Effect of the Economic Downturn on a Manufacturing Company - Essay Example

Summary of the observation A manufacturing company was severely affected by the economic downturn, and it became apparent that the demand for their products had fallen to the point that they had to cut down production. This meant shutting down the less productive plants and selling off some equipment. The management’s main concern was what action to take with regard to the work force. With fewer production facilities, the company needed to reduce the number of labour hours by twenty per cent. There were several factors that affected the decision, most important of which was how to deal with the company union which strongly opposed the lay-off of any employee. The union happened to guarantee their members job security, which was the main reason that nearly all the workers had joined up. A number of alternatives were suggested by managers during a brain storming session, the most extreme being to lay off twenty per cent of the work force permanently. The least disruptive was to retain the full complement of employees and merely schedule them on a revolving four-day work week, until the crisis is over and the company can return to full production. The management eventually decided to reduce the working hours of each production worker instead of laying off employees. They felt that dismissing workers from their jobs would be too disruptive, and before they could do so they would have to meet with the union members and negotiate who should be dismissed, according to the terms of their collective bargaining agreement. They expected stiff opposition and a possible court case if they were to insist on laying off people. Unfortunately, when the decision was implemented, many of the good employees lost interest in their jobs and filed for resignation when they were offered better paying jobs by a competitor firm. 2. Explanation of the decision-making process Bounded rationality refers to the situation where a decision is analysed premised on rationality, although people actually lack information and may act emotionally rather than rationally, and often the final decision is one that satisfices rather than rationalizes (Gigerenzer & Todd, 1999; Munier & Stelton, 1999). The decision-making process that was employed by the company was simple and straightforward. A joint meeting of the executive and operations management committee was called, the finance manager briefed them on the need to reduce operations expense of which the labour cost is the largest, and the managers then brainstormed on the different alternatives that they felt were viable. Bounded rationality in the decision-making process Source: University of Portsmouth, 2005 The four best alternatives were as follows: Twenty per cent of the production employees across the board shall be laid off with two week’s severance pay. The managers should identify who are to be separated. Ten per cent of production employees shall be laid off, only from those departments that may be reduced, and some shifts reduced from the regular three to only two. Some departments may not be affected at all. Convince the employees to take a uniform fifteen per cent pay cut. In this case management will also take a pay cut to make up the difference from what employees save to what finance needs to make up. Scheduled leaves will be given to the amount of the cut. Declare a four-day work week for all production employees, eliminating twenty per cent of the work hours and reducing production personnel’s pay by twenty per cent. There are a number of criteria that the management team considered in making the final decision. The top criterion is to absolutely reduce labour cost in production by twenty per cent. The number is not arbitrary. The finance department reasoned that twenty per cent of the production capacity is being suspended until demand picks up. Other than this, there are many uncertainties, such as the length of the suspension of operations, whether further reductions shall be necessary, and whether the firm will still return to full operations after the crisis because this will depend on the strength of the recovery of the demand. Another criterion was the possibility of getting into a controversy involving the labour union – the more a particular alternative puts management and union in opposition to each other, the least desirable it is. While all the alternatives will be unfavourable one way or another to the union, there would be a greater disagreement between union and management on the issue of lay-offs than on reduced pay or reduced working hours. Heuristics are ‘strategies using readily accessible, though loosely applicable, information to control problem solving in human beings and machines’ (Pearl, 1983, vii). In this case, heuristics were resorted to when arriving at the alternatives and the final decision. In this case, the managers, when arriving at their decision, applied criteria which they felt to be most important, but which actually had little to do with the problem in a rational way. The final selection was to reduce the work week from five days to four, and therefore people were paid wages only for the four days. The thought process undergone by management was evident in its final decision. The managers informed their employees that the decision was undertaken for their common benefit, to ensure that nobody loses a job during the financially tough times. In their deliberations, however, managers went to great lengths to arrive at the decision that was easiest to implement and which avoided the unpleasant confrontation with union leaders concerning personnel lay-offs. Since management was not sure how long the economic recession would last or in what way the market will respond, thus the decision adopted merely scaled down operations without distinguishing among functions or among the workers or their relative performance. The decision was satisficing, its considerations were based on emotional rather than rational factors, and information was lacking, for which reasons the decision-makers adopted fast and frugal heuristics in the decision-making process (Gilovich, et al., 2002; Hepler, 2008). The result was essentially short-term , and should have been updated or revised as new information was brought to light. One such information is the early resignation of valuable employees, necessitating an adjustment in the management’s priorities and criteria. 3. Decision I would have made in the situation The final decision achieved the objective to reduce labour costs by twenty per cent, but the strategic goal of the corporation – to deliver the best value in the product for the least cost – was not achieved. The reason is that valuable workers whom the company needed to maintain most in the company were dissatisfied with the reduced pay and eventually resigned from the company, only to be employed by the competitor. In the end the final decision was satisficing in the short term, but disadvantageous in the long-term, because the decision bore repercussions which were not earlier foreseen by the managers and which were not known for a fact. If I were the decision maker, I would have added to the alternatives, particularly the selective reduction of personnel. Obviously, the reduction in productive capacity is intended to last for the medium term at least, and possibly for the long-term, so the permanent lay-off of some people may be reasonable. By selecting who the company wishes to retain and who it wants to let go, management could at least be sure that if the economy recovers and demand strengthens, the company has the valuable, well-trained, experienced personnel who could jump-start production. Workers who are let go may be assisted by the company to find new jobs they could transfer to. This is an alternative the company failed to consider. While it is mentioned that information is lacking, I feel that the company could have done more in seeking to gain other facts that could have improved the decision. In this case, the human resources department did not play a large role. Much of the problem was defined by the financial management department, for the reason that the problem was viewed as financial. On the other hand, it is the workers in the production department who were more severely affected, so there should have been some major scenario building and planning done by the human resources department. Had HR been a strong concern, it would have come to light that there are employees within the firm that may be lost to competitors because of their knowledge and skills. Not only did the company lose the service of these people who could have created competitive advantages for it, but they were lost to competitors who will benefit from the training and development the company had given them, which is strategically tragic. In making the decision that certain individuals may be let go, the management will have to deal with the labour union; it is an uncomfortable, maybe even painful, but necessary step to take. Management must therefore convince the union that based on the financials the lay-offs are necessary, but give to the union the credit of having negotiated with you some support for those who shall be laid off. A separation pay, counselling, and representations or recommendations to other firms for their employment would be good measures. It is also possible for the company to help the personnel laid off to start a small enterprise of their own. These are difficult, ‘unsatisficing’ decisions, but ultimately they are the better decisions for the long term. References Gigerenzer, G; Todd, P M; & the ABC Research Group 1999 Simple Heuristics That Make Us Smart. Oxford University Press Gilovich, T; Griffin, D; & Kahneman, D 2002 Heuristics and Biases: The Psychology of Intuitive Judgment. New York, NY: Cambridge University Press Hepler, T J 2008 Decision-making in Sport: An Examination of the Take the First Heuristic and Sel-Efficacy Theory. Ann Arbor, MI: UMI Proquest LLC Munier, B & Stelten, R 1999 Bounded Rationality Modeling. Available at: http://www.lamsade.dauphine.fr/~bouyssou/BRM.pdf Pearl, J 1983. Heuristics: Intelligent Search Strategies for Computer Problem Solving. New York: Addison-Wesley. ISBN 978-0-201-05594-8 University of Portsmouth 2005 Decision making process. Available at http://mosaic.cnfolio.com/ENG500TopicDecisionMaking Read More