Downsizing fixed costs in government and corporate sectors

Downsizing/Fixed Costs

There are a number of industries that have downsized their fixed costs. Most manufacturing industries, for example, have downsized fixed costs by offshoring work, reducing the size of their workforce or by making adjustments to their pension commitments. Industries such as auto manufacturing, airlines and banks have all taken advantage of the opportunity to lower their fixed costs. Government agencies have also undertaken downsizing in recent years, again with an eye towards lowering fixed costs.

A reduction in fixed costs does not necessarily impair a company's ability to meet the needs of its customers. In many cases, the restructuring was necessary to modernize the way the company does business. In other cases, firms like Eastman Kodak have downsized because they have fewer revenues. This means that the downsizing will not affect their service levels because there are fewer customers to serve. Companies like the automakers that have restructured the fixed costs associated with their pensions should not see a negative impact because their fixed costs were not going towards customer service, R&D or anything else related to today's business.

That said, not every industry is able to downsize without compromising service levels. There comes a point when fixed cost reduction is beyond the point of diminishing returns. This means that further reductions have limited value economically to the company, but will continue to harm service levels. Once a company has downsized the excess costs that were not being used to generate revenues, it will begin to downsize too much, and key performers will be lost.

Overall downsizing is a step that many businesses need to take periodically to ensure that they are operating at a high rate of efficiency. However, downsizing should be done with strategy and corporate capabilities in mind, as opposed to seeing workforces cut without any thought as to the impact on the organization.

2. In general, direct labor is a variable cost. Some direct labor, however, is going to be inherently fixed because the company has a baseline level of demand that it is always going to meet. Beyond that baseline demand level, however, direct labor is a variable cost. Many companies have recognized this and structured their labor forces accordingly.

The advantages of treating direct labor as a variable cost are that the firm has more flexibility in times of slumping demand to remove that labor cost from its operation. However, when the company sheds people it also sheds skills and experience. This could hurt the company later on, when business picks up again. Additionally, those downsized workers could take their skills and knowledge to competitors.