Introduction:
Downsizing is a commonly used euphemism which refers to reducing the overall size and operating costs of a company, most directly through a reduction in the total number of employees. When the market is tight, downsizing is extremely common, as companies fight to survive in a hostile climate while competing with other companies in the same sector. For employees, downsizing can be very unnerving and upsetting.
There are several reasons to engage in downsizing. The primary reason is to make the daily operations of a business more efficient. For example, a company may be able to replace assembly line employees with machines which will be quicker and less prone to error. In addition, downsizing increases profits by reducing the overall overhead of a business. In other instances, a company may decide to shut down an entire division; a car company, for example, might decide to stop making sedans altogether, thus cutting an entire department.
In some cases, it becomes apparent that a business has too many employees. This may be because there has been a decline in demand for the company's services, or because a company is running more smoothly and efficiently than it once was. Many offices are heavily bloated with support staff and redundant departments, and these businesses may refer to downsizing as “trimming the fat.”
Downsizing and fixed cost:
Some industries that have reduced fixed cost commitments include government agencies such as the division of defense, computer industry, and the automotive industry.
I do believe that a reduction in cost have impaired the ability to meet the needs of customers if they go overboard. For example, cutting the defense department could leave America unprotected and unready if a war was to break out. For the computer industry cutting costs may cause production to slow down and they may not be able to meet product demands. For the automobile industry it could cause slow-down in design and development. When cutting costs there has to be balance, if the cuts are too aggressive it could hurt the industry and leave the consumer dissatisfied.

Direct Labor: Variable or Fixed Cost:
Direct labor can be a fixed or a variable cost. According to the text, the behavior of wage and salary costs differ based on labor regulations, labor contract and customs. It depends on management’s flexibility to adjust the workforce as needed. The more flexibility the more variable in nature the direct labor will be.
However many managers prefer it to be a fixed cost because they do not want to decrease their workforce if they experience a short-term sales decline although they may have to pay more to keep them it will cost less in the long-run because hiring and training new employees can be expensive. They do not want to add to many employees in they have a short-term sales increase because they could become over extended if the economy declines, so it would be more beneficial to keep the cost fixed.

1. Which industries have substantially reduced fixed cost commitments? Do you believe this reduction in costs has substantially impaired the ability of these industries to meet the needs of their customers?
Answer:
Industry downsizing has been a major part of the corporate world, even government agencies are downsizing. GovernmentExecutive.com "covers the business of the federal government and its huge departments and agencies - dozens of which dwarf the largest institutions in the private sector" on its website. Read the assigned Government Executive article and answer the following questions: Which industries have substantially reduced fixed cost commitments? Do you believe this reduction in costs has substantially impaired the ability of these industries to meet the needs of their customers? It appears that both private and public sectors are reducing fixed cost. According to Ciccotello and Green, the technology, auto, and government industries have substantially reduced fixed costs. The specific examples referenced in the article, Industry’s Downsizing Lessons, were IBM, Honda, and the DoD; in some cases the downsizing has been beneficial and in others it has been detrimental. DoD has taken the lead in the current round of federal downsizing, instituting several initiatives to reduce permanent staff positions, rely more on temporary help and outsource production. Honda made large cuts in its permanent engineering staff in response to the more volatile sales environment for automobiles since the mid-1980s. These cuts left Honda unable to keep pace with its competitors in the design of new automobiles. The results have been the loss of market share and profit for Honda, which now faces the difficult task of trying to catch up. The consequence of cutting fixed costs too far could be even more dangerous for a government enterprise like DoD. The computer industry is rapidly changing technology is causing companies to reassess large, fixed-cost commitments. As a result, evidence of decreasing operating leverage in this industry abounds. Many large computer firms have made dramatic cuts in permanent staff. Standard and Poor's reports that IBM had more than 370,000 full-time employees in 1990 and fewer than 270,000 in 1994. At the same time, computer firms have greatly increased outsourcing of products and leasing of equipment. Both of these trends reduce the requirement for large in-house expenditures on personnel, plant and equipment. Outsourcing and leasing make the enterprise more nimble, more able to quickly adapt to a rapidly changing sales environment. So the second lesson for DoD decision makers is: Cuts in fixed costs may be prudent in a volatile operating environment.
