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Increasing cost efficiency instead of reducing workforce

Bremen, April 8, 2009 - “Unemployment is not only the worst-case scenario for employees, but also for the employer as dismissals weaken the efficiency of the company. Qualified and committed employees form the corporate perspective for the time after the global economic crisis. All measures have to be taken in consideration to avert enforced redundancy.” (Harry Prunk, CEO SIKORA AG)

There are alternatives to the worst-case scenario. Possible measures are for example the reduction of overtime and extra work, strategic vacation planning, setting up short time work, and partial retirement. Another option is the elaborate use of technical possibilities of latest developments in order to reduce the further big cost share besides personnel costs, the material costs during the production of wires and cables, hoses and tubes. By means of true cost calculations, the benefit of technologies, which increase quality and productivity during production, to the company’s balance sheet can clearly be defined. The following example will show that: “The integration of the eccentricity, wall thickness, ovality and diameter measuring system, X-RAY 2000, achieves more costs savings than the dismissal of five employees”.

While at the dismissal of employees usually compensation has to be paid, which will negatively influence the balance of the current business year as extraordinary costs, in case of an investment to reduce material consumption, only the linear depreciation values are shown in the balance sheet. In comparison, a compensation payment for dismissed employees adds up to an amount of 5 x 14.000 € = 70.000 € for five laid-off people². This would be similar to the investment in the measuring and control system X-RAY 2000.

At the beginning both measures, the investment and the personnel reductions, will influence the cash flow and the liquidity of the company in the same way, but in case of an investment, a credit for financing the project does much less influence the liquidity of the company as the following sample calculation shows.

Interdependency between material savings, profit and increased productivity
Assuming that at present the wall thickness of the product has a nominal value of 2 mm, but an average wall of 2.10 mm is applied, a material over-consumption of 5 % is achieved. Based on 6,600 production hours per year (3 shift operation) with a material output of 600 kg/h of the extruder and a material price of 1 €/kg, the material consumption is calculated by 3.96 million €/annum.

The reduction of the wall thickness by 0.1 mm (5 %) results in material savings of 198,000 €/per annum, which corresponds to 30 €/h. In consideration of costs for maintenance and servicing in the amount of 0.5 €/h and a depreciation of 1.32 €/h (depreciation, i.e. the reduction in the value of an asset, over 8 years, 6,600 h/year) the profit of the company improves from the first day of initial operation by 28.18 €/h. If this is multiplied by the assumed 6,600 h/year the impressive profit for one business year would be 185,988 €, by implementing an X-RAY 2000 in the production process.

In addition, proportional to the reduced material consumption the line speed can be increased, i.e. according to the above mentioned calculation a product surplus of 5 % will be produced on the line within the same time. On the base of an hourly rate for the machines of 100 €³ the savings resulting from the increase in productivity (0.05 x 6,600h/annum x 100 €/h) will amount to further 33,000 €/per annum.

Impact of personnel reduction on the performance of the company
In contrast, the lay-off of five employees would save labor cost plus payroll fringe costs to an amount of 250,000 €/annum (5 x 50,000 €). However, the saved labor and payroll fringe costs cannot be calculated in full amount as cost reduction. The available manpower is reduced by the laid-off employees and important know-how will be lost. Losses in quality have to be expected, as well as overtime work for the remaining employees, maybe with additional costs for payable overtime work and costs for subcontracted workers and outsourcing orders to other companies.

Once the business situation improves and the demand increases, new employees would have to be hired, which then requires cost intensive training as well. In an estimated calculation, only 50 % of the saved labor and payroll fringe costs can be assumed as cost reduction, meaning only 125,000 €/annum.

According to the previous example, the integration of an X-RAY 2000 in an extrusion line is in comparison to the dismissal of five employees evidently the more economic and more human solution. Even if with the measuring and control technology material savings of only 4 % would be achieved this statement remains, considering that only 50 % of the saved labor costs plus the payroll fringe costs will reduce the actual costs effectively.

Alternatives to personnel reductions strengthen the company
During the 36-years-old company history, the management of the Bremen/Germany based-SIKORA AG has recognized that the financial success of a company depends besides technical innovation on “soft” factors of the company culture. An employee-orientated management style and the connected commitment of the employees decisively contribute to the economic success.

X-RAY 2000 technology safeguards jobs
Within this company philosophy SIKORA has developed the X-RAY 2000 for online measuring and control of wall thickness, eccentricity, the diameter as well as ovality in production and extrusion lines to improve quality and efficiency in order to save costs. For this method of quality control the product is transilluminated by X-rays. Measuring values are continuously available within fractions of a second, which allows a fast centering of the crosshead and a continuous measurement and control of the extrusion line in consideration of the minimum values. The measuring axes are arranged under 0, 90, 180 and 270° position. The measuring values of the X-RAY 2000, i.e. diameter, ovality, wall thickness and eccentricity are displayed numerically and graphically on the processor system ECOCONTROL 2000. Not only in times of a booming business there is a demand for measuring and control equipment with the initial supply with new lines, but especially in times of depressed economy for productivity increase of existing lines. This is because nobody can on a long term afford to produce with excessive expense.

Conclusion
For sure, different approaches will lead a company to different results. Costs saving actions are always to be decided according to company liquidity, structure as well as economical and environmental circumstances. The implementation of measuring and control technology turns out to be an effective means to save costs, increase efficiency and at the same time to safeguard jobs. In addition to the introductory statement of the essay, for Harry Prunk it is obvious: “Know-how has to stay in the company – even more in times of crisis. Instead of permanently educating new employees, we enjoy the more efficient way: we are developing the individual. This offers for the team bigger chances to move the business forward from which customers benefit. We have many employees who have been with SIKORA for 10, 20 and even more than 25 years. Employee turnover is almost non existent, which keeps know-how in the company.”

²Depends on number of seniority, statutory provisions of the state

³Assumed operation costs for extrusion lines

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