GOOD ETHICS IS GOOD BUSINESS
By Dr. David M. Anderson, P.E., fASME, CMC
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Quality. It is unethical to sell shoddy or unsafe products, especially when this there are many techniques available to design for quality and build in quality. And this site, www.HalfCostProducts.com, presents eight effective cost-reduction strategies to minimize cost without resorting to cheap parts, cutting corners, or searching the world for cheap labor, all of which can lower quality and, ironically, be disappointing at reducing total cost to the point of actually costing more money.
Offshoring. Laying off people to offshore their jobs “to save cost” is unethical because it betrays loyal works and hurts people and their communities. And it is bad business because it just doesn’t work. It won’t save money on a total cost basis and thwarts six of the eight cost reduction strategies presented at www.HalfCostProducts.com . And that will hurt the rest of the company and the stockholders, which may betray their trust in management. Instead, companies should lower cost by keeping their employees and having them implement the truly effective cost reduction strategies at www.HalfCostProducts.com .
World-Wide Ethics Standards. Another ethical problem of offshoring is exposure to temptations to do unethical practices in other countries, such as various forms of bribes and conflicts of interest. Bill George, former Chairman and CEO of Medtronic, advocates a world-wide ethical standard base on the highest ethical practices in Chapter 11, “Ethical Dilemmas; When in Rome, Don’t Follow the Romans,” in his book, Authentic Leadership. He has always been a “vigorous proponent of a common worldwide ethical standard, arguing that a company would lose business in certain areas but also gain from having a clean reputation.”
He concludes that “These efforts enhanced Medtronic’s reputation around the world and made it easier, not harder, to do business and gain share.”
Mistreating Vendors. This site advocates establishing vendor/partnerships who build your custom parts. After being pre-selected, vendor/partners will help the team design their parts and tooling, which will save more than:
Switching vendors for a “lower price, which:
betrays ongoing relationships (again, betrayal is not an ethical business practice)\
may hurt the vendor, especially if it has invested time and money in the relation and has been counting on the business.
will hurt the customer company who will lose the value of learning relationships build up over the years.
Sharing proprietary information with competing vendors is
downright unethical, but this was done years ago by GM’s purchasing chief,
Ignacio López de Attiortua, who “was demanding double-digit price cuts from
suppliers, breaking long-term contracts, and sharing the firms’ proprietary
know-how with rivals, in a quest for lower bids.” This drove away GM’s best
Beating up vendors to lower price is another betrayal of a
partner. Not only is this not an effective a lowering cost, it can drive
your best vendors to the competition (as Lopez found out at GM). Further, it
is just not done at the best companies. Taichi Ohno, the father of the
Toyota Production System, said “Achievement of business performance by the
parent company through bullying suppliers is totally alien to the spirit of
the Toyota Production System.”
Reneging on contracts is unethical. As a matter of policy,
Toyota honors contract with suppliers and does not renege on them.
Layoffs. There are many ethical issues with layoffs, because of the devastating effects on people and the local communities, especially when layoffs are bad for business. Consider the excerpt from Dr. Anderson’s 2008 book, “Build-to-Order & Mass Customization,” from the section, “Don’t Lay Off People,” in Chapter 13:Cost Reduction Strategy (home page):
Great companies don’t lay off people. Of the eleven “great” companies profiled in Jim Collins’ book, Good to Great, six had no layoffs at all in the ten years before making the transition from good to great and four other great companies had only one or two layoffs. In contrast, layoffs were used five times more frequently in the comparison companies (“not great” companies in the same industries).
The largest manufacturer of electric motors in the U.S., Baldor Electric, rode out one recession, even though sales shrunk by 12%. Baldor’s CEO, John A. McFarland said: “We don’t believe in layoffs. You’re just sending all the investment and expertise out the door.”
Savvy smaller companies also realize the same principle. U.S. Tool & Die’s Robert Moscardini pointed out that they spent 3,000 hours training workers per year and figures that, at $60 to $100 per hour, “That’s a big investment. You don’t just let those people go.”
Unfortunately, layoffs are the most common knee-jerk reaction to “cut cost fast” and “downsize” operations to the downturn level, which is presumed to be permanent; but it rarely is permanent – that’s why they call downturns “cycles!”
