Tailored to the Bottom Line: People management practices and profitability in manufacturing

Tailored to the Bottom Line: People management practices and profitability in manufacturing

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The study adresses different questions : How do people management practices impact the performance of a company ? Have these practices in your company kept pace with the changes in your business ? Most importantly, which practices contribute to profita

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issue 7 |   2010Complimentary article reprintTailored to the Bottom LinePeople Management Practices and Proitability in ManufacturingBy RIChARD KleIneRt > emIly StoveR DeRoCCo > AtAnu ChAuDhuRI AnD RoBeRt mACIejewSKI > IlluStRAtIon By tIm o’BRIen        This publication contains general information only, and none of Deloitte Touche Tohmatsu, its member irms, or its and their afiliates are,  by means of this publication, render-ing accounting, business, inancial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your inances or your business. Before making any decision or taking any action that may affect your inances or your business, you should consult a qualiied professional adviser. None of Deloitte Touche Tohmatsu, its member irms, or its and their respective afiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member irms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member irms.Copyright © 2010 Deloitte Development LLC. All rights reserved.
112Deloitte Review       deloittereview.com
tailored to the bottom lineTailored to the Bottom LinePeople Management Practices and Proitability in ManufacturingBy RichaRd KleineRt > emily StoveR deRocco > atanu chaudhuRi and RoBeRt maciejewSKi > illuStRation By tim o’BRien eople are billed as companies’ most important as-set so routinely that we should be surprised they Pdon’t all sleep nights in a corporate vault. Yet, in the hard-nosed, bottom-line discipline of managing organizations, the “soft skills” of people management practices are more often an afterthought than a core strategy linked to superior business performance. And while manufacturers’ workforce management practices have moved far beyond the personnel ofice of decades past—with its origins in managing masses of low-skilled work-ers in a pre-technological age—many have a long way to go to engage their people and connect these practices to shareholder value. Talent management for many manufacturers could be characterized as a less than ideal blend of new aspirations and old tactics. Consistent with a bottom-line approach, it is fair to ask: How do people management practices impact the performance of a company? Have these practices in your company kept pace with the changes in your business? Most importantly, which practices contribute to proitability? deloittereview.com       Deloitte Review311
114tailored to the bottom lineThe road to useful conclusions is often paved with hard data. In our research,1 we found that answers to some of these questions lay in excellence in speciic as-pects of people management practices. The data suggest that certain practices help some manufacturers outshine the rest. These companies have developed clear talent management strategies that align consistently with their overall corporate strategy and complement their culture and values in ways that point to improved results. survey of manufacturing organizations In May 2009, Deloitte*, The Manufacturing Institute and Oracle jointly conducted a na-tional survey of manufacturing organizations to assess the current performance of com-panies with respect to people management practices, as well as the future importance of these practices. They were asked to identify the top drivers of their future business success and to comment on talent shortages experienced today and expected within the next two to three years. Proile of survey respondentsThe survey was conducted via the Web, on an anonymous basis, to which 779 individuals re-sponded. The distribution of respondents was as follows: Primary industry sector: Aerospace & Defense   6%Automotive  6%Consumer Products  9%Energy & Resources  3%Industrial Products 43%Life Sciences & Medical Devices  2%All other  31%methodologyWe sorted the respondents based on their self-reported earnings before interest, tax and de-preciation (EBITDA) and identiied the top quartile and bottom quartile companies based on EBITDA. We tested for statistically signiicant differences in the current performance of each of the people management practices between the bottom and top quartile EBITDA irms. We performed a similar analysis for gauging the importance of their people management practices. * As used in this article, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.Deloitte Review       deloittereview.com
