Cutting Costs Without Cutting People

March 10, 2011
Many cost-reduction strategies focus on reducing labor costs. It's a strategy that can backfire in a recovering economy. Don't overlook the myriad additional opportunities to contain costs and keep good people.

Daniel Eastman is CEO of Personalized Awards Inc., a small manufacturing company with headquarters in Mequon, Wis. The business, which was moving along robustly when Eastman bought it in 2005, has been suffering since the economy headed south several years ago.

It's still suffering. While some manufacturers have seen an uptick in business as the economy recovers, Eastman has not. At least not yet. Still, the CEO says he is determined to avoid laying off employees for as long as he can, hoping in the meanwhile that business starts to pick up.

"I see great value in keeping the team in place," says Eastman, whose firm makes awards. "It is very difficult and costly to have to re-assemble talent." Not to mention the ethical and moral considerations he says are additional factors in his decision not to invoke layoffs.

While he waits for business to improve, Eastman is reassigning and reshuffling his employees from their traditional roles. Some are converting paper records to digital files. Others are engaged in inventory management and developing new customer leads, tasks they typically would not perform. One assembly worker is quite astute with social media. He's promoting the company vigorously via Facebook, LinkedIn and Twitter, according to Eastman.

These actions during a slow time position Personalized Awards to be better organized and prepared when business activity picks up, Eastman says.

His is a sentiment shared by other manufacturers who recognize that layoffs aren't necessarily the best -- or only -- strategy to address workplace lulls -- and that a drive to cut costs need not translate directly to cutting people. Toyota, for example, moved full-time workers to training or improvement tasks when it shut down production to address its well-publicized pedal issues. Others reduced work weeks, which shared the pain but spared the job. Even more found and removed costly hidden wastes.

Many of their actions present sound industry practices in any economy.

Lessons From the Recession

As the economy wilted in 2008, manufacturers were quick to cut their direct costs -- labor and materials. More likely to be overlooked were the costs associated with indirect spending in such areas as energy, logistics, administrative expenses and other categories. Thus, opportunities for spending reductions in those categories remained and still remain for many manufacturers.

An indirect-spend visibility analysis can bring those opportunities to light, explains Karen Kurek, national manufacturing industry lead at RSM McGladrey, a tax and consulting firm. Kurek cites the example of a manufacturer that had overlooked freight charges in its bid to reduce more obvious direct expenses related to its business, despite the significant costs associated with freight. However, when the company sat down and reviewed its methods of procuring freight, number of vendors and other variables, it discovered multiple inefficiencies that were costing it unnecessary dollars. For companies with significant sales forces, as another example, travel costs may be an area that deserves extra scrutiny.

Karen Kurek: "An indirect-spend visibility analysis can bring cost-reduction opportunities to light."

"The point is that if you haven't looked at something in awhile, maybe that is an area that would be very fruitful for you to take a look at to see if there is some waste," Kurek says.

Risk and fraud-management control is another fruitful area to examine. A typical organization loses 5% of its annual revenue to fraud, according to the Association of Certified Fraud Examiners' 2010 Global Fraud Study. Yet manufacturers typically do not give fraud control enough attention, Kurek suggests. While this is something that companies should look at in good times and bad times, she says, a struggling economy sets the stage for people to do something they might otherwise not consider.

The firm suggests companies can limit their exposure to risk and protect their assets by "fostering a culture of honesty," limiting opportunities to commit fraud and implementing appropriate internal controls.

Extending Lean

Lean practitioner Bill Peterson is quick to point out that lean is a growth strategy, not a cost-cutting exercise. "In essence, it keeps people employed," says the faculty member at the University of Tennessee's Center for Executive Education.

Nevertheless, reduced costs can often be a byproduct of lean endeavors. "When you do things more efficiently, your customers are happy, it actually takes less cost to produce [product], therefore you get a little more profit out of it and you can do more," he says.

Manufacturers have focused their waste-reduction efforts on the shop floor for many years and have reaped benefits. Peterson suggests their back-office operations deserve similar attention. In fact, he cites university research that indicates office processes are now a constraint to production in many cases.

"As we lean out the manufacturing floor, now employers are waiting for information, or they're waiting for parts to be purchased, or they're waiting for equipment to be installed, or they're waiting for a hire to be made. All of those processes take long and constrain the shop floor," he says. "There are opportunities to lean out the offices so they can enable the shop floor even more."

