Incentives versus value in manufacturing systems: An application to high-speed milling

• We describe a value-based, decision-analytic approach to calculate the value captured or lost as a result of decisions induced by the incentive structure in a manufacturing firm.
• We analyze the effects of incentives in the context of a high-speed milling example and explore the insights provided by a hybrid incentive structure.
• We show that incentives can be used to effectively communicate optimal tradeoffs between multiple attributes.
• It is possible for simple, piece rate incentives to induce optimal decision making.
• The optimal incentive structure is robust to uncertainty in both the milling stability boundaries and the tool life.

Optimal parameter selection is an important aspect of optimizing system performance. This paper examines the effect of different incentive structures, including reward and penalty based structures, for employees within an engineering firm on the value captured by that firm. Incentives are used to communicate the firm's values to the employee without revealing the firm's value function. We use a high-speed milling example to illustrate the approach and derive results. We show that, in certain cases, simple incentive structures can be aligned such that they induce profit maximizing behaviour. In other cases, we show that incentive structures result in a loss of value that we term the value gap. In the milling case considered, reward-based incentives coincide with optimal parameters while penalty-based incentives result in a greater than four-fold increase in costs. The effect of uncertainty within a system can also be analysed. We consider uncertainty in the process dynamics as well as tool life and that the inclusion of uncertainty in the analysis may not change the results in some cases.