If your business starts to improve too fast, you will have no choice but to lay people off. What is the Iron Law of Layoffs?

Law of LayoffsThe Iron Law of Layoffs

Using quality tools like lean thinking, six sigma, or theory of constraints has proven that you will release hidden capacity. Productivity will go up and waste will shrink. By now you are thinking great, that’s what process improvement is all about. But if we don’t plan on how to use this extra capacity then we may just end up with no choice but to lay off some idled employees.

The relationship is simple. With company growth, you have to increase capacity by either adding people (scale) or increasing productivity (process improvement). The one trade off is attrition. Some employees may quit or retire as time goes by. Therefore, the equation is:

Improvement = Revenue Growth + Attrition

The Iron Law of Layoffs says that if change management is faster (>) than Revenue Growth + Attrition then layoffs will occur. This means that the more successful an organization is in improving productivity over its growth in revenue then the greater the pressure is for layoffs.

Eliminate Fear

Deming suggested that management should eliminate fear by promising job security. In order to do this management must strategically plan on how to use the capacity released and facilitate change proactively. Otherwise, the Iron Law of Layoffs will make managements promises unbelievable.

The opposite means that if process improvement is slower, become a better manager. One way to be a better manager is to gauge your improvement efforts. If you are in a slow growth market then try working on smaller improvement efforts first. If you are in an elastic market, where customers respond to price changes, then you could use the new capacity to produce more goods at the same fixed costs and lower prices, which should increase demand.

We have seen how using quality tools like lean thinking, six sigma, or theory of constraints will release hidden capacity, increase productivity, and eliminate waste. But we must be careful to respect the Iron Law of Layoffs by keeping our improvement efforts in balance with our growth so we can truly eliminate fear and promise job security that our employees will believe.

Our next Internal Auditor class is forming now. Call for information on having your own private in-house classes today.