GE Transportation: A case study of PIP

Introduction

Thomas Gilbert’s second leisurely theorem provides a framework for assessing competency. Although typically used to assess individual performance, the potential for improving performance theorem, or PIP, can also be applied to organizations. The following case study illustrates how the PIP for a major corporation was used to determine the likelihood of maintaining growth and productivity levels during a period of flux.

Article

Wertz, R.J. (2013). GE Transportation: A case study of the potential to improve performance. Performance Improvement, 52(2), 31-35. doi: http://dx.doi.org/10.1002/pfi.21327

Background

GE is a global corporation employing more than 300, 000 persons worldwide. Its transportation division accounts for less than 3% of the company’s business, but it is one of the most successful in terms of growth. From 2010 to 2011, the division’s profit doubled. Growth was spurred in part by multi-year contracts for new locomotives.

To handle the surge in business at their Erie and Grove City, Pennsylvania locomotive manufacturing facilities, GE recalled approximately 800 workers it had laid off in 2009. The company added an additional 100 workers at their Erie site. Still, GE was challenged to meet its production schedules. In 2011, the company attempted to boost locomotive production by leveraging its capabilities at its aircraft engine manufacturing plant in Lynn, Massachusetts, but those efforts were halted by failed union negotiations.

At that point the company had maximized its existing resources. In 2011, GE announced plans to open a new manufacturing plant in Fort Worth, Texas at a cost of $96 million. It anticipates hiring 500 new employees. The decision to open the Texas plant has raised concerns among workers at the Pennsylvania sites, mainly because Texas, unlike Pennsylvania, is a “right-to-work” non-union state. Current employees in Pennsylvania fear that the Texas plant will make it more difficult to negotiate contracts and benefits. They worry the new facility presents a threat to their job and wage security.

While production continues apace at the Erie facility, potential conflicts regarding salaries could undermine the company’s ability to meet its projected targets and continue to grow at its current pace. GE Transportation needs to examine its goals. Are the company’s performance expectations realistic? Will the expansion help or hurt its performance? Can GE Transportation continue on the same trajectory or is some adjustment of goals necessary?

Using PIP to Gauge Competence

Thomas Gilbert’s PIP algorithm is a simple framework for gauging the potential for improving performance. The “PIP” is the ratio of exemplary performance to typical performance, expressed as Wex/Wt. The lower an organization’s PIP is, the more efficient, productive, and competent its performance. There are two noteworthy characteristics of the PIP. It is, first, a measure of opportunity and, second, it is dynamic. Exemplary standards are not fixed. They can (and often do) change with time. This means that the measure of opportunity will vary depending on how one defines exemplary performance. A reasonable estimate of opportunity depends on a reasonable definition of exemplary performance.

Worthy performance can be calculated using quality, quantity, and/or cost:

Quality measures that which is produced, be it a product or service. Accuracy, class (e.g. economy versus luxury), and novelty are three sub-measures of quality.
Quantity refers to productivity. Rate, timeliness, and volume are sub-measures of quantity.
Cost is integral to calculating worthy performance and evaluating the organization’s potential to improve performance. Measures of labor (direct overhead, benefits, salaries, taxes), materials (supplies, tools, space, energy) and management (supervision and general administrative expenditures) all factor into cost.

For GE Transportation, 2011 was a year of record earnings. Greater productivity yielded a 45% increase in revenues and twice as much in profits from the previous year. In 2010, the company was stable, but not as productive or profitable. The author opted to use 2011 data as representative of exemplary performance, and 2010 data as representative of a more typical year.

To determine the outlook for continued growth, the author first defined performance using revenue, profit, and cost data from 2010 and 2011.

W(performance) = Revenue / Cost (where Cost = Revenue – Profits)

The measures were then plugged into the PIP algorithm (PIP = Wex / Wt). According to Gilbert, 1.0 indicates peak performance.

Findings and Conclusions

GE Transportation’s performance indicators for 2010 and 2011 were as follows:

2011 (Wex) Revenue = $4.9 billion, Profit = $757 million; thus, Cost = $4.143 billion
2010 (Wt) Revenue = $2.695 billion, Profit = $315 million; thus, Cost = $2.380 billion

Using this data to define each level of performance, the PIP algorithm was run, with the following results:

Wex = Revenue / Cost = $4.9 billion / $4.143 billion = 1.18
Wt = Revenue / Cost = $2.695 billion / $2.380 billion = 1.13
PIP = Wex / Wt = 1.18 / 1.13 = 1.044

The findings (esp., the PIP being very close to 1.0) indicate that GE Transportation performs with a high degree of competence. There seems to be little opportunity for growth based on these data. However, shifts in GE work sites and its workforce may present challenges to maintaining such a high level of competence. Periodic evaluations using the PIP to compare performance at each venue could prove useful in determining if the shifts hindered or helped the company’s bottom line, and inform decisions about adjusting expectations.

Questions for OPWL-N Members

Do you see the PIP as a useful preemptive evaluation tool? How have you used, or might you use, the PIP in your organization to gauge how competitive your organizational performance is?

Workplace Oriented Research Central (WORC)
Prepared by OPWL Graduate Assistant, Susan Virgilio
Directed by OPWL Professor, Yonnie Chyung
Posted on January 19, 2014