tailored to the bottom linewhat sets them apartecognizing that larger companies have the scale and resources to develop Rmore comprehensive talent management strategies, we focused our research on the largest 142 companies from our survey. The most proitable large com-panies share three practice areas that differentiate them from the least proitable companies: • Deining a clear and explicit people strategy that is linked to the business strategy.• Performing formal succession planning across the workforce.• Linking employee pay directly with productivity of the company or to the respective manufacturing plant.People and the end goalAny business strategy ultimately depends on people for its successful execution. Acquisitions, mergers, downsizing, offshoring, partnering, you name it – people are central.2 But the people strategy needed to drive and support a high-end, in-tensive-customer-experience retail company is very different from that needed for a mass merchandise, low-cost discount retailer, and vastly different from a custom-ized, specialty engineering and manufacturing aerospace and defense irm. Yet rela-tively few employers surveyed have developed an explicit and documented people strategy tailored to their business goals. Of the largest companies that participated in the survey, 55 percent of those with top quartile proitability rated themselves “high” in linking people manage-ment strategy to business strategy, while only 30 percent of bottom quartile proit-ability companies reported similar performance (igure 1). Among all the survey respondents (regardless of size), the igures stand at 44 percent for the most proit-Figure 1. Top three differentiators 7000.60.0054.5550.0045.540.0030.330.336.36.00030.00210.0000.085.75Clear and explicit peopleFormal succession planningEmployee pay directly linkedstrategy linked toacross the workforceto productivity of companybusiness strategyor respective plantLow EBITDAHigh EBITDAdeloittereview.com       Deloitte Review115
116tailored to the bottom lineable companies and 36 percent among the least proitable. In many organizations, the HR function does not participate in the strategy development process nor does it have complete visibility into corporate or business unit strategies. As a result, corporate strategy and people strategy are developed independently and people management practices may be misaligned with corporate objectives. For example, an industrial products company may develop a strategy to increase its service rev-enues by 20 percent over the next three years, but if it fails to measure and improve service orientation among employees, it will likely fail to achieve that objective and may also ind its employees demotivated. The most proitable companies, the data would suggest, align people practices to corporate strategy. According to GE’s vice president of human resources for Aus-tralia and New Zealand, Sam Sheppard, rather than being an administrative func-tion, HR initiatives, actions and priorities must be aligned with the business plan.“There is no point being an add-on function, a reactive partner for the busi-ness,” Sheppard said. “It’s very easy sometimes to get sidetracked on what we would like to be doing, but if we can’t translate that into a bottom-line impact for the business, then that lessens our value to the organization.”3  After struggling with lack of focus and losses in the billions in the early 1990s, Sears Holdings Corporation likewise overhauled its strategy implementation pro-cess. A senior management team incorporated the full range of performance drivers into the process. Then, they articulated a new vision: For Sears to be a compelling place for investors, the company must irst become a compelling place to shop; and for it to be a compelling place to shop, it must become a compelling place to work.Sears validated the vision with hard data, designing a system to objectively measure each of the three “compellings.” The team extended this approach by de-veloping a series of related competencies that employees were required to hone and identiied behavioral objectives for each of the “compellings” at several lev-els through the organization. These competencies then became the foundation on which the irm built its job design, recruitment, selection, performance manage-ment, compensation and promotion criteria. The company also instituted the Sears University to develop these competencies.4Recognizing that it is important for HR managers to be familiar with the broader aspects of the business, Coca-Cola rotates top-performing line managers into HR positions for two or three years to build the business skills of its HR professionals and thus make the function more credible to the business units. At Procter & Gamble, an HR manager is expected to work in a plant or work alongside a key-account executive to learn more about the business and its needs.5  Deloitte Review       deloittereview.com
tailored to the bottom lineFormal succession planning across the workforceWell-deined succession planning takes a long-term view of talent within the organization. It develops talent to step into key roles on a timeline consistent with anticipated—and unanticipated—vacancies. Lack of rigorous succession planning can hit companies hard. It takes them longer to replace critical talent and often at a higher cost from external sources.Among the largest companies in our dataset, 45 percent of companies with top quartile proitability exhibit high ratings in formal succession planning while only 30 percent of bottom quartile companies performed similarly. Looking at all respondents (regardless of size), 36 percent of the highly proitable companies rate their current capabilities in formal succession planning as “high,” while only 20 percent