Downsizing

Downsizing is the reduction of staffing levels necessitated by business reasons such as low sales or low profits. The number of employees required to build products is a variable expense directly related to the number of units being built. So if fewer people are on the company’s payroll, labor expense is reduced, resulting in stabilized or increased profits. People are a primary resource in virtually all businesses. People perform work necessary to the firm’s success. Having either too few or too many employees may result in lower operating efficiencies and lower profits for the business. Determining the number of employees needed to operate the business is a primary management responsibility. The following employee planning process is for a manufacturing firm; however, the process for a service company is virtually the same. With the best business forecast available, management estimates by product line the number of units that are projected to be sold over a time period of six months or more. Projected sales are totaled and existing finished goods inventory is subtracted to determine the number of units that need to be manufactured. Using existing manufacturing standards, by type of job and work station, management then estimates the number of positions needed and the requisite knowledge, skills, abilities (KSAs), and experience. After the positions, KSAs, and experience levels are identified, the employees are evaluated to determine which ones have the required background to perform the work. In the aggregate, if there are fewer employees than needed, new employees are hired; if there are more employees than needed, downsizing occurs. The downsizing process can occur in several ways. If the sales forecasts, initially used by management to plan production levels, project a protracted slump in sales (that may last for a year or more), then those employees not needed are usually terminated. If the sales slump is expected to be relatively short and then sales are expected to rebound, then excess employees are usually laid-off. When an individual is laid-off, the assumption is that the person will be needed back within a reasonable period of time. The return to work process is known as a recall. A termination assumes that the employee will not return to work at that company. Attrition is an attractive alternative to downsizing. Attrition occurs when an individual leaves a company’s employment through either a voluntary resignation or being terminated for reasons other than low sales or low profits. The position is vacant, but the company does not fill the position with a newly hired employee. Total number of employees will decrease; however, this process is very slow and will not reduce the total number as quickly as downsizing. John B. Abbott