Manufacturing's crisis? The hidden cost of short-term solutions

Today we had an interesting discussion with Mikhail Lvovskii about the current market situation. We both agree that the manufacturing sector across the European Union is facing one of its toughest periods. With rising costs, declining demand, and energy crises, companies are struggling to remain competitive. For many, the immediate response is predictable: cutting jobs to achieve short-term positive cash flow. What we agree with Mikhail is that while this may stabilize finances temporarily, it leads to deeper, more lasting issues that many organizations seem to overlook.

The classic response we drown: Crisis > Layoffs > Short-Term gains

It’s an all-too-common pattern. Probably due to some bias of our brain, of maybe because this solution is what the majority of companies are implementing: faced with shrinking margins, companies in Europe, especially in manufacturing, default to layoffs as the go-to solution for cost reduction. The immediate effect is appealing—cash flow improves, and the books look healthier. Good? Well...but what about long-term cost? Unfortunately, many organizations fail to consider the deeper impacts of this approach. They expect that the same levels of productivity and engagement will continue even after significant cuts. The reality, however, is quite different, we all know.

When organizations cut jobs, they inadvertently send a message to the remaining workforce: no one is safe. As a result, motivation and engagement—the cornerstones of productivity—take a significant hit. Employees left behind often experience a "survivor syndrome," leading to decreased morale and lower engagement. Instead of focusing on innovation and efficiency, workers are more likely to focus on job security, which severely impacts creativity and performance. Maybe this is a topic more relevant for your HR team...but believe me, the final effect is clearly present in the full P&L of each GM, COO, CEO, and CFO. Do you remember the meme with the boat (you can see the picture)? Why after all those cutting we are not going faster? Well should be clear why.

Please try to think: reducing headcount means overburdening those who remain. With fewer hands on deck, the expectation is that the remaining team will maintain or even increase productivity, despite heavier workloads. This strain often results in burnout, which further decreases output and innovation over time.....and finally beyond the operational issues, job cuts have a direct impact on the #wellbeing of the remaining employees. Anxiety, stress, and fear of future layoffs create an environment where employees are less likely to perform at their best. Research has shown that such emotional strain can lead to higher turnover rates, absenteeism, and long-term health issues, all of which increase costs for the company over time.

In the broader picture, this approach to "crisis management" reflects an outdated industrial revolution-era mindset, where short-term fixes were sufficient for long-term growth. But in today’s rapidly evolving business environment, such strategies are no longer sustainable.

Rather than following the familiar pattern of cutting jobs, companies should explore more innovative, holistic approaches to tackle the economic challenges. Some potential strategies include:

1. Reskilling & upskilling: Instead of layoffs, investing in retraining employees can yield long-term benefits. Upskilling ensures that the workforce remains adaptable, capable of handling more advanced technologies, and better prepared for future challenges.
2. Fostering innovation: companies should create environments where innovation thrives, encouraging employees to develop new ideas, products, or ways of working. This might involve giving teams the freedom to experiment with new processes or technologies.
3. Digital transformation: embracing automation and digital tools can help companies increase efficiency without sacrificing jobs. This not only enhances productivity but also positions the organization to adapt to future technological advances.
4. Wellbeing programs: providing mental health and wellness support can help mitigate the negative effects of restructuring. Supporting employees' wellbeing is crucial for maintaