, as well as how much they’ve accomplished once the work lands on their desk.” In order to use all this information, the employee must be allowed to incur occasional inventory buildups, which means not producing exactly as much as hoped on a particular day.  More Details

—Marguerite Rigoglioso

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Also on Stanford Knowledgebase:

  1. Anchoring Employees with the Lure of Stock Options
  2. Financial Incentives Can Create Bad Employee Behavior
  3. When (Organizational) Change Hurts: Startups Need to “Think Employees” from the Get-Go

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