But not all industries have dramatically slashed their fixed costs. Some private entities, such as utility companies, have very stable operating environments and a steady demand for their products. For them, radically reducing fixed costs doesn't make sense. There are other companies, such as Honda, that have reduced operating leverage too much. Hence, the third lesson of operating leverage: Cut fixed costs with care, so as to not undermine the agency's performance in the event that requirements for the organization's products or services increase in the future. 2. The article also mentions an auto company which downsized and suffered negative consequences. If possible find out why this company suffered a downfall.
Answer:
Effects of Downsizing on Employees

Statement of Problem
Downsizing is a major problem faced by employees during tough times of recession. Apart from the economic reasons, they also have severe psychological effects on the employees. This project is about comprehending the effects of cut backs on employees. Employees suffer from severe self-esteem issues, due to which it’s very hard for them to jump back into the same mental stableness. The structure of this study is to assess the effects of downsizing on employees. Employees tend to be less effective after a downsizing procedure took place in their organization. Dedication towards their jobs decline as a result of downsizing. Depression is one of the major issues that are targeted by this study and there are a couple of scenarios that pertain to this topic which are going to be evaluated. The scenarios are as follows: •Depression suffered by employees during downsizing.
•Downsizing’s ill effects on surviving employees.
•Employees losing self confidence due to termination.
•Treatment of employees during termination.
Definition of Terms
The concept of downsizing is commonly known as the lessening of labor force in a business. There are multiple ways of looking at this particular term, as employees and employers look at this from different angles. Organizations believe that they would become more productive and successful due to downsizing. Employees on the other hand look at downsizing as the management’s weapon to implement more control over the employees, as employees would always be on their toes when work is considered because they would be scared of losing their employment. Employees face severe problems of job insecurity. Employees suffer from severe depression, low self esteem and a lot or emotional trauma. To maintain a stable life, they have to try to cope up with all these psychological issues.
Industry downsizing became a major part of the corporate world in the 1990’s. Given current economic conditions, government agencies are now downsizing. There is some concern that excessive cuts in some government programs, especially defense spending, will have an important effect on the country's ability to respond to military crises. In the U.S., downsizing has been studied as the adoption of a new practice (Budros,
1997). We believe that downsizing in Japan is more accurately viewed as the abandonment, or deinstitutionalization, of permanent employment. The economic crisis of the 1990's. This positive evaluation of the permanent employment system increasingly came under question as four decades of postwar economic growth ended with the fall of the stock market and burst of the bubble economy in 1991. In the face of reduced sales, declining levels of GDP growth, increased international competition, and a weak yen, managers increasingly believed that Japanese firms were overstaffed. Estimates of excess employees reached
6 million (Eisenstodt, 1995). Downsizing in the 1990's, however, took on a different flavor. While firms used many of the same techniques favored in the earlier periods--dismissal of contract and part time labor, and dispatch of employees to affiliates-- there were distinct differences. Direct layoffs, though still a small proportion of total dismissals, became more common (Usui and Colignon, 1996). According to Ministry of Labor statistics, the percentage of job separations among firms with over 1000 employees due to management circumstances (as opposed to retirement and other individual circumstances) increased from 2.3% in 1980 to 9.3% in 1998 (Ministry of Labor: 521). The unemployment rate increased from approximately 2.2% in 1990 to 4.2% in early 1998 (and on to
4.8% in 2000) (Ministry of Labor, 1996, 2000). If some cuts in fixed costs are good, aren't more cuts better? Not always. Take the experience of Honda Motor Company. An industry leader for years, Honda made large cuts in its permanent engineering staff in response to the more volatile sales environment for automobiles since the mid-1980s. These cuts left Honda unable to keep pace with its competitors in the design of new automobiles. The results have been the loss of market share and profit for Honda, which now faces the difficult task of trying to catch up.

