Overview
Hostess, the maker of Twinkies, is liquidating its business and 18,500 employees will lose their jobs as a result. Why?
In rough numbers, it's because ~40% of its employees who were represented by the bakers union refused to accept an 8% pay decrease which the company said was necessary to help it remain a viable business. In other words, all employees would have been paid 92% of what they had been paid and the union representing 40% of those employees said no. That's bad but it's really much worse than that.
And that brings us to the story I want to focus on today. Unions and their negative impact on a company's marketplace competitiveness by insisting on outmoded and extremely wasteful and unproductive work place rules.
Because as we will see below, the biggest factor leading to the company's demise was undoubtedly the unwillingness of the unions to work with the company over the years to achieve much needed and obvious productivity gains in its operations.
In fact, the editorial below suggests to me that a 20% gain in labor productivity would have pretty much been a no brainer. And that 8% would have been an absolute slam dunk. But the union played hardball to the very end and the company will shut its doors. Game over.
Companies must be profitable to remain in business. Profits, aka the 'bottom line,' are the cost of staying in business and what enable companies to provide jobs and employee benefits.
In simple terms, profits are calculated by subtracting costs from sales. The difference is profit.
Sales, aka the 'top line,' are a result of prices and volumes. The more the company sells and the higher its prices, the greater the sales.
Consumers decide how many Twinkies to buy and how much they're willing to pay for each one, as an example. What consumers decide to buy, how much they decide to buy, and who they decide to buy it from with their MOM determine the total sales of a company.
NOW LET'S CONSIDER COSTS ... SPECIFICALLY LABOR COSTS
Labor costs aren't just what the company pays employees directly. While they include wages and salaries, they also include costs for pensions and 401(k)s, health care, vacations, payroll costs such as Social Security contributions, workmen's compensation, unemployment taxes and so forth.
And then there's the biggie in missed opportunity at Hostess --- LABOR COST PRODUCTIVITY. On the surface, it looks like the lack of an emphasis on productivity probably cost the company 20% more in labor costs than what would be a reasonable expectation.
And if that guesstimate is anywhere close to the mark, that 20% potential savings completely overshadows the 8% concession the company needed from members of the bakers union to stay in business.
One often kept secret is how seriously union rules thwart ongoing productivity improvements at a company's operations. It's a game of silly intramurals, and it's frequently a very costly game which leads to a lack of the company's competitiveness in the marketplace. In other words, wages and benefits matter, but sometimes not as much as union rules making it tough for a company's management to manage its operations productively.
In fact, union work rules are generally a big factor in a company's operations failing to be able to compete effectively with its non-union competitors. Pay and benefits aren't the primary issue. Instead it's the restrictions imposed by union contracts and shop floor practices restricting management from running its daily operations in an efficient and effective manner.
As an example, most foreign auto makers have made it a practice to stay non-union in their U.S. facilities for this very simple reason. Wages weren't the fundamental issue. It's the work rules.
THE SAD PRODUCTIVITY STORY OF HOSTESS
So it comes as no surprise that this work rules issue was a major factor contributing to the cessation of Hostess operations and the liquidation of the company. The real surprise to me was to see just how stupid and burdensome those union work rules stifling productivity had become.
The Twinkie, a Suicide is subtitled 'Unions kill an American classic, and 18,500 of their own jobs:'
"Perhaps it says something about America—though we're not sure what—that iconic junk foods like Twinkies, Devil Dogs, Ho Hos snack cakes and Wonder bread have endured since the 1930s despite changing consumer health and eating habits. It does say something about institutions that can't—or refuse to—adapt to new economic times that the company behind those products has chosen to go out of business overnight.
Hostess's owners have decided to liquidate rather than ride out a nationwide strike by one of the largest of its dozen unions, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union. The Texas-based company owned by the private-equity shop Ripplewood Holdings and other hedge funds essentially gave up. On Friday it shut down its 33 bakeries and 565 distribution centers and prepared to fire nearly 18,500 employees en masse and auction off its brand and recipe portfolio.
Hostess posted sales of $2.5 billion in 2011 but lost $341 million and lacked the cash flow to hold out through the bakers union work stoppage that had only lost a few days of production so far. One reason is a labor-rule burden that by comparison makes Detroit look like Hong Kong.
The snack giant endured $52 million in workers' comp claims in 2011, according to its bankruptcy filing this January. Hostess's 372 collective-bargaining agreements required the company to maintain 80 different health and benefit plans, 40 pension plans and mandated a $31 million increase in wages and health care and other benefits for 2012.
Union work rules usually required cake and bread products to be delivered to a single retail location using two separate trucks. Drivers weren't allowed to load their own vehicles, and the workers who loaded bread weren't allowed to load cake. On most delivery routes, another "pull up" employee moved products from back rooms to shelves.
This year management negotiated concessions from some of the unions, including the Teamsters, but the bakers rejected a last and best offer in September. Then the courts gave Hostess unilateral authority to modify collective-bargaining contracts, prompting the strike. So now it will liquidate, instead of attempting to emerge from Chapter 11 intact.
The 18,500 layoffs are equal to about 11% of the net new jobs the entire U.S. economy created in October. The unions are blaming private equity, or Bain Capital, or capitalism, but the election is over. And so is Hostess."
SUMMING UP
To repeat, 20% fewer employees ALMOST CERTAINLY could have generated as much output as what the union operations were producing due to terribly unproductive and outmoded union work rules and practices.
Then the company would have worked hard to increase sales and profits, thereby needing additional employees to handle the increased sales.
Of course, 20% fewer employees initially would have meant 20% less in union dues. Now it will be zero employees and zero union dues instead.
What a tragedy.
The sheer idiocy and total irresponsibility of bakers union leadership is mind boggling to me.
Especially when the Teamsters union knew what needed to be done and agreed to do it.
Meanwhile, the bakers union leadership said to hell with everybody, including their members.
And their members were Hostess employees who paid the union dues to represent them in labor negotiations and are now out of a job.
Talk about malpractice!
Thanks. Bob.
No comments:
Post a Comment