Layoffs, in isolation, solve nothing.
Each week, and sometimes it feels like every morning, new posts dominate my LinkedIn feed. Dozens of people, strangers to one another, are posting an almost identical story. The author of each post woke up to an email stating their employment had been terminated. The choice of words used by the company may differ, yet the outcome remains unchanged. Layoffs have emerged as the default response companies embrace. In addition to the tolls layoffs have on the emotional and financial health of the families impacted, layoffs also create more problems for the companies implementing them.
These layoffs will provide momentary relief that is reflected in the cash flows. This moment will be unexpectedly short. Increasing inventories is a trend that remains across corporations lowering their total headcounts. This will drive operational expense up through increased carrying costs. Throughput will fall as the capacity of the company decreases with the reduced labor. Throughput going down, inventory going up, and operational expense going up is the very situation these companies are seeking to avoid. They are managing themselves into it. These companies resort to further layoffs in the future, making their problems worse.
Consider a life sciences company based in Silver Spring recently announced a plan to lay off 12% of its workforce. The CFO said the company is focused on "prudently managing our expenses and reducing cash burn." Layoffs are projected to lower annual overhead by $4 million. This company also had a reduction to cash on hand by 57% from 2020 to 2023. During this earnings call, the CFO also announced a plan to embark on multiple growth-related initiatives. The company has not explained how they intend to sell additional units with 88% of its original work force. The company has not given any indication that it will reduce inventory to match the market-demand. This means inventory will increase. Operational expense will increase. Throughput is going to decrease.
Layoffs are necessary at times; but they accomplish nothing in isolation. A comprehensive inventory driven strategy is required to ensure the company is positioned for success.