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Are Layoffs The Answer?

By Amy Radishofski, Features Editor, Manufacturing.netWhen the economy is bad and companies start to suffer they often cut jobs to cut costs, but that may not be the best option.

When companies find themselves struggling to make ends meet, mass layoffs usually are not far behind. But what if cutting your workforce isn’t the best way to cut costs? What if you could be losing market share? What if you could be setting yourself up for failure when the economy rebounds? How can you trim expenses while keeping your competitive edge?

“Companies need to be careful to only cut the fat and not the muscle when they are trying to reduce expenses,” said Jerome Patterson, Chief Marketing Officer at business consultancy Acorn Systems.

Perhaps you have underutilized capacity in your manufacturing facilities. Maybe you’re offering your customers extra services that they don’t need or want. Your operations may be filled with places where you can cut back on expenses without cutting back on employees.

“Companies need to shift their mentality,” Patterson said. “They need better understanding and insight into their operations in order to make better decisions. You may be able to save up to 15 percent of your revenue if you take a better look at costs. If you’re a billion-dollar company, that’s a substantial amount of money.”

Patterson outlines four areas for opportunities to cut costs without hurting profit:

• Benchmarking -- Make sure you understand your costs and then benchmark your facilities and the costs for certain activities.

“If you have the same operation at two different plants, but it costs $1,000 at one location and $1,500 at another, find out where the operations differ,” suggests Patterson. “Maybe they found a way to cut costs that you can implement at other facilities.”

• Partner negotiation -- Gather all the facts and insight that you possibly can before you sit down to talk to your suppliers about strategic sourcing. The more information you have, the stronger your discussion will be.

“Remember, you don’t want to beat up your suppliers,” he adds. “Try to find win-win situations for everyone involved.”

• Process changes -- Take another look at your operations from customer service and returns management to distribution and logistics. Instead of cutting back on people, you might be able cut back on other resources.

“Look at your entire cost of goods sold,” Patterson says. “Maybe you can ship directly to an offsite location instead of going through a regional middleman.”

• Products -- Examine your product line. Why do you have certain products? Do they make or lose money? Are certain additional features really necessary?

“Investigate your product line all the way to the end consumer,” he advises. “Find out what is truly profitable and find out what makes certain products unprofitable.”

And these are just a few instances of situations where you can cut back on costs that don’t involve cutting human capital.

Getting better insight into your operations may also change your view on outsourcing. Once you factor in the cost of product returns, time zone issues, import duties, and so on, you may not be saving as much as you thought you were.

“There is this concept that China is the cheapest place to do business, but that isn’t always the case,” Patterson noted. “If you look at the costs beyond the $3 toy to include the entire cost of goods sold, many times domestic production is actually the best option.”

Patterson notes that while layoffs are sometimes an unfortunate necessity, scrutinizing every detail of your operations can help you be sure that you aren’t setting yourself up for problems once the economy rebounds.

“Layoffs can provide an immediate, short-term gain, but at what cost?” asks Patterson. “The recession will end, but when the economy comes back, will you be leaner and stronger than you were when you went in?”

Before you hand out your next round of pink slips, stop and think -- are you really doing what’s best for your company? You may be able to save more money (not to mention save a few jobs) if you’re willing to take a closer look at how you do business.

“Businesses tend to have an X-ray view of their operations, but they really need to have more of an MRI view -- they need a deeper, more insightful view of their business to determine what’s fat and what is muscle,” Patterson said. “If you can’t tell the difference and you start cutting muscle, you could be putting yourself in danger.”

Acorn Systems is a leading provider of profit improvement solutions to grow revenues, reduce costs and improve operational efficiencies.