of the less proitable companies rate themselves similarly. A majority have yet to establish an effective succession planning process.Many organizations struggle when it comes to grooming successors for key po-sitions. Succession planning, as traditionally conceived and executed, is narrowly focused on identifying employees who are ready for promotion, usually only at senior executive levels. A long-term talent management strategy should look be-yond the C-suite to prioritize succession of all critical positions based on speciic organizational needs and strategic direction. According to Johnson & Johnson, the ability to groom future leaders is crucial to removing a potentially signiicant constraint to its future growth. Each year J&J’s CEO launches the talent review process with a letter addressed to execu-tive vice presidents reinforcing the importance of leadership development and also highlighting a new area of focus for that year to emphasize succession management priorities. J&J uses bottom-up succession reviews to discover and grow talent irst at the operating company level, then at the group level, and inally at the corporate level. As a result, talent review now takes place in every aspect of J&J’s business planning with continuous examination of capabilities and development needs of executives in the context of larger organizational needs.6 Colgate-Palmolive also developed an innovative way to ensure that all lev-els of management make succession planning a priority. It instituted a pro-gram that mandates that all senior managers must retain 90 percent of their staff who have been designated as “high potential” or risk losing part of their compensation.7Linking employee pay to productivityAmong the largest companies in our survey, 58 percent with top quartile proit-ability ranked high in linking employee pay to productivity, while only 36 percent deloittereview.com       Deloitte Review117
118tailored to the bottom lineof bottom quartile companies performed similarly. Considering all respondents (regardless of size), 55 percent of highly proitable companies rate their current capabilities in linking employee pay to productivity as “high” compared to only 41 percent of the less proitable companies. Organizations are increasingly placing emphasis on rewards management pro-grams and performance-based pay. Deloitte’s 2010 Top Five Total Rewards Pri-orities Survey reports that 66 percent of respondents plan to make changes in the design of compensation plans, with particular emphasis on performance-based pay and performance management tracking and administration.8 Siemens successfully transformed its employee compensation system as part of its value-based management program. Before launching the program, perfor-mance-related pay was a small proportion of total compensation, even for the most senior executives. After the launch of the program, approximately 60 percent of the remuneration of the top 500 executives became performance-related. Siemens based this on current share price and investor expectations of the improvement in economic value added over the next year.9  At Nucor Steel, employees involved directly in manufacturing are paid weekly bonuses based on how much their work groups—each ranging from 20 to 40 work-ers—produce. Typically, these bonuses are calculated on anticipated production time or tonnage produced, depending upon the type of facility. The formulae for determining the bonuses are non-discretionary, based upon established production goals. This plan creates pressure for each individual to perform well and, in some facilities, is tied to attendance and tardiness standards. Nucor department managers earn annual incentive bonuses based primarily on the return on assets of their facility. Senior oficers receive no proit sharing, pension or discretionary bonuses. Instead, a signiicant part of each senior oficer’s compen-sation is based on Nucor’s return on stockholders’ equity, above certain minimum earnings. If Nucor does well, the oficer’s compensation is well above average, as much as several times base salary. If Nucor does poorly, the oficer’s compensation is only base salary and, therefore, signiicantly below the average pay for this type of responsibility.10Building current strengths, managing future prioritiesanufacturing companies need not only take stock of their current people Mmanagement practices, but also to plan for the future importance of those practices. They should identify practices of continued high priority and those in need of improvement, given future business realities, while recognizing how cer-tain practices are more impactful to their enterprise value. Deloitte Review       deloittereview.com
