Is a No Layoff Policy Really Wise?

Conventional lean wisdom dictates that in order to obtain employee commitment for lean improvements, improvements that by their nature create efficiencies that could threaten jobs, a "no layoff from lean improvement" policy is necessary.  Otherwise the employees, the creators of ideas and suggestions, cannot be expected to fully buy in.

Mark over at the Lean Blog has been debating this in a couple of recent posts.  Definitely worth the read, especially the comments.

In many Lean implementations (including mine in hospitals), we insist on "no layoffs due to Lean" and management makes that pledge. If employee input is critical to Lean improvements, layoffs will understandably kill most of the enthusiasm for Lean. We try to think of employees as partners in providing value and improving quality, not "heads" to be cut (I hate it when employees are referred to as "heads" or "bodies").

There was a lot of good discussion and I'll amplify my point that it's got to be part of your corporate DNA to manage in a way that allows you to avoid layoffs. If you haven't built your company around that philosophy, it's probably impossible to avoid the need to "cut heads" by suddenly deciding at some point "we want a no-layoff philosophy."

He references a recent WSJ article and another from CNN Money.  Both articles describe several companies that have made, and kept, a no layoff pledge or policy, even in these hard times.  From small private companies to large public companies, in a variety of industries... including some hard hit by the recession.

In the midst of a recession, job cut announcements have become a daily occurrence. But some employers have promised no pink slips, and are sticking to it.

Both private companies - like equipment maker Hypertherm - and public companies like Lincoln Electric had no-layoff policies in place long before the economic fallout this year, and have no plans to lift them now. and steelmaker Nucor

"We have a no-layoff practice that we have been able to follow going back to 1966," said Gregg Lucas, a spokesman for Nucor. "That no-layoff practice continues even today in the current challenging economic environment."

Others, like Southwest, FedEx, Aflac, Toyota Motor North America and Erie Insurance may not have a formal policy ruling out layoffs, but say that there is no history of layoffs and no plans to lay off workers going forward.

That is definitely laudable.  It takes some serious leadership guts to make that pledge, especially in industries like steel, cars, and airlines.  And keep in mind that's a full no layoff pledge, not a "no layoff due to lean improvements."  A much higher bar.

Each company has a variety of tools to help manage the workforce to avoid layoffs.

Some companies like Toyota keep workers busy during downturns with training sessions or classes. Hypertherm reallocates employees to departments where there is a greater demand for labor. Others choose alternative cost-cutting methods like hiring freezes or shorter work weeks.

Dean Gruner, CEO of ThedaCare, a Wisconsin-based health care system provider, instituted a no-layoff policy 18 years ago. To slash expenses in lean years, the company slows the hiring process and redeploys workers to other areas. "We can manage our staffing levels by being thoughtful about our turnover rate and redesigning the work that we do," Gruner said.

But here's my problem, coincidentally spelled out by a guy at one of the big name lean consultancies.

One of the major drawbacks to such a policy is the risk of failing, according Michael Chamberlain, senior vice president of Simpler Consulting. If companies instill such a policy but can't stick to it, that will deal a serious blow to their credibility. And, there will always be certain business conditions that the organization can't anticipate in the future, he said.

In addition, if the company has to go back on it's word, anything it says after that, "could be perceived as one more promise that will be broken," according Michael Maslansky, CEO of Luntz Maslansky Research, a market research firm.

In my mind employee trust is king, and this kind of danger is very real.  Toyota has made the news over the last few months with how, even though they are not unionized, they are paying their workforce to come in and get trained.  It costs Toyota $35 million a month, and they have tied up hundreds of corporate trainers.  The UAW Detroit Three "Jobs Bank" by comparison basically pays the workforce to stay home and get trained by Oprah and Montel. 

When I visited one of Toyota's most profitable factories in Japan last month, we were told that they had just cut back almost all of their contract and temporary workers.  Several factories in the U.S. are idle.  The auto demand downturn is severe.  So how long can Toyota hold out?  How long should it hold out?  At what point does the cash burn from its impressive "training but no production" program begin to offset the true value in the knowledge, creativity, and experience of their employees?  It's an ugly thought.

What happens if and when Toyota has to lay off?  What will we say?  Will we still hold them on a pedestal?  What will Toyota's "life time employment" employees say?  What will happen to their lean prowess, their force of employee-driven productivity improvements?

