By Dr. Kim A. Stewart
Jones International University
Let’s recall for a moment a key question that we raised in Module 3. Can a company be both a low cost leader and best differentiator in its industry, making the best quality products at the lowest cost? Yes, it’s possible but it is exceptionally rare. Lincoln Electric Company is one of the very few companies that have achieved this pinnacle. Headquartered in Euclid, Ohio, a suburb of Cleveland, Lincoln Electric primarily makes equipment and supplies used in arc welding which involves welding metals together using an arc of electricity. Parts of its product line are recognized as the best quality and the lowest cost in the industry. With about $1 billion in annual sales, the company employs approximately 5,700 people in facilities in the U.S. and in
18 countries. About 3,000 people work in Lincoln’s four U.S. plants, two of which are located in
Euclid. Lincoln commands a leading market share in the U.S. and international welding markets.
The company has chased corporate giants such as General Electric and Westinghouse out of the arc welding equipment market with its relentless ability to continually improve the quality of its products while driving down manufacturing costs. The company provides a customized costcutting program that guarantees customers that Lincoln Electric’s products and advice will lower their costs. If not, customers get a rebate check. Since the program’s inception, Lincoln has mailed two rebate checks. In the opinion of many management analysts, Lincoln Electric is among the very best managed businesses in the world.
Over the years, thousands of Fortune 500 executives have visited Lincoln Electric to learn how the company does what it does so well. The company’s formula for success over the last century has emphasized motivating their employees to perform like gangbusters, producing an exceptional amount of output without compromising top-notch quality. Lincoln Electric relies on its factory employees to provide them with ways to boost quality and cut manufacturing expenses. Their front-line factory employees—almost all high school graduates—provide many of those industry leadership ideas.
Here are the components of Lincoln Electric’s motivational system in its U.S. facilities:
Piece rate pay: Factory employees are paid entirely by piece rate, meaning they receive a set amount of money per unit of work they produce. There is no hourly wage or salary that provides a safety net in case they miss work or do not perform well. Produce a lot of highquality units and you can make a lot of money at Lincoln Electric; perform poorly and you receive very little pay at all. One of the disadvantages of piece rate pay is the tendency for employees to compromise quality to maximize their output quantity. Lincoln Electric eliminates this problem by its ability to trace quality defects back to the employee responsible for them. The employee can pay the cost of correcting the defect (usually the cost of servicing the warranty claim filed by a customer which is subtracted from the employee’s bonus), or the employee’s score on the quality criterion of his bonus evaluation is reduced.
Employees are very aware of the amount of output they are producing throughout the year and the quality of what they produce.
Bonus system: Twice a year, factory employees are evaluated by their supervisor on four factors: 1) output—the amount of units they produced that period; 2) ideas and cooperation—the quality of the ideas that the employee provided to management about how to raise quality and cut costs; 3) quality---the quality of output; and 4) dependability— essentially the ability to work independently with very little supervision. The size of the
bonus pool at Lincoln Electric directly depends on the company’s financial performance that year. The lower the sales and income, the less money