The Expensive Recession: Managing Costs During Difficult Financial Times
Money’s low, stocks are down, workers and employers on all sides of the board are struggling to make ends meet. In this recession people are counting on their jobs more than ever, yet many companies view layoffs as the quickest way to get out of the red. But by focusing on root causes of money loss, management can make long-term changes to boost the profit of operations. Shift worker absenteeism bleeds company money, and frequent worker turnover requires more basic worker training and more money hunting for replacements. Increased preventative health care and management training would cut down on illness and injury, saving money on health costs and reducing absenteeism, as well as helping workers feel more connected with the company to slow worker turnover. This article focuses on the personal pain of layoffs and alternative ways to cut costs while saving jobs.
Everywhere you look people are feeling the pain of living with less. Managers of 24/7 operations are right in the thick of one of the most significant management challenges of their careers. Most companies’ stock prices are down materially – the Dow, the blue-chip stock measure, ended 2008 down 33.8%, its worst annual performance since 1931, when the Great Depression was in full swing. The broad Standard & Poor’s 500-stock index performed even worse, down 38.5% for 2008, its worst year since 1937. Earnings at Standard & Poor’s 500 companies are expected to continue to fall in the first half of 2009, marking eight straight quarters of declines.
When forced to deal with financial cutbacks, the initial focus of many chief financial officers is headcount. That’s because it’s easy to look at one number and communicate a necessary reduction in force to those who have to implement it. But for those who have to execute them, staff cuts are far from simple. People’s lives are involved. Managers may have to sever employees they have worked with for many years; employees who have come through and put the company first during boom times. And when all is said and done, and lay-offs have been implemented, the manager is still held to achieving financial and operational results without being able to rely on critical people they have worked with in the past.
It can be difficult to attack directives to reduce headcount; sometimes it amounts to career suicide. However, there are senior managers out there who will look at other options if presented with a well laid out proposal. In many 24/7 operations, particularly unionized ones, a flat out headcount reduction is extremely difficult, if not impossible to execute. If your company needs to quickly ease a financial strain, waiting until the next union negotiation is not going to work.
Putting together a plan to achieve cost reductions that can be bought into by senior managers and union leaders is not impossible. But first, you need to thoroughly understand your numbers. By focusing on absenteeism, turnover, overtime, health care and benefits, and scheduling and staffing levels, you may be able to create a plan that is an alternative to straight headcount reductions.
Absenteeism – In shift work operations, absenteeism is three times higher than the US average (7.5% vs. 2.5%) because of the reduced sleep, poorer health, and difficulties with family and social life that shift work can cause. Highest in healthcare and emergency services, absenteeism is still more than twice the US average in manufacturing, transportation, processing, and utilities.*
Turnover – In 2006-2007, the average turnover rate for shift work operations was 10.6% vs. 3.6% for the U.S. average, again almost three times higher. Healthcare, customer service, processing and manufacturing had the greatest turnover levels. Estimates were that it cost an average of $24,000 to train a new employee (upwards of $60k for a utility worker and $30k for emergency services personnel).*
Overtime – Overtime is common in shift work operations because small amounts of overtime are often built into the shift schedule. For 2006-2007, overtime averaged 14.6%.* While this is not an excessive overtime rate, managers need to look at how overtime is distributed among workers. Working excessive overtime may create additional health and safety risks resulting in increased health care costs, absenteeism, safety issues, and legal liability.
Health Care – Extended hours employees represent 10% of the U.S. insured population but they incur 17% of the total U.S. cost of healthcare.^ This is because of increased risk of cardiac, mental health, and gastrointestinal disorders within the shift work population. Maintaining a healthy lifestyle is crucial for shift work employees given the additional stress represented by their non-standard work hours and their increased risk of certain health problems.
Scheduling and Staffing Levels – 36% of facilities have demand that fluctuates throughout the day, but only 20% vary staffing levels to match these fluctuations. 12% of facilities changed their schedule within the past year; 33% have not changed their schedule in 10 years. The optimum work schedule for a facility should be determined by key operating criteria, the health and safety impact of given schedules, and the family and social needs of the employees. Since these factors change from time to time, work schedules should be reassessed periodically to make sure that they still match all the requirements.*
By now everyone is familiar with the plight of the U.S. automobile industry. Historically, automakers have been saddled with significant overhead costs (such as health care and pension costs for retirees). In addition, in 2008 U.S. vehicle sales fell 18% to 13.2 million and analysts predict U.S auto sales will fall even more in 2009. The problem is matching cost reduction with lost revenues. This industry is being forced to reassess cost structures or face bankruptcy.
Take General Motors, for example. Over the past two years, along with many capital asset reduction programs, they have offered hourly employees an attrition plan which reduced the 74,000 person workforce by 19,000 (they had 125,000 employees in 2003), eliminated about 3,500 salaried workers, froze pay for the remaining salaried employees, and eliminated health care coverage for retired workers over 65. General Motors has clearly eliminated millions of dollars of costs over the past few years; they had no choice and we should applaud them. But while many GM facilities have been permanently closed, a significant amount of GM’s cost reductions have come from eliminating shifts and temporarily eliminating employees. Demand for GM products is down significantly and the company can’t seem to match its decrease in revenues with necessary cost reductions, no matter how hard they try. Maybe it’s time for GM to take a closer look at absenteeism, employees’ health issues, overtime management and scheduling and staffing levels. Perhaps the U.S. government should require analysis of these areas and goal setting of related financial productivity targets as part of the bailout package.
Recessions have historically raised safety concerns for 24/7 operations. The last economic slowdown in 2001-2002 resulted in dangerously low staffing levels, placing employees at an increased risk for accidents, injuries, and performance errors. Key results from a study by an affiliate of Circadian Technologies released in 2003** found that:
• The number of shift workers working more than 400 hours of overtime each year increased by 45% over 2000 levels.
• Seventy-three % of facilities reported using holdovers – where the shift length is increased or doubled – to cover necessary overtime. Other studies showed that that mandatory overtime costs U.S. employers $150 billion per year in stress and fatigue-related problems.
If you need more information about reducing costs in your shift work operation, buy a copy of Shiftwork Practices 2007 by Circadian.* For even more information, call us at 1-800-SHIFTWORK, and we will schedule a time for you to talk with a shift work specialist who can help assess your businesses opportunity to reduce the costs of managing your shift work operations.
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* Shiftwork Practices 2007, Circadian Information Limited Partnership, copyright © 2008
^ Financial Opportunities in Extended Hours Operations, Circadian Information Limited Partnership, copyright © 2003
** Shiftwork Practices 2003, Circadian Information Limited Partnership, copyright © 2003
Tags: 24/7, fatigue, Health Care, health costs, Safety, shift work, stress