One of the commenters to Mark's post asked if he had "ever been responsible for a P&L"?  I have had P&L responsibility for almost two decades, and have had the ultimate P&L responsibility in that I used to own a fledgling company.  It does change you.  You want to focus on the people, but at some point you are also forced to make some tough calls between people and the fundamental survival of the enterprise even after all the tools of pay/hour cutbacks and such are implemented.  Failure could affect even more people.  It's tough.

I think a "no layoff from lean improvements" policy is acceptable and necessary, but a fundamental "no layoff for any reason" policy is a bit disingenuous and downright dangerous.  I will say that most companies jump to layoffs far, far too rapidly as they don't perform an accurate business analysis based on the true value of the employee, a value that includes knowledge and creativity in addition to the cost of the pair of hands.  But the time may come when difficult choices need to be made, even with employee value in mind, in order to fundamentally keep an organization viable.

Leaders must recognize that value, be willing to make the tough calls with that value in mind, but of paramount importance is to be open and honest with the employees.  A demonstrated acknowledgment of employee value coupled with an atmosphere of trust, openness, and mutual sacrifice will allow a lean culture to thrive in even the most difficult of times.

Unfortunately I see some top notch true lean companies like Toyota having to make those tough choices in the next few months.  It will be interesting to see how they fare.

Comments

[Dennis Britton]

It seems to me like the constraint is in the demand or market, so astute leaders will refocus their enterprise to markets with growing demand like alternative energy or health care or shrink the size of their organization to match the smaller size of their market.

[Ralf Lippold]

The sound of the article is pretty pessimistic even though the way Toyota is treating its people is exceptional and should be called that.

The no-layofff policy definitely sticks mainly to the Toyota employees.

It is amazing how much the Toyota management focuses on people development for the times to come. Bringing the plants up to date in times when production is low or even non-existent is phantastic. Wish I could say that for my last employer. Production stop due to supplier shortage always ended in sending everybody home. This would have been the best time for team learning as the daily pressure was not there.

I wonder what strategies Toyota is taking into account when the downturn keeps on take longer. Perhaps even refocusing their business model and finding new fields of prosperity. Their employees will be a perfect fit in any organization and will not be necessarily bound to car manufacturing alone.

Best regards

Ralf

[William Pietri]

Interesting post!

Watching a lot of tech companies go through layoffs recently, I've been thinking about the relationship between layoffs, firings, and honesty.

During fat times, it seems like companies are relatively willing to carry employees that are marginally productive -- some slightly positive, some modestly negative. Then, when things get tough, they use the bad times as an excuse to do what they should have been doing all along: correct their hiring or acquisition mistakes.

From what I see, a fair bit of this trouble comes from people not willing to be honest with themselves. Then, rather than be honest with others, they talk about layoffs when they are really up do something else. Although this can save some face for employees and some awkward conversations for managers, I can't help but think the dishonesty has longer-term negative effects.

[Gregg Smith]

I'm with an organization that implemented a no layoff policy in the 1980's. It's one of our major selling points to new recruits and allows us to attract and retain the best talent in our area. Our CEO has been preaching to us since the fall to run the business prudently, spend only what we need to spend, and make sure we DON'T have to go back on our pledge. January will be very slow in manufacturing and we are preparing to provide remedial training on 5S, lean principles and safety. We may have the entire workforce in one building working lean implementation for the entire month.

If you commit to no layoffs, you have to be flexible and creative every now and then to maintain the policy.

If it were easy, every company would be making the same promise!

[Mark Graban]

It will be interesting to watch Toyota. They are likely to show their first loss (not profit) in 70 years. They have plenty of cash cushion to keep employees on (and keep training them) IF they think the market will come back. Toyota isn't a charity. I bet they'd continue investing in their people and their plants will be even better if they expect the market to recover in a year or two? If this is truly another Great Depression coming, they might have to lay off people. Again, they ain't a charity.

We'll see.