3. The public utility industry is listed as an industry with high fixed costs. The article notes that this industry has not had to undergo downsizing. Is this statement still true? (Note: how about Enron? How about the California Electricity Outages in 2001?)
Answer:
Not all industries have dramatically slashed their fixed costs. Some private entities, such as utility companies, have very stable operating environments and a steady demand for their products. For them, radically reducing fixed costs doesn't make sense.
In the Cold War era, DoD was thus comparable to the above-mentioned, publicly owned electric utility; the demand for its products and services was stable and predictable.
Today, however, the operating environment at DoD has become more volatile. Few threats are certain. Unlike the bipolar world that existed previously, the new defense environment is highly fractious and rapidly changing. Thus, the "sales" environment for DoD no longer resembles that of an electric utility. The lessons of operating leverage suggest that DoD should reduce fixed costs to respond to this more volatile environment. From this perspective, even some painful cuts are justified. Not all industries have dramatically slashed their fixed costs. Some private entities, such as utility companies, have very stable operating environments and a steady demand for their products. For them, radically reducing fixed costs doesn't make sense. The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a situation in which the United States state of California had a shortage of electricity supply caused by market manipulations, illegal[5] shutdowns of pipelines by the Texas energy consortium Enron, and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor Gray Davis's standing.
Drought, delays in approval of new power plants, and market manipulation decreased supply. This caused an 800% increase in wholesale prices from April 2000 to December 2000. In addition, rolling blackouts adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers.
California had an installed generating capacity of 45GW. At the time of the blackouts, demand was 28GW. A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price. Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value. Because the state government had a cap on retail electricity charges, this market manipulation squeezed the industry's revenue margins, causing the bankruptcy of Pacific Gas and Electric Company (PG&E) and near bankruptcy of Southern California Edison in early 2001.The financial crisis was possible because of partial deregulation legislation instituted in 1996 by the California Legislature (AB 1890) and Governor Pete Wilson. Enron took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California's spot markets.
The crisis cost between $40 to $45 billion. 4. The article lists the four lessons of operating leverage. The lessons revolve around the costs (or benefits) associated with downsizing. Review one (or two) of these lessons, and comment on the lesson(s).
Answer:
Both the private and public sectors operate in a landscape dominated by economic, political and technological change. Many businesses are responding to this more volatile environment by reducing their "operating leverage," the degree to which they are committed to fixed costs such as property, plant, equipment and full-time salaried employees.
The first lesson in operating leverage: An assessment of the volatility of the environment is critical.

The third lesson of operating leverage: Cut fixed costs with care, so as to not undermine the agency's performance in the event that requirements for the organization's products or services increase in the future.
Fixed costs must be paid, even if revenues are not generated to pay them. A firm may be forced into bankruptcy if its commitments cannot be made. Higher operating leverage thus increases risks for private firms.
The fourth lesson of operating leverage: Downsizing costs can be staggering, and once cut, fixed assets are very costly to replace.
The lessons of operating leverage suggest that DoD should reduce fixed costs to respond to this more volatile environment. From this perspective, even some painful cuts are justified.
These reductions are already taking place. The DoD comptroller predicts a 30 percent reduction in permanent staff between 1985 and 1997. DoD has reduced less drastically its temporary staff, the Reserves and National Guard. Given the current threat (sales) environment, DoD arguably improves efficiency when it relies more on temporary help, much as many private businesses are currently doing. When additional staff are needed (as during the Persian Gulf War), DoD relies heavily on its reserve component and augmentees like the Civil Reserve Air Fleet to help carry the load. But permanent staff and capacity are not added because DoD's roles and missions are changing rapidly.
