 Current system does lack an incentive for productivity  Job is just a low wage, dead-end, unattractive “punishment tour,” with extremely high turnover  Turnover rate is terrible (50 Vs 400%)!  For a 250 person work force, this is a 400% turnover rate (1,000/250).  Piece-rate may make sense Freddie's Position - POINTS TO CONSIDER

 A piece rate also has some serious problems at least for beginners (8 units)???  Measured on a per hour basis the pay increase may be > 13%  13% calculation ($4.35/3.85) assumes no increase in productivity  At 2.0 hours per unit rise is 30% ($5/3.85)  At 1.6 hours per unit, the hourly raise is 62% ($6.25/3.85).

 Freddie's argument is not internally consistent. a. Increased productivity to 2.0 hours/unit implies average worker has been on the job between 14 and 22 days  b.If the turnover were to decline dramatically, the productivity should improve to around 1.6 hours/unit, which would make the hourly pay rate about $6.25/hr. ($10/1.6). This is well beyond the “13% raise” being requested.

 A $10 piece rate is not likely to be a simple panacea for the turnover problem  The $10 proposal is likely to result in more than a 13% increase in labor cost

 Assumption of higher productivity 2.1 hrs Vs 2.3 hrs  Lack of incentive for productive employees  Higher wage may enhance profit  Salary reform is a must as turnover is 8 times of industry

 Expected production at highest productivity  253,750 hours x 2 = 507,500 hours ÷ 1.6 hours/unit = 317,000 units per year  Loss of revenue on the differential  Contribution per labour hour may be a consideration

 Saved Training & Outfitting - Under question??????  Turnover is not the only issue……  Average worker stays 52/4 = 13 weeks  Beyond 5 th week production – units

 Average tenure = 13 weeks = ~520 hours If the learning curve were followed: 170 hours = 64 units 350 hours = 219 units (350 ÷ 1.6) Total Production = 283 units ( )  Average productivity would be 520/283 = 1.84 hours per unit  Actual average productivity is 2.3 hours per unit (253,750 hours ÷ 110,000 units)  If learning curve productivity could be achieved, throughput could rise by 60,000 units a year with no improvement in turnover!

TenurePersonsGoalActualTotal 1st Week* nd Week rd Week th Week th Week th -16 th Week >16th Week Annual2148*52*

 Protect new worker & reward performer  May be a mix of time & piece rate $4 per hour during first 4 weeks Piece rate after that $9-10 seems ok  In 5 th week productivity = 40/24 units = 1.67  Rate per hour = 9/1.67 = 5.4 (35% bonus)

 $10 can be offered to employees with highest efficiency  Hourly rate amounts to $ (10/1.6)= 6.25  Hourly raise is around 60%

OutputLabor Cost Till 4th Week 34$160/week484(34*160) = th Week6$9/Piece(6*24) = th -16 th Week 72$9/Piece(72*25)= >16th Week10$10/Piece(10*27) = Per week Per Annum(2698*2*52) *2*52) Differential Differential Contribution =712144/60562 $11.75

 Current Revenue/unit = 3.85*2.3*1.2*100/24 = $  Incremental Cost per Unit: Labour = $ % = Material = $11.75 =  Contribution per unit = $  Additional Profit = 60000* = $

 The problem: Not labor cost but low production  Achieving full learning curve: could increase productivity with no improvement in turnover  The business: could afford to pay a lot more in total labor cost if it could generate a lot more

 Turnover is certainly terrible but can be improved a lot  High turnover is a “fact of life” but possible to reduce  No room in this business for higher prices, but improved productivity based on the known learning curve may provide a solution