Question

the recession that started in 2008 had devastating implications for employment. But one surprise was that for some manufacturers, the number of jobs lost was actually lower than in previous recessions. One of the main explanations for this was that between 2000 and 2008, many factories adopted lean manufacturing practices. This meant that production relies less on large numbers of low-skilled workers, and more on machines and a few highly skilled workers. As a result of this approach, a single employee was supporting far more dollars in sales. Thus, it would require a larger decline in sales before an employee would need to be laid-off in order to continue to break even. Also, because the employees are highly skilled, employers are reluctant to lose them. Instead of lay-offs, many manufacturers have resorted to cutting employees hours. Would you look into cutting overhead? What overhead would be easiest to cut?

Answer 1

a) Replacing low-skilled workers with sophisticated equipment requires fewer, highly trained set of skilled workers to operate the increasingly sophisticated equipment. This is where non-value added activities are reduced to the minimum following the lean manufacturing concept. In the process of doing so, variables costs (low-skilled workers) are being converted into fixed costs (equipment).

The cost behaviour of high-skilled workers eventually move towards becoming fixed costs. This is characterized by their salaries along with other benefits and compensations as fixed. However there’s also a mix with variable costs as part of their income e.g. overtime, claims or allowances.

b) When the factory is facing a hard time, it may also cut on the hours work. The act of cutting hours is similar to reducing variable costs by cutting the number of workers. Somehow, cutting hours is not a long-term solution as workers may find it difficult to meet their financial obligations i.e. to pay bills, loans, etc. But in a lean manufacturing environment, the cutting of low-skilled workers is close to becoming impossible as there’s very little to cut.

There are several advantages offered by lean manufacturing that can benefit companies such as low inventories, less wastage, highly skilled workers, higher productivity, high sales value per worker, and so on. However, lean manufacturing has its set-back especially during recession. While it may benefit high-skilled workers as they are not easily replaceable or downsized, it also can have a disadvantage to manufacturer as it has less variable costs to cut when time is bad. And likewise, from the management accounting perspective, a company that has high fixed costs (high skilled workers) may find itself running at a loss when the production is low as each piece of product has to absorb the fixed costs.