But DoD may be in danger of repeating Honda's mistake and cutting operating leverage too far. Testifying in Congress on military readiness, Defense Secretary William Perry suggested that the cuts are already too deep. And in a speech to 1995 graduates at the U.S. Air Force Academy, President Clinton expressed concern that further cuts may bring about the return of the "Hollow Army" of the late 1970s.
To avoid "hollow forces" yet cut operating leverage wisely, government entities should be more conservative than private businesses when considering cuts in operating leverage. The risks associated with errors in restructuring are much different in the private and public sectors. For private companies, cutting fixed costs too deeply hurts profits. For DoD, cutting fixed costs too far undermines the nation's ability to defend itself. Government must learn from business and recognize the greater error.
Downsizing should be part of a clearly defined, long-term vision that fits into the company’s overall strategic plan (Mishra et al. 1998). So a careful and systematic transition plan is required (GovExec.COM, 1992).
To maintain the size and capabilities of the workforce equal to the magnitude and complexity of the work (Goldenkoff 1997) is the key to enhance competitiveness and productivity to stimulate recovery (Talent Information Management 1997). Most organizations found that workforce planning, whereby care is taken to ensure that employees with the skills and training needed to accomplish the organization’s work are retained, is an important component of success for downsizing. Five-pronged approach to workforce downsizing that considered as: size, skills mix, skills distribution, costs and organization capability and culture (GAO 1995).
If an organization simply reduces the number of its employees without changing its work processes, work overload and staffing growth will recur eventually (GAO 1995). Work process re-design also needs a strategic planning linked to the organization goal in order to success.
The organization needs to anticipate and plan to address the immediate loss of morale, trust in management and ability to cope with stress that occur in the wake of a downsizing to prevent those negative feelings fester and hinder employees from moving forward (Mishra et al. 1998). Beach (Monk 1998, p. 42) has defined morale as the total satisfaction a person derives from his/her job, working group, boss, the organization and environment. Morale pertains to the general feeling of well-being satisfaction and happiness of people. Indicators of low morale include: absenteeism, breaches of discipline, higher employee turnover, complaints, lowered output, loss of interest, group conflicts, disloyalty and sabotage. Therefore, low morale can decrease productivity, effectiveness and efficiency that hurt the competitive advantage of the organization.
Researchers discovered that survivors of a layoff were most affected when they felt that those laid off were not compensated fairly, or were unfairly let go (Pisarnweerawong 1996). Therefore a proactive planning providing counseling and guidance to help those laid-off can ease the stress from the survivors.
Survivors do not get information about downsizing from formal channel will look from informal channel like the grapevine. The disadvantage of the grapevine is that it may transmit incorrect and untimely information. When grapevine passes inaccurate or unconfirmed information, especially about rumored layoff or other stressful events, employees who cannot verify the truth may feel demoralized. The Ragan Company (1998) recommends to communicate immediately with employees details of ‘3Ls’: layoffs, losses and lawsuits, as well as other important news affecting the organization.
Open communication, managerial support and employee retraining are the keys to motivate the survivors of downsizing (Kogan 1996). Positive, inter-group relations between managers and their supervisors have a positive effect on manager involvement, organizational trust, and organizational commitment, which return gaining employees’ loyalty, trust and eventually increase job satisfaction.
Ray et al. (1995, p. 468) stated the results of training, such as improved employee morale or job satisfaction, are often described as intangible and hard to measure. These improvements can benefit organizations by reducing labor turnover, absenteeism, error rates, transfer request, and filed grievances (soft-dollar benefits). Such indirect benefits could produce increases in productivity, ultimately affecting the organization’s bottomline (hard-dollar benefits). Drucker (Central 1999) emphasized that everyone must take responsibility for the organization’s objectives, contribution, and behavior, and this is what the employees and the organization has to understand and learn in the next era.
Downsizing should be a product of the organization aligning its strategic business objective and shaping its corporate culture to better fit its changing environment. Therefore, it needs to be conducted in a humane way with honesty, compassion and good communication with all concerned.