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By Sheila Kennedy
The slow market recovery has organizations gravitating toward innovative and, at times, controversial business improvement programs. Surviving, much less thriving, in today's economy sometimes leads to extreme measures.
The debate rages on about the long-term value of outsourcing as a restructuring tool ,- whether immediate labor cost savings are negated by inferior quality, communication and cultural barriers, and loss of control. Weak employment statistics have brought negative attention to jobs lost as positions move to outside firms, often overseas.
But extreme measures must be considered when the alternative is closing the plant doors. Perhaps you know of a facility that has had an experience similar to that of Kinleith Mill in New Zealand.
Motivation for change
In 2001, the future of Kinleith Mill was uncertain. Although it's the largest operating unit of Carter Holt Harvey, one of Australasia's leading forest products companies, Asian and Australian competition and rising costs were putting pressure on the mill. High operating and maintenance costs, as well as an industrial relations environment that resisted change, made it difficult to compete effectively in global markets.
Kinleith needed to achieve considerable ongoing efficiency improvements to remain viable. To accomplish this, drastic restructuring of the business was required, affecting maintenance, stores and operations.
Though the plant's existing management team was extremely competent, Dave King, mill manager, realized his team would be unlikely to achieve or sustain deep internal restructuring. Therefore, he sought an external partner for support. The partner had to meet four criteria:
Outsourced inside out
Carter Holt Harvey and Kinleith Mill management aggressively researched various restructuring alternatives and potential partners. ABB was selected as the company's alliance partner in February 2002, and the service under consideration was ABB's Full Service Maintenance Performance Management offering. This program involves handing over complete responsibility for all maintenance and maintenance stores operations within the facilities to ABB personnel, under a long-term, shared-risk, shared-reward contract ,- which was a massive cultural change. This organizational transformation was initially expected to yield ongoing annual savings of $18 million.
The change in maintenance employer from Carter Holt Harvey to ABB required Kinleith's entire maintenance and maintenance stores organization be made redundant, or laid off. Once this was done, ABB could hire back the most suitable employees from the previous organization, bring in some experienced ABB management, and round out the organization with fresh talent. Brand new business processes and administrative systems would be implemented.
The contract for maintenance of the mill included bonus/penalty clauses based on jointly defined key performance indicators (KPIs). ABB would be penalized when targets were missed and share in the profits when targets were exceeded. Cost, efficiency, health, safety, environment and risk KPIs were defined.
The transition would be led by a cross-functional team of Kinleith Mill managers from legal, maintenance, production and industrial relations until the handover to ABB took place. ABB would bring in international resources to manage the final transfer of responsibility from Carter Holt Harvey to ABB Maintenance Services. Several tense and challenging months followed before the transition was completed in January 2003.
Union pushes back
Kinleith had already been in the process of negotiating a more modern collective agreement with its production employees. The existing agreement rewarded overtime hours and paid premiums for a variety of events such as change of shift. Employees were promoted according to a predetermined ladder regardless of performance. Absenteeism was high and the mill was shut down once each year during the two-day period of Christmas and Boxing Day. Applying this collective agreement had placed a significant burden on managers at the mill. Above all, the agreement failed to drive needed changes in behavior within the workforce.
The unions resisted the proposal to outsource maintenance and took legal action alleging the restructuring was subject to negotiation and not to consultation. King admits, "This was a period of extreme tension with a high degree of uncertainty for all concerned." Kinleith worked through the legal process and ultimately reaffirmed, through the courts, the right to restructure the business subject only to a second round of consultation.
Personnel made redundant
When the 270 maintenance employees learned they were being made redundant, there was an understandable degree of resentment, anger and low morale. However, each retrenched employee received a generous severance payment per the labor agreement. This was a considerable added bonus for employees already nearing retirement, and even more so for the 60% who were rehired by ABB and placed immediately on its payroll.
[EDITOR'S NOTE: To view two large flowcharts illustrating the restructuring of Kinleith Mill, click on the "Download Now" buton at the end of this article.]
As a result of the restructuring, Kinleith dropped from seven unions to just three. New union delegates selected by the new ABB workforce reflected the future ,- the vision ,- of Kinleith Mill. Under the new collective agreement, Kinleith employees receive a salary and promotions are based on merit. There is no incentive to increase hours because overtime is not paid incrementally. Twelve-hour shifts and four days on, four days off replace eight-hour shifts with six days on, two days off. The mill now operates 365 days per year; absent employees are now responsible for covering their shifts.
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