Armco, Inc. produced stainless, electrical, carbon steels and steel products. Armco, Inc., along with the help of other companies Armco, “produced coated, high strength and low-carbon flat rolled steel and oil field machinery and equipment” (Merchant & Van der Stede, 2012). In 1990, Armco was the sixth largest steel manufacturer in the United States. Armco’s Midwestern Steel division generated $550 million dollars in sales in 1990. Within Armco, the Kansas City Works division was their largest entity. It accounted for approximately $250 million in sales. Within the last decade, along with other steel producing companies, business within the Kansas City Works division began to decline. (Merchant & Van der Stede, 2012)
Kansas City Works was divided into five different cost centers: melting, casting, the 19’ mill, the rod mill department, and the grinding media department. Performance measures of management and their superiors were based on terms of cost control and safety. The main performance measurement was known as “Cost Above.” The Cost Above and the specific items that made up the Cost Above were reported to managers on an Operating Statistics Report. “The Operating Statistics Report showed a five-year history, monthly, and year-to-date actual’s and monthly and year-to-date objectives and variances from objectives for each of the factors that determined total Cost Above for each cost center” (Merchant & Van der Stede, 2012). The Operating Statistics Report also provided the same accounting information, which was utilized for financial reporting and inventory evaluation purposes. Management had become accustomed to the Operating Statistics Report and found it to be valuable. Therefore, when the Cost Above system was eliminated managers became unhappy.
Bob Nenni, the director of finance, wanted to implement a new performance measure system, and in 1991 Rob Cushman, President of the Midwestern Steel Division, allowed Bob to implement the new system. The goal of the new system was to provide middle and lower class management with a better understanding of how their performance related to the application of the division’s business strategies and as a better system for managers at all levels to assess the degree to which the desired results were being accomplished. Rob Cushman and Bob Nenni believed the new performance measure system consisted of two major improvements: the new system was designed for managers could focus on a few key objectives that determined the success of Kansas City Works, and the new system was created to provide and improve how evaluations were conducted for operation managers and manufacturing supervisors.
The new system included a balanced set of performance measures, including quality, schedule achievement, and safety, along with costs. The new performance measurement system generated a couple of concerns; the first concern was regarding how to evaluate managers’ performances in situations where the numbers are inaccurate by uncontrollable factors. The second issue was as to whether or not to increase the amount of total compensation that was connected to individual performance evaluations. Bob felt Armco was on the right track with the new performance measurement system, it would just take some time to get accustomed to the changes. (Merchant & Van der Stede, 2012) Midwestern Steel Division: Old System Faults
The Midwestern Steel Divisions old performance measurement system did not provide accurate and dependable information regarding management and employees performance. The old system did not have key performance measurements for each department within the plant. The Operating Statistics Reports provided to management provided too much detail and was not easy to read. There was also information that was not necessary to management to make budget decisions. The old performance measurement system did not provide any information on quality control. The reports did not provide a breakdown of information on production quality standards. In addition, reports were generated the 15th day following each month end, therefore, providing outdated information to management. Midwestern Steel Division: Old System Praises
The Midwestern Steel Division operation managers liked the old system, as they were familiar with it. Management understood the system and it was within their comfort zone. Management liked the Operating Statistics Reports because it provided them with detailed budget information and their objectives, in which they were required to meet each month. Implementation: New Performance Measurement System
The new system is defined by 10 key performance measures, each of the performance measures is directly related to the specific areas and jobs of the employees. Although, out of the 10 performance measures that were defined, the maintenance performance measures were not clearly defined. The maintenance performance measures should be addressed as they could assist in cutting costs and expenses. In addition to the new system, managers were no longer responsible for the costs incurred within their departments. Management was able to put the blame on the costs incurred by lower level employees.
The new system was implemented very quickly without proper training; therefore, management at Armco felt there was necessary changes that should take place. The first change that should take place is in provide training to managers. Training needs to be applied to all levels of management, this way they are more knowledgeable about the new system, how it operates, and why it will be effective to the company. The other change that should be made is to the reports, costs should be specifically defined. For example, the fixed and variable costs are not broken out separately, and when reporting department costs, it is important for them to be listed separately so managers are aware of the specific costs. When a new performance measurement system is being implemented upper management, implementing the systems needs to make sure the system includes processes for all of the aspects of the plant, including evaluations, cost of implementing, and time (Josifovski & Minovski, 2015). In this case, Bob and Rob did not make sure all areas of the new system were covered. New System: Continuing Issues
The first issue was regarding how to evaluate managers’ performance when the numbers are misleading by irrepressible factors. One of the main irrepressible factor described was the electric, in this case, Rob Cushman could have backup generators in the plant, to assist with the ongoing power failures they are experiencing. In addition to buying generators, Rob should be in contact with the local power company to have them test the transformer and find the root of the problem.
The second problem was an issue regarding increasing total compensation associated with individual performance reviews. Rob Cushman is able to help correct this issue by creating criteria for performance reporting (Melitski & Manoharan, 2014). The criteria would define the job requirements, goals, and objectives of each specific job. It would then define how well each employee performs his or her job based on the listed criteria. If the employee excels at their job then they would receive a higher compensation compared to someone who provides minimal effort.