CASE: Oilwell Cable Company, Inc. Question 1:
The advantage of proceeding without passing it by the team is that the process will be much faster and somewhat cheaper. Norm runs considerable risk, however, if he does not discuss the microprocessor decision with his production team. If he does not pass the decision by the team, they may assume that it is a management attempt to reduce the size of the work force. The case makes it clear that the company depends on a small, loyal workforce. If even one of them becomes disgruntled, it could have significant impact on the quality and productivity of the plant. This decision, because it, in fact, will not displace workers, seems well within the comfort zone of the team.

An old adage says that you do not ask a question unless you are prepared to hear the answer. It is entirely possible that the team, mindful of recent cutbacks, will think that this improvement is really about cutting more jobs and turn it down. Another possibility is that they may delay implementation by asking for further study, or suggesting alternate solutions. As noted in the previous question, they can think that regardless of whether they are asked for an opinion or not. The advantage of asking is that the issues are out in the open, and management maintains the loyalty of the employees. Based on the description of the company and their success, halting this improvement seems a small price to pay for the support of the employees. Management can always come back another day and do a better job of selling the advantages of the microprocessor, but it would be nearly impossible to rebuild the trust of the employees if it is shattered by a forced implementation. If the team approves, then the implementation can move out quickly with the enlightened support of the team. The project is relatively low tech with a strong emphasis in operations. I would recommend a functional project run out of the team.

Based on the description, the company does not have many projects going on. They could achieve the benefits of the project office through a project that would identify and record project management policies and procedures for the company. Then HR could develop training material that would make these policies and procedures accessible to the employees who need them.

Using some simplifying assumptions the value of the microprocessors can be evaluated. Based on the text, the cost percentages are as follows:

Direct Labor | 5% | Indirect Labor | 5% | Material | 60% | Fixed Overhead | 15% | Variable Overhead | 15% |

The microprocessors will cut scrap by 0.5% and cycle time by 1%, which we will assume is equivalent to a 1% reduction in variable overhead. Based on sales of $25,000,000 the costs would be as follows:

Item | Percent | Amount | % Savings | $ Savings | Annual Sales | n/a | $25,000,000 | | | Assumed Cost | n/a | $22,500,000 | | | Direct Labor | 5% | $ 1,125,000 | | | Indirect Labor | 5% | $ 1,125,000 | | | Material | 60% | $13,500,000 | 0.5% | $ 67,500 | Fixed Overhead | 15% | $ 3,375,000 | | | Variable Overhead | 15% | $ 3,375,000 | 1% | $ 33,750 | Total Savings | | | | $101,250 |

This totals to $101,250 annual “income” from this improvement. The Case does not state a period of return. Instead, we can calculate the pay back period as:

30,000 (12)/ 101,250 = 3.6 months

This is certainly an attractive investment.

Exhibit 2 seems to contradict Norm’s memory, but we do not know the whole story. Norm’s recollection includes 1985, but the graph does not. The drop in 1989 and 1990 is probably due to the economic downturn. The increase in 1991 is probably due to the economic upturn and Oilwell’s use of overtime and temporary employees. Norm should proceed with the installation of the microprocessors, but only with the support of the Operations Team.