Compelling Reasons to Avoid Layoffs. However, there are several compelling arguments against laying off people (with the possible exception of discrete early retirements of non-critical people that are not perceived as part of any layoff program). First of all, layoffs for any reason are not only devastating to those laid off but also can have debilitating effects on employees that remain first with company-wide fear and anxiety, then organization disruption, and following increasing workloads and possibly new jobs to learn. Further, the best and most sought-after employees may “jump ship” at the first hint at the coming disruptions and their consequences. This all lowers company productivity and effectiveness – all for the illusion of saving cost.
Layoffs really don’t save as much money as expected, considering severance pay, unemployment fees and rate increases, and other termination costs. This is especially true if the workforce is protected by employee agreements or union contracts, which, as in the automobile industry, gives laid-off workers 95% of their pay for the remainder of the contract, which could be years. So any cost savings would only happen after a few years when the market may have picked up, at which time the company could (a) stubbornly stick with the plan because they have paid so much into it, and hire new, less experienced people, or (b) admit that all this human and organization cost would have been for naught and bring the same people back.
Even without such contracts, human resource experts argue that firing/rehiring cycle has a 1.5 to 2 year breakeven point, meaning that if the market rebounds in less than that time, the company would be ahead by saving on all the severance and rehiring costs and simply keep the people on salary, even if they theoretically had nothing to do! Savvy readers of business books can probably predict where this train of thought is going: Put those people to work improving the company with programs like Lean Production and Build-to-Order and use “excess” human resources to relieve work loads so all employees can enhance their skills through training and implementing improvement programs.
Other reasons not to lay off people are labor continuity and skill and knowledge retention. Losing key skills is usually more disruptive than perceived when deleting names on the employee database. Similarly, few companies have perfect documentation and knowledge sharing, in which case valuable information and skills will be lost when people leave. Many operations depend on the current employees knowing what to do and how to do it. Thus, laying off people slows down operations, raises the cost per task, and maybe degrades quality, especially when the transferred people have to learn new tasks and search for information.
Professor Kim Cameron, of the University of Michigan Business School, says in the article, “Many Say Layoffs Hurt Companies More Than They Help (Wall Street Journal, February 21, 2001) that “layoffs tend to break down communications and the informal knowledge in organizations about how to handle certain customers, suppliers or operations.”
Some companies will layoff “temps” (temporary employees) at the first sign of trouble, arguing that hiring temps in the first place was a hedge and they were not really expecting job security anyway. However, temps may be performing important, maybe critical, tasks and, unless the company has perfect documentation and widespread cross-training, organizational performance may suffer.
Trimming Payroll without Layoffs. One approach that avoids layoffs, but immediately trims payroll temporarily without severance costs, is to shorten the hours worked – and payroll paid – for all employees, with the possible exception of critical people. For instance, a 10% payroll savings could be generated by closing business every other Friday; the employees would see a temporary 10% income drop, but would greatly appreciate keeping their jobs and wouldn’t mind a three-day weekend every other week, an extra week off over the holidays, or adding a week to their summer vacation.
During the 2008 recession, the New York Times observed that: “At many companies, management is hanging on to as many workers as it can, cutting hours to try to limit layoffs, while hoping that business improves.”
Charles Schwab, when needing to temporarily cut labor costs, asked almost half of its employees to take some Fridays off. A Schwab spokesman summarized their philosophy as follows: “You don’t engender loyalty and a sense of shared mission by resorting to layoffs first.”
For more challenging situations, some companies still avoid layoffs with unpaid mandatory furloughs, for example, the plant closes for one week per month or so. The company temporarily saves 25% on payroll cost without the cost or disruptions of layoffs. The workers retain their jobs and benefits and have a few weeks for extra vacations, spending more time with their families, or painting the house instead of paying for it. And when the downturn has passed, the workforce and its morale are intact.
If there are truly excess people who are not critical to the current level of business, they could be offered extended time off without pay (but with benefits) to pursue an advanced degree, travel, spend time with a newborn, take care of elderly parents, or other personal reasons for such a sabbatical. Of course, they would have to be assured that they would have a good job when they came back.
Another option to keep from laying off people is to “loan” employees to other companies that are nearby so as not force a move or a lengthy commute. A mutual bidirectional arrangement might be possible if the two companies had out-of-phase business cycles.
In any event, make sure that enough people will be on duty to adequately deal with customers and suppliers.
For more information call or e-mail:
Dr. David M. Anderson, P.E., fASME, CMC
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