For example, he cites a company that has an extremely long proposal and contract process, one that typically is late as well. Lost business is one result. Another is a loss of lead time for the production employees to actually manufacture the product. The lead time had been eaten up by the proposal process "and now you have to deliver really fast."

Bill Peterson:"There are opportunities to lean out the offices so they can enable the shop floor even more."

The answer is to apply lean to removing the waste in the proposal process, from legal to finance to marketing and to any other functional areas that contribute. "Now you can deliver an accurate proposal faster, which gives you a competitive edge. It may even give your shop-floor people more time to do the work because you didn't waste time," Peterson says.

Myriad wastes can be found in office processes, if one only looks for them. The UT faculty member cites the waste of batching work (similar to on the shop floor) as opposed to one-piece flow, re-entering the same data multiple times, time lost to searching through the computer for data, and micro-managing as a few examples.

"What we are trying to do is free up time to reinvest in the business," he says.

Creative Job-Sharing Levels Seasonal Swings

In 1993, Burlington, Vt.-based Rhino Foods faced a conundrum wrought by efficiency improvements coupled with a drop in sales: excess workers. Not interested in laying off his well-trained employees, owner Ted Castle sought help from his workforce to find alternatives. Several brainstorming sessions and 18 years later, the solution, known as the Employee Exchange Program or EEP, continues to pay dividends for Rhino Foods and its employees when seasonal lulls hit the maker of ice cream inclusions and sandwiches, as well as other food products.

The program is simple on the face of it. As Rhino Foods describes it, EEP is "a counter-seasonal employer workforce exchange that allows Rhino and its partnering companies to retain their well-trained workforces and avoid seasonal layoffs by exchanging employees during times of low demand." In short, when Rhino Foods has a lull, it sends skilled workers to partner companies that have a need for temporary help. Both companies benefit, as well as the workers, who avoid layoffs.

Rhino Foods' Lorri Miller, who administers the program for the food company, says it remains simple even once you delve below the surface. Of course, great employees and good partners make a difference, says the human resources generalist. The company has developed exchange partnerships with more than 10 local businesses in Vermont, not all of which are manufacturers or food-oriented companies.

While some of the benefits are obvious, others are less so. The exchange, Miller says, results in shared learnings among the companies. It also keeps the employees engaged. "They are proud to represent Rhino Foods," she says, and they learn new skills and develop new relationships. Even more, the program has strengthened the sense of trust at Rhino foods.

Miller says the company has shared the EEP concept with many businesses, both inside and outside of manufacturing. The company also has posted a white paper on its website ( that provides significant detail about the program. No company is too big or small to make it work. "Just be creative," she says.

At press time, Rhino Foods had five of its employees at two other companies' locations.

Focusing on Growth

Ultimately, as McGladrey's Kurek notes, "You can't cut your way to growth." It's an opinion shared by Mandyam M. Srinivasan, management science professor at the University of Tennessee, who also teaches in its Center for Executive Education. He suggests that companies with too severe a commitment to cutting costs typically get into trouble.

"Sometimes it works but more often than not you end up making the wrong kind of decision when you go there," he says.

Srinivasan, author of several books on supply chain management, says manufacturers should instead focus on how to leverage their strengths and then grow business in those areas. Use capacity to manufacture specific products at which you excel, he says. "Don't try to be all things to all people."

And if you are a manufacturer that has successfully implemented lean, exploit the lead-time advantages and on-time delivery benefits lean delivers versus the competition, Srinivasan says. Grow demand for the limited portfolio by providing a more compelling value proposition.

"Once you do that, you're automatically generating a demand," he says. "When you generate more demand, it will automatically bring down costs."

Reducing labor presents only limited opportunity for cost reductions in any event, Srinivasan says, pointing to the fact that labor typically accounts for only about 10% of a manufacturer's costs. "When you try to cut those costs, at most you can cut 10%, but there's no limit to how much you can grow your business," he says.

About the Author

Jill Jusko

Bio: Jill Jusko is executive editor for IndustryWeek. She has been writing about manufacturing operations leadership for more than 20 years. Her coverage spotlights companies that are in pursuit of world-class results in quality, productivity, cost and other benchmarks by implementing the latest continuous improvement and lean/Six-Sigma strategies. Jill also coordinates IndustryWeek’s Best Plants Awards Program, which annually salutes the leading manufacturing facilities in North America.

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