Lean Factories Find It Hard to Cut Jobs Even in a Slump

By TIMOTHY AEPPEL and JUSTIN LAHART

SPARTANBURG, S.C. -- At a factory here that churns out plastic parts for everything from spray cans to blasting caps, laying off just one worker can be more trouble than it's worth.

The plant, owned by Cleveland-based Parker Hannifin Corp., has become so lean over the past decade that many assembly lines run with only a handful of highly trained workers.

Fewer Workers on Factory Floors

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Andy McMillan for The Wall Street Journal

In Parker Hannifin's Spartanburg, S.C., factory, workers are safer than in many other industries because cutting a full-time employee has become quite costly.

So while mass layoffs have driven the U.S. unemployment rate to its highest in 26 years, Parker and other companies like it are responding to the slump in more surgical ways, mainly by cutting hours and shedding temporary workers.

"Because of productivity gains, every one of my people carries more dollars in sales today," says Donald Washkewicz, Parker's chief executive. In 2000, the average Parker worker represented about $125,000 a year in sales. Today, that figure tops $200,000. "If I need to cut back, I have to cut back fewer people to achieve the same goal."

Similar trims are taking place at each of Parker's nearly 300 factories. And to varying degrees, this is happening at thousands of other large and small factories across the U.S.

The selective cuts help explain a curiosity of this recession. The manufacturing sector is suffering a sharp contraction and has had to slash many jobs -- some 1.3 million, according to a Labor Department jobs report released Friday. But fewer positions have been eliminated than would be expected given the depth of the slump.

As of February, 14 months into this recession, manufacturers have cut payrolls about 9.4%. That's slightly less than the 9.5% cut 14 months after the start of the 2000 recession, when the economy was already recovering. The drop in production and orders, however, has so far been much worse this time around, indicating that companies have sought ways to cut back other than simply shedding workers. As of January, the latest figures available, U.S. manufacturers cut production 12.8% since the start of this recession, compared with just 2.6% at the same point after the last recession began.

The sheer speed of this downturn, and the fact that it hit many manufacturers after the economy as a whole was officially in recession, may have muted layoffs. A good chunk of the factory sector was still humming along until late last year, aided in part by strong exports. Manufacturers may also be trying to hold on to workers as long as possible, in the hope that business revives.

But deeper changes in manufacturing are also playing a role. A decade ago, most factories tended to do "batch" work, with large groups of employees churning out endless runs of the same pieces. Since many workers did identical tasks, it was easier for companies to cut people during downturns.

That kind of work, which employs more people and includes a larger share of less-skilled positions, has been steadily migrating to lower-cost locales overseas. In the U.S., companies now have new equipment and streamlined operations that require fewer, more highly trained people to make more goods. The sector lost 3.5 million workers -- one in five jobs -- between January 2000 and the start of this recession. Even as employment contracted, production in that same time period rose 10%.

"When you get down to where we are now, where manufacturing is less than 10% of the employed population, there just isn't that much more you can cut," says Kurt Karl, chief U.S. economist at Swiss Re. Mr. Karl says manufacturers are especially eager to hold on to workers who are trained to operate their increasingly sophisticated equipment.

At Parker's Spartanburg plant, five workers make the tiny plastic rings that become seals on aerosol cans. Each member of the group runs a different set of high-speed machines doing a distinct step, such as extruding long noodles of plastic, grinding them or cutting them into final product.

The group can curb production several ways short of layoffs. Two workers can complete the first two steps in one day, then the other three workers can finish those products the next day, essentially cutting everyone's hours by half. Or, all five can take whole days off together. But permanently pulling one or two of them out of the mix is far more difficult to accomplish, and could make it impossible for the line to operate efficiently.

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Andy McMillan for The Wall Street Journal

Wanda Hughes, at Parker Hannifin's slimmed-down Spartanburg plant.

Mr. Washkewicz, the Parker CEO, says the last thing he wants to do is lay off a worker he's spent money training: "You want to sustain those skills."

But cutting hours might not be a long-term solution. Mr. Washkewicz says during the recession that hit the U.S. in the early 1980s, he headed one of Parker's operations that cut back to four-day weeks in order to save jobs. It worked for a while. But after about three months, many people were struggling to pay bills on salaries that had been reduced by 20%. The company ultimately changed its approach, laying off workers and restoring those who remained to a fuller schedule.