tailored to the bottom lineApart from the top three differentiators, our research identiied several other people management practices to which the most proitable companies assign mod-erate to very high importance in the future and for which current performance levels suggest room for improvement:• Conducting formal orientation of new employees including familiarizing them with corporate values. • Explicitly deining technical competencies and evaluating these while hiring. • Measuring and recognizing strong performance using clear metrics and methods of evaluation. • Willingness to pay top performers signiicantly more than average employees.Emphasis on core values and corporate culture will remain important in the future. The majority of the most proitable companies already excel in that aspect. In addition, those companies will sustain their efforts with regard to: • Considering future talent needs in the recruitment process.• Evaluating problem solving skills during the recruitment process. • Explicitly deining non-technical competencies and evaluating these in hiring.• Sharing proits across the workforce.• Using a deined contribution approach to the employee beneit program.These high-priority practices fall broadly into three categories: people strategy and culture, talent acquisition and development, and performance management. People strategy and cultureHigh-performing companies align people management practices to the corpo-rate culture (“cultural it”) and to the business strategy and long-term objectives of the organization (“strategic it”).11 This tight coupling of internal practices, culture and strategy remains unique for each organization and is dificult for competitors to imitate. While rivals can poach a few employees or can try to mimic some strategic moves, rarely will they be able to penetrate the lattice of internal it, cultural it and strategic it.Our research suggests that higher percentages of highly proitable companies excel in focusing on core values and corporate culture and on orienting employees to that culture (igure 2). deloittereview.com       Deloitte Review911
120tailored to the bottom lineFigure 2. Emphasis and orientation on core values and culture74.32.26843.7508700650043020010Management has strong focus on core New employees receive formal orientation values and corporate cultureand mainstreaming instruction including company valuesLow protabilityHigh protabilityCompanies that inspire employees can expect signiicant discretionary effort from their workforce, who in turn can help win and retain customers.12  The Nokia Way deines Nokia’s core values. Nokia reviewed and reined these values in 2007 to engage employees and to relect how the business evolved and changed. It asked employees to explain what was most important to them to help create a new set of values that deine Nokia. Over 2,500 employees from around the world took part in 16 regional events to come up with the key themes for new values. Involving employees at every stage of the process helped Nokia embed a strong values culture throughout the business.The new values, an evolution of the previous Nokia values, are:• “Achieving Together,” which relects that the company increasingly works in networks. • “Very Human,” which builds on Nokia’s previous value of “respect.” • “Engaging You,” which includes all company stakeholders and not just customers. • “Passion for Innovation.”13  Nokia now communicates these values to all its employees through videos and other information on its intranet and as part of its communications on company strategy. In May 2007, around 13,000 employees registered in the Nokia Way Jam, a 72-hour online discussion to decide on values and debate future business strategy. The collaborative nature of the Jam was an expression of Nokia’s culture and the Deloitte Review       deloittereview.com
tailored to the bottom linevalue it places on “achieving together.” Nokia analyzed the results of the Jam and identiied several key corporate initiatives to be included in future plans and several initiatives within its business groups. The Jam prompted new activity and changed some of Nokia’s business priorities.14Talent acquisition and developmentHighly proitable companies do a better job in their recruiting process by thor-oughly analyzing technical, non-technical and problem solving skills. These com-panies consider recruitment as a dynamic process that is closely linked to the people and corporate strategies. Thus, they work with the businesses to identify future needs in terms of skill sets and proactively recruit such people ahead of the compe-tition (igure 3).076057.25048.8040302010Figure 3. Talent acquisition and development43.942.540.232.531.534.3Technical competenciesNon-technical Future talentProblem solvingare explicitly denedcompetenciesneeds, includingskills and and evaluated in(leadership, generalnew types ofwillingness tohiring processmanagement andskills and expertise,change are interpersonal skills) are considered evaluated in are explicitly dened in ongoinghiring processand evaluated inrecruitment effortshiring processLow protabilityHigh protabilityThese companies measure return on investment (ROI) in the recruiting func-tion and use metrics and analysis to optimize the most effective sources, programs and methods. Uncertain business conditions make workforce planning a tightrope walk for most organizations. To conduct robust planning in such uncertain conditions, some proitable companies borrow techniques from supply chain management, where the overall task is similar to workforce planning. These companies have shifted from forecasting to simulations. One large global chemical company started using standardized data from its enterprise resource planning system to produce man-power estimates for each location that could be aggregated for the company as a deloittereview.com       Deloitte Review121