The manufacturing process has seen a variety of changes and alterations throughout the years. With the introduction of newer technology and practices, the general goals, aims and methods, and the standards of what measurements are used to regulate operation have also shifted. Traditionally, the cost efficiency of production spending and labor were the most important considerations in the process. However, the increase in market competition and the advancement of technology have considerably brought up the value of quality and delivery time as features of production (Krishnan, 2011). In a modern time where competition based solely on low costs is becoming less viable, competitors of any given firm can offer products of better quality, outmatching their contemporaries.
Within this highly developed climate, it was necessary for organizations to adopt a more viable competitive approach to both meet the goals of their production and satisfy customers. One such approach is changing to quality-based and time-of-delivery-based competition (Nahm et al., 2006). As outlined in the study, many organizations have adopted this approach as a way of meeting the goals of the new age, but a number of them have failed to adapt to the changes sufficiently. In the Knussmann company, the failure of doing so can be attributed to a variety of factors, most notably to the inability of the company to change its performance measures. The case study demonstrates that an undue focus on keeping production costs as low as possible and monitoring direct labor variance can be extremely detrimental to the process of adopting a new cost strategy.
The Main Problems
As shown in the case study, the Knussmann company has attempted to shift away from a traditional model of competition and performance measures in order to improve its success in the market. As a result of this move, the organization established new time and quality-based objectives for its plants, which emphasized a larger throughput rate and the reduction of scrap. While the established goals of the company have aligned with a more modern vision of organizational performance, the internal monitoring and evaluations were still rooted in more traditional approaches, creating a discrepancy between the two. In particular, it should be noted that the direct labor variance was regarded as an especially important metric, with the management and leadership using its results as the basis for work decisions and the operation of Knussmann as a whole. Direct labor variance, for purposes of clarity, is the variance relating to the work of employees in a workplace and the products they make. This measurement can be divided into two more, labor rate variance and labor efficiency variance. Labor rate refers to the difference between actual and budgeted costs, and efficiency variance would be the difference between worked hours.
The company in this discussion, Knussmann, has managed to successfully change its competitive goals and orientations while not being able to fully adopt a more modern outlook on performance management. As seen by the importance placed on direct labor variance, the main measurements used to determine the completion of newfound goals were not compatible with them. While the company valued product quality and turnover as its main goals for the process, the actual labor force and management were expected to work while taking into account not the newfound values but the old cost-effective ones. A fixation on minimizing costs has effectively prevented the organization from meeting its newfound goals or making any significant advancements toward them. When the variable costs for direct labor were found to deviate from set norms too much, the company responded by reducing its inventory or adopting other measures that were predominantly focused on further reducing costs and not optimizing the quality and delivery times of their production. For the entirety of the time period, Knussmann has not been able to meet its newfound production goals.
In conclusion, it should be said that the process of adopting a new competitive structure and successfully using it to stay ahead of the competition is both difficult and necessary for any organization. With the changes of the global market development of newer and newer methods of production, the traits of a brand that can be considered valuable change as well, leading to the need for any given business to adapt accordingly. In many cases, this process involved completely changing the proposed values of a company and the metrics used to measure performance. As seen with the example of Knussmann, this process requires an organization to take a comprehensive and full approach, one that supports change with the appropriate measurement metrics. By only changing an organization’s overall goals to suit a more quality-based agenda, it is impossible to meet them while using a cost-based evaluation system (Ghalayini & Noble, 1996). From the failure of Knussmann, managers and other business specialists can understand the importance structural change and its full implementation can have in an organization.
Ghalayini, A. M., & Noble, J. S. (1996). The changing basis of performance measurement. International Journal of Operations & Production Management, 16(8), 63–80.
Krishnan, A. (2011). The Evolution of Performance Measurement System ( PMS ) and Linkage to the Environmental Uncertainty and Strategy; a Review of Literature.
Nahm, A. Y., Vonderembse, M. A., Subba Rao, S., & Ragu-Nathan, T. S. (2006). Time-based manufacturing improves business performance—results from a survey. International Journal of Production Economics, 101(2), 213–229.