1.  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

2.  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).

3.  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.

4.  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

5.  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

6.  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

7.  Saved Training & Outfitting - Under question??????  Turnover is not the only issue……  Average worker stays 52/4 = 13 weeks  Beyond 5 th week production – 17-20 units

8.  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 (64 + 219)  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!

9. TenurePersonsGoalActualTotal 1st Week*108770 2nd Week091412108 3rd Week081715120 4th Week072018126 5th Week062418108 6 th -16 th Week7225181296 >16th Week1026 260 03 1252148 Annual2148*52*2219096

10.  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)

11.  $10 can be offered to employees with highest efficiency  Hourly rate amounts to $ (10/1.6)= 6.25  Hourly raise is around 60%

12. OutputLabor Cost Till 4th Week 34$160/week484(34*160) = 5440 5th Week6$9/Piece(6*24) = 1441296 6 th -16 th Week 72$9/Piece(72*25)= 180016200 >16th Week10$10/Piece(10*27) = 2702700 Per week269825636 Per Annum(2698*2*52) 280592 25636*2*52) 2666144 Differential280562-220000 60562 2666144-1954000 712144 Differential Contribution =712144/60562 $11.75

13.  Current Revenue/unit = 3.85*2.3*1.2*100/24 = $44.275  Incremental Cost per Unit: Labour = $11.75+20% = 14.10 Material = $11.75 = 11.75  Contribution per unit = $ 18.425  Additional Profit = 60000*18.425 = $1115855

14.  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

15.  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