0264 · 2.2.4Why reducing the size of the workforce may be necessary

Downsizing and its causes

0:00A factory introduces a machine that packs its products automatically. Customers still receive their orders, but the business needs fewer employees to complete the work. Management must decide which skills to keep and how to treat those whose jobs disappear. By the end of this video, you will understand why businesses reduce their workforce and how to justify a redundancy decision. The workforce is the group of employees working for a business.

0:22Employing them involves costs, including wages and training. Managers must match the number and skills of employees to the work that needs completing. When that work changes, the business may need a different combination of jobs to continue operating effectively. Downsizing means reducing the number of employees in a business. It changes the size of the workforce, although the business may continue producing the same quantity of products. A machine could complete tasks previously performed by several employees.

0:48The central decision concerns how many employees the business needs for its future activities. Reasons for downsizing include automation, reduced demand for products, the need to lower costs, and the closure of a branch or factory. Each changes the amount or location of work available. Managers should establish the reason before choosing any employees. That helps them identify which activities will continue and which skills the business must retain.

Examples of workforce downsizing

1:12Automation is the use of machinery or technology to carry out tasks previously performed by employees. At Cedar Components, a machine places finished car parts into boxes. The remaining packing tasks require fewer employees, so management can reduce the department’s size. Employees who can operate the equipment become especially useful because production now depends on that skill. Reduced demand means customers want to buy fewer products. Harbour Café sells lunches, and fewer customers now visit during the afternoon.

1:39With fewer meals to prepare and serve, the owner needs less employee time during that period. If the decline continues, the original workforce would have too little work, so the business needs fewer employees. The need to lower costs can also encourage downsizing. Amber Hotel provides overnight accommodation and faces rising operating expenses. Management might combine reception duties on quieter shifts, so the hotel needs fewer receptionists and pays less in wages.

2:03However, it must keep enough employees to assist guests promptly, because poor service could reduce future bookings. Closing a branch or factory removes work at a particular location. Willow Outfitters sells clothing and decides to close one shop. Jobs connected with operating that outlet may disappear, even while its other shops continue trading. Managers should consider whether affected employees have suitable skills for vacancies elsewhere in the business.

Redundancy, alternatives and selection

2:26Redundancy is when an employee loses their job because the job is no longer needed, through no fault of their own. The reason concerns the business’s requirement for the role. An affected employee may receive a redundancy payment. This provides some financial support after employment ends, while creating an immediate cost for the business. Dismissal is different. An employee is dismissed, or sacked, because of unsatisfactory work or behaviour. Redundancy concerns a job that the business no longer needs, while dismissal concerns the employee’s work or conduct.

2:56A highly capable employee can therefore face redundancy when their role disappears. Keeping this distinction clear helps you explain the business’s decision accurately. Other ways to reduce the workforce include not replacing employees who leave, offering early retirement, or arranging fewer hours. Leaving vacancies unfilled gradually reduces employee numbers, while agreed early retirement can achieve a similar result sooner. Fewer hours cut the time worked by existing employees, so wage costs fall while every job is kept.

3:25These approaches reduce the number of redundancies, so fewer employees lose their jobs against their wishes. For the business, downsizing can reduce regular wage costs because fewer employees receive pay. Employees who lose their jobs face a loss of employment income because those wages stop. The business also faces immediate costs if redundancy payments are required. Employees who remain may face heavier workloads because the same responsibilities are shared among fewer colleagues.

3:50The practical challenge is to keep the skills needed after the change. Managers should first identify the activities that will continue, then compare relevant employees using consistent evidence. Useful information includes skills, qualifications, years of service, attendance, disciplinary records and ability to perform several jobs. No single measure gives a complete picture of future usefulness.

Worked example: Maple Foods

4:12Maple Foods produces packaged lunches and has eighteen employees. Four work in packing, but an installed machine means that department now needs three. The business has a cash reserve of twelve thousand dollars. Its aim is to lower wage costs while maintaining reliable deliveries, and management must choose one packing employee for redundancy. Dana has eight years of service and can perform manual packing only. With three years of service, Ellis holds a machine-operation certificate.