Many of the current Parker workers whose hours have been cut say that they prefer it to losing their jobs entirely, but that they don't feel out of the woods yet. "I try not to worry about the economy," says Miriam Porter, one of the workers now taking two unpaid days off each month. However, she adds, "it is looking kind of bad."

The Spartanburg plant, which employs about 133 workers, is part of Parker's hydraulic-filter division, which has plants in several U.S. locations as well as overseas. In the 2000 recession, the division's sales fell about 7%, prompting layoffs of 22% of its work force. This time, sales are down substantially more -- the company declines to provide a specific percentage -- but only 5% of workers have lost jobs.

Last week, Parker announced a one-year salary freeze for its workers world-wide. When it comes to scaling back production, each part of the company is given broad leeway in how and whether to cut workers or their hours. As part of its announcement last week, Parker trimmed the hours and salaries of everyone at its Cleveland headquarters by 10% through the end of June. The pay cut for top executives, including Mr. Washkewicz, was even bigger, because it included reductions in incentive bonuses.

Parker isn't alone. The Labor Department reports that in February, manufacturing production workers spent an average of 39.6 hours a week on the job, down from 41.2 hours a week a year earlier. In a survey of chief financial officers conducted by Duke University and CFO Magazine last month, 55% of manufacturing firms said that they had reduced employee hours over the past month, compared with 30% for other firms. Over the next year, 58% of manufacturing firms said they planned to cut hours, compared with 32% for other firms.

Streamlined production and technological improvements also mean fewer jobs need to be cut in a downturn. In another section of Parker's Spartanburg plant, two long rows of machines churn out plastic tubes for blasting caps. The small explosive devices are used by construction and mining companies to clear debris. With demand down for blasting caps, Parker recently went from making them on two shifts to just one.

That move cost the jobs of two workers who ran those machines on a second shift. A decade ago, those same two blasting-cap lines required up to eight people to operate. Eliminating production on that second shift would have meant shedding four times as many workers. The labor-saving improvements included replacing nearly 400 mechanical rollers that required workers to painstakingly apply lubricant throughout the workday. Now the line has mechanisms that don't need oiling.

Another factor saving jobs thus far is smaller inventories. A decade ago, Parker, like many other companies, structured its factories so that workers were building large batches of goods at each stage of production. That often led to huge stockpiles and made it harder to adjust when a downturn hit. There might have been six months or more of goods on Parker's shelves before the signal finally came to reduce production.

Parker's plants today have been largely restructured to create smaller production clusters. Seals for aerosol cans, for example, are only made in numbers that match the flow of orders. Mr. Washkewicz says those big stockpiles of yesteryear used to mean he had to cut more people, much faster. "In the past, we were trying to adjust to past sins, as well as the current drop," he says.

Some companies say tighter inventories helped them notice a dropoff in orders more quickly than they might have in years past. "We saw the economy changing early last year and started cutting back," says Rick Olson, who oversees four of Toro Co.'s plants in the northern U.S.

Toro, based in Bloomington, Minn., makes lawn mowers and other equipment that traditionally sees lots of seasonal flux in sales. Rather than laying off workers in droves, the company curbed seasonal hiring and overtime and didn't replace workers who had left.

Some smaller companies have found ways to shrink head count since the last downturn. Germantown, Wis.-based Mahuta Tool Corp., which makes items such as 600-pound screws used in cranes, went from 23 to 12 workers in the last bruising manufacturing recession. This time, the company has only had to cut two workers, reducing its payroll to 17, in part because each worker now represents far more production than before.

"The highly skilled person, you're not going to lay them off," says CEO Lynn Mahuta. "You will find other work for them to do."

For workers who haven't been spared the ax, the future is an open question. Spurgeon Jackson, a 34-year-old machine operator who has spent 15 years at Parker's Spartanburg plant, was one of the two people laid off from the second shift making parts for blasting caps. He was recently called back to cover for a worker on medical leave, but he doesn't know how long it will last.

"The 2000 recession was bad," he says, stopping next to the clattering row of machines, "but not nearly as bad as things are right now."

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