[Jason Grijzen]

Employees are a strange asset. The Toyota mindset is that employees are something that you invest in, no different than tooling or facilities. You put money into your people and you get a better more profitable product. The bank probably doesn’t see it that way. I know I can't list my assembly person's 5S training on my balance sheet. Toyota is in a tough situation (like everyone) and it will be interesting to see how far they go. How much money will they spend to keep their people? After these problems are behind us, will they need large reserves of capital to get going again? Or will they need an army of well trained, dedicated hands? The only thing for certain is that everyone will be watching. I think this will either be a historic achievement for Toyota, or a humbling moment where we see a limit to how far Toyota can go. At the end of the day though it will be no where near as dramatic as what's happening with virtually every other manufacturer out there. If Toyota does lay people off it will be at a point much further than anyone else would have taken things, and the number of people laid off will probably be much smaller than every other manufacturer as well.

[Barry "aka the Hillbilly"]

Nucor Steel seems to have been able to pull this off. I don't know if they will be able to do it forever. They have a batten down the hatch culture that tries to preserve the livelihood of all.

I still think Ken Iverson's book "Plain Talk - Lessons of a Business Maverick" is one of the best I have read. Nucor goes through a "Painsharing" process during troubled times, with the President and Mangers taking a bigger cut than the workers. I think Ken said something like a 50% cut for him, 25% for Plant Managers, maybe 10% for workers. At least that's how it worked when Ken ran the show.

Ken took chances on people and created a culture of improvement. He shunned the typical CEO perks (Company Cars, special parking places, Executive Cafeteria's and all the other junk that drives a wedge between the working man and management). And he insisted upon a simple management structure (only 4 layers). In his book he points out a lot of the corporate excesses of Big Steel. Bethlehem built 3 golf courses just to keep everyone apart (Executive, Management, and Union). Ken also made light of the large study Bethlehem research conducted that concluded Thin Slab Casting would not work. I suspect he was not very tolerant of the Excuse and Blame culture of Big Steel.

Nucor jumped in with both feet and built the worlds first production scale thin slab plant in Crawfordsville, Indiana. Ken stated that they fully expected only half of the new things they tried to work out in the end. They tried to improve and not place blame when someone tried to improve but failed. It was an important part of the culture he created with the Nucor folks.

He noted that many of the current business practices were harmful and not necessary at all. I have a lot of respect for him. Many of America's problems have been created by an Elitist Corporate Culture. In the good ole days, when America didn't have much competition, we got away with it. Today, we can no longer afford to not work as well together as the Japanese, Germans, Chinese, etc.

As far as Toyota is concerned, they have employed quite a few temporary employees. Those employees have acted as the buffer and are generally let go. Its not like Toyota doesn't have any flexibility at all.

I don't think they will cut into muscle and get rid of permanent employees unless it becomes very painful (a US Depression). I suspect they are more worried about a complete collapse of the US dollar than the current level of sales. The collapse of the Dollar vs Yen would create much more significant and long term problems for them.

But honestly, I don't know why they would lack the confidence to stay the course ? It should be apparent that Toyota and Honda have been following a sound strategy. If you believe you are a competent manufacturer and are going to continue to slowly pick up market share going forward, then why not take this opportunity to train and make your production system even better.

The other small problem Toyota has is that many of their partially owned US based suppliers have been expanding faster than Toyota's actual market share. Toyota made the decision to allow them to go after BIG 3 business in the last 20 years. It was a way of expanding the Toyota supply base ahead of Toyota's market share gains. Pretty clever, unless of course one of the Big 3 goes under. Toyota's US suppliers may actually be more out on a limb than Toyota Motor currently.

I think Toyota will have the foresight to weather this storm. Continue along the way on their slow and steady market plan they have been following for many years.

[Michael Lombard]

I work in the homebuilding business, and as you can imagine, we've been hit hard by the housing bust, sub-prime mortgage bust, and now the recession. We've shutdown about 1/3 of our building operations nationally. Not good! Lots of people lost their jobs, but we'd be facing a cash crunch right now if we had not acted a year ago. As a lean advocate, I was firmly against the layoffs then, but I see the grim reality now.

How about this for a no layoffs policy: "Nobody loses their job as a result of lean/kaizen. No layoffs when we're projecting profits for the next quarter. No layoffs until we've exhausted all forms of sensible cost-cutting."

[Thomas]

Interesting post, and great comments so far. As with other aspects of how they run their business, Toyota has a strategy of retaining the right amount of people to meet the low end of production estimates, then use temporary hires as a buffer. This usually works for everyone, since the ‘permanent’ employees have long-term stability, and the people in the ‘buffer’ zone know that they do not.
Toyota (and Honda) seems to understand, and run their organization for, the large-picture and the long-term, two things Detroit seems to have little concept of. I suspect that if needed, they will do what they can to remain healthy and also support the health of their key suppliers. The question is if they have the resources and fortitude to try this, if it becomes necessary. There are more eyes on them than just their employees, after all; they have established strategic relationships with key suppliers, something that probably came with some kind of assurance of the stability of future orders.
But the bottom line is really the condition of Toyota. The first rule of business, as Henry Ford and others have said, is to make money, and to do that the business must survive.
One thing is sure: the next few quarters will be interesting to watch!

[Barry]

I'll make a few more comments concerning Nucor Steel.

I know this company has been maligned in this blog before concerning Trade Policy.

However, I have worked in the Steel Business, specifically the Mini-mill portion.

Ken Iverson took a tired old worn out shell of a company that was nearly bankrupt, a division of Oldsmobile and turned it into a Steel Making Powerhouse.

He and the folks at Nucor have earned their success.

He did it with a conviction that sharing the wealth with the hard working employees that made the product each and every day was a critical element of Nucor's success. As a result, many of the workers earned more per year than the United Steel Workers at the Integrated American Steel Makers.

He made a point in his book of not playing "Wall Street's" short term profit game. He was very critical of this type of mentality. He told Nucor Investors they had better be in it for the long haul.

He promoted a very flat management structure. He was very hostile to many of America's so called fundamental Business practices.

There were very few perks for the CEO's and like Toyota; the Nucor Corporate Office was small and not much to look at. As I recall, the Nucor Corporate staff walked over to a local Cafe in Charlotte for lunch.

I remember reading in his book "Plain Talk - Lessons of a Business Maverick" how just after buying a plant from another Bankrupt Steel company, that Ken made a personal visit. The first thing he did was go to the Security Office and request several cans of black spray paint. He then went out in the parking lot and spray painted over the lettering for the Plant Managers parking spot and several others.

Nucor, like Toyota have guarded their own castle and have built up reserves. When the Steel business tanked in the US around 2000, Nucor was able to buy up bankrupt Mini-mills assets for just cents on the dollar. A big part of that confidence came from the culture of taking chances on people and letting them improve and then not limiting how much they could take home to their family's.

They were confident they had the management know how to make those Steel making assets profitable long term.

Nucor is also a very innovative company and in many plants is able to go from scrap metal (recycled) to a hot band in just hours. Some of the bands actually finish cooling on the trucks as they are delivered to downstream processors. Nucor is a very lean and efficient business in many ways. They are one of America's largest recyclers.

Much of their strength comes from the culture of improvement that Ken fostered. Nucor jumps in and tries stuff that other companies won't touch. Some of it works, but about 40 % of it doesn't. They don't sweat it, don't blame those who tried and failed. Some of those mistakes cost multiple millions of dollars. They just move on and keep trying.

The no lay off policy is something that they believe is a cornerstone of their culture. Many of the mills have been built in rural areas and there aren't a lot of other employment alternatives. Still, Nucor does everything it can to preserve everyone's livelihood.

In some ways, I actually believe Ken and Nucor are ahead of Toyota when it comes to allowing workers to make as much off of their cumulative improvements as they can possibly make. I think Toyota isn't quite willing to do that. Preferring to have wages in the neighborhood of the Big Three. Toyota may keep more of those improvement profits for the company? Ken wasn't afraid to take chances on his employees and reward them.

America needs more quite leaders with the convictions of Ken Iverson. It's too bad many people don't know what he and the folks at Nucor are all about.

[Adam Hartung]

Layoffs, at best, produce only short-term improvement. At the risk of creating severe damage. Like a crash, starvation diet - the health risks outweigh the short-term gain. Instead, businesses need to change what they do to be more competitive - and that involves applying innovation - rather than focusing on cost cutting. Read more at http://www.ThePhoenixPrinciple.com

[Natalie Loopbaanadvies]

Toyota's lifetime employment is outstanding. The 'No Layoff policy' may be a wise decision, as long as the company would come up with new innovations that would attract the consumers. But this year, Toyota has been severely affected by the recession. And the recall-related costs earlier this year has severely hurt the company. Let's see if Toyota can still hold on to it's lifetime employment.