3 Posts
Looking for help on what a good target is for a manufacturing company employee incentive plan.
We are looking at $COPQ as a % of COGS.
I have heard 0.5% is best in class... thoughts?
We are looking at $COPQ as a % of COGS.
I have heard 0.5% is best in class... thoughts?
2 Replies
62 Posts
Dear Michelle,
I think that using any COPQ-based metric for employee incentives is wrong. COPQ is based on many assumptions relating to the accounting decisions as well as decisions for which employees are not accountable. In some organizations field warranty cost is applied as a program for "sales incentive" payments to major customers. If performance measures are used for employee incentives then they must have some ability to directly influence the performance that generates this outcome. COPQ is much broader than an individual employee's actions, especially when it is aggregated as a percentage of revenue. That means that as revenue changes the actual amount of cost changes. Also, there is a time-delay in obtaining field data that has a disconnect from field failure cost reporting and the dates that sales occur. In a rising sales market this benefits employees as the base is inflating faster than the costs are being reported. In a declining market just the opposite occurs and the employees are penalized as the warranty cost reporting is catching up based on the installed base (as well as realization of censored reporting from longer life time failure mechanisms) and the sales are declining. These facts all combine to cause me to recommend not using such a metric for incentive pay.
Best regards,
Greg
I think that using any COPQ-based metric for employee incentives is wrong. COPQ is based on many assumptions relating to the accounting decisions as well as decisions for which employees are not accountable. In some organizations field warranty cost is applied as a program for "sales incentive" payments to major customers. If performance measures are used for employee incentives then they must have some ability to directly influence the performance that generates this outcome. COPQ is much broader than an individual employee's actions, especially when it is aggregated as a percentage of revenue. That means that as revenue changes the actual amount of cost changes. Also, there is a time-delay in obtaining field data that has a disconnect from field failure cost reporting and the dates that sales occur. In a rising sales market this benefits employees as the base is inflating faster than the costs are being reported. In a declining market just the opposite occurs and the employees are penalized as the warranty cost reporting is catching up based on the installed base (as well as realization of censored reporting from longer life time failure mechanisms) and the sales are declining. These facts all combine to cause me to recommend not using such a metric for incentive pay.
Best regards,
Greg
14 Posts
Hello Michelle,
Good question. In terms of setting a COPQ goal to use as a basis for an incentive plan, I would not recommend looking outside your organization, but inside. Manufacturing is so diverse, and as Gregory mentioned, the means of calculated COPQ are so varied, that any attempt to compare one company to another or setting a "best in class" benchmark is futile.
I would instead recommend using tried and true methods to analyze your own COPQ data and set your goal based on that. For instance, with monthly COPQ numbers over the past 2 years, you could set up a control chart to determine your mean and control limits. From there you could set a goal at - 1.5 to -2 sigma from the mean. This would be a "stretch" goal, but one if achieved, would be worth your organization rewarding it's employees for.
Two other thoughts: Avoid goals for the sake of goals. Couple your incentive efforts with providing the employees a means for improving their workplace. And two ... back to one of Gregory's points ... make sure whatever is inside the COPQ calculation used to pay out incentive is genuinely reflective of the employee's effort. Disincentivizing employees based on obscure "accounting" costs will only defeat the spirit of the program you're trying to launch. If necessary, have only a relevant subset of costs from the broader COPQ report used for the employee incentive plan.
Hope that helps. By the way, I offer a low-cost online short course titled "Cost of Quality Analysis and Reporting" It's on sale for another two days. In it, I teach the full range of principles and practical tips needed to launch or refine a COPQ system, and include in it a full set of Excel templates. Here's the link to the class:
https://www.udemy.com/course/cost-of-quality-analysis-and-reporting/?couponCode=E5ED22FAAE2AFFBC4A5D
Ray Harkins
Good question. In terms of setting a COPQ goal to use as a basis for an incentive plan, I would not recommend looking outside your organization, but inside. Manufacturing is so diverse, and as Gregory mentioned, the means of calculated COPQ are so varied, that any attempt to compare one company to another or setting a "best in class" benchmark is futile.
I would instead recommend using tried and true methods to analyze your own COPQ data and set your goal based on that. For instance, with monthly COPQ numbers over the past 2 years, you could set up a control chart to determine your mean and control limits. From there you could set a goal at - 1.5 to -2 sigma from the mean. This would be a "stretch" goal, but one if achieved, would be worth your organization rewarding it's employees for.
Two other thoughts: Avoid goals for the sake of goals. Couple your incentive efforts with providing the employees a means for improving their workplace. And two ... back to one of Gregory's points ... make sure whatever is inside the COPQ calculation used to pay out incentive is genuinely reflective of the employee's effort. Disincentivizing employees based on obscure "accounting" costs will only defeat the spirit of the program you're trying to launch. If necessary, have only a relevant subset of costs from the broader COPQ report used for the employee incentive plan.
Hope that helps. By the way, I offer a low-cost online short course titled "Cost of Quality Analysis and Reporting" It's on sale for another two days. In it, I teach the full range of principles and practical tips needed to launch or refine a COPQ system, and include in it a full set of Excel templates. Here's the link to the class:
https://www.udemy.com/course/cost-of-quality-analysis-and-reporting/?couponCode=E5ED22FAAE2AFFBC4A5D
Ray Harkins