4:38That qualification allows Ellis to perform packing and machine operation. Comparing their skills shows that keeping Ellis would give the business more flexibility after the equipment changes. Farah has five years of service and training in machine operation and quality checks, so she can pack, operate the machine and check completed lunches. Hugo joined two years ago and holds dispatch training. His ability to perform packing and dispatch helps the business prepare orders for reliable deliveries.

5:03During the last year, Dana and Farah each had zero days of unauthorised absence and a clear disciplinary record. Ellis had one day of unauthorised absence, with a clear record. Hugo’s record shows two days of unauthorised absence and a written warning for missed dispatch checks. The machine removes the need for one manual packing position, so future skills are central to this decision. Dana has the longest service and strong attendance, but her current abilities cover only packing.

5:29Hugo’s attendance and disciplinary record deserve consideration because dispatch mistakes could delay orders. His additional skill nevertheless supports the delivery objective stated in the case. Selection must be fair and legal, with the same criteria applied to every employee in the department. Gender, race, religion, age and disability must never be reasons for choosing an employee for redundancy. Attendance information also needs careful interpretation, since some absences have legal protection.

5:55The case records unauthorised absence specifically, but managers should still check the circumstances before making a final decision. I recommend making Dana redundant because the machine has removed manual packing work, and her skills cover only that activity. Keeping Ellis and Farah retains both trained machine operators, so the new equipment keeps running. Hugo is the strongest alternative because of his absences and written warning, but he alone has dispatch training for reliable deliveries.

6:20Dana’s long service matters less here than skills, because the business must match its employees to the work after the change. Maple Foods therefore lowers its wage costs while keeping the skills it needs to run the machine and deliver orders reliably. Employees who remain need reassurance about their roles and workloads. Uncertainty about further job losses can reduce motivation and encourage valuable employees to leave. Management should explain the operational change and ensure remaining duties are manageable.

6:47For Maple Foods, keeping trained machine operators is important because their departure could disrupt packing and delay deliveries. Suppose Dana earns eighteen hundred dollars per month and receives a redundancy payment of thirty-six hundred dollars. Assume wage savings begin immediately and all other costs remain unchanged. Eighteen hundred dollars multiplied by twelve gives an annual wage saving of twenty-one thousand six hundred dollars. This measures the wages Maple Foods avoids paying over a full year.

7:12The redundancy payment reduces the saving in the first year. Twenty-one thousand six hundred dollars minus thirty-six hundred dollars gives eighteen thousand dollars. The business therefore saves eighteen thousand dollars during that year under these assumptions. The payment comes from the cash reserve, which falls from twelve thousand dollars to eighty-four hundred dollars. Any additional training or disruption costs would also reduce the financial benefit.

Answering exam questions

7:34In Paper One Short Answer and Data Response, you could define redundancy or explain a reason for downsizing using stimulus information. Define means give precise meaning. An explain answer must set out purposes or reasons, say why and how, supported with relevant evidence. Connect the business change to the reduced need for employees, then finish with its operational or cost consequence. For example, automation at Maple Foods replaces some manual packing tasks.

8:01The department therefore needs fewer employees to complete its work. Reducing employee numbers lowers its regular wage costs. Each sentence develops the connection between the equipment change and the business outcome, using information from the case. Paper Two Case Study can require you to consider employee information and justify a selection. Consider means review and respond to given information, while justify means support a case with evidence or argument. Choose one employee, use relevant details, and explain why the strongest alternative is weaker.

8:30Your conclusion should connect the choice to the business’s future needs. Downsizing means reducing the number of employees in a business. Automation, reduced demand for products, the need to lower costs and the closure of a branch or factory can all reduce the number of jobs required. Remember that redundancy is when an employee loses their job because the job is no longer needed, through no fault of their own.

8:52Dismissal is different, because it follows unsatisfactory work or behaviour. A justified selection protects necessary skills, follows fair and lawful criteria, and considers the employees who remain.