Letterkenny Army Depot: Finance Innovations Support Lean Six Sigma Success
Author(s)Harvey, Roger K.; Labedz, Chester S., Jr.
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As a result of significant dollar savings to the Army and U.S. taxpayers, Letterkenny Army Depot received widespread public recognition in 2005. The depot received a public sector Shingo Prize for applying Lean principles and tools to its PATRIOT missile system recapitalization program. While Letterkenny was Leaning its production systems, the depot implemented two innovative and effective financial incentive systems: one to reward employees, the other to reward customers. The reward systems were innovative because they occurred in a not-for-profit organization and effective because they motivated customers, employees, and unions to embrace Lean. First, the commander of Letterkenny Army Depot introduced a mechanism for immediately recognizing surplus Net Operating Results (“NOR”) funds generated by Lean savings. Rather than following prescribed budgeting procedures, Letterkenny made sixty percent of auditable surplus NOR available to customers within the current fiscal year. With Lean savings immediately put “back in customers’ hands”, the customers usually chose to repurchase Letterkenny services with their Lean savings checks. The additional services performed by the depot at essentially no cost to the customer provided combat-ready weapon systems to the Warfighter, over and above the quantities planned for the current fiscal year. The depot reinvested the balance of its NOR surpluses in improvements to its facilities and equipment, helping to promote Lean buy-in among civilian employees and their unions. Second, Letterkenny negotiated a revised process for awarding NOR-related bonus checks to its employees. To further promote Lean buy-in, the depot established a “threshold” approach to determine the size of the employee payments. Letterkenny awarded payouts of $200/employee for each $1 million increase in NOR, up to a maximum of $5 million. By reaching annual Lean-enabled NOR of at least $5 million each year, Letterkenny employees could and did receive annual bonus checks of $1,000 in three successive years. The case describes the organizational conditions leading to these innovations and the responses to them among its customers, unions and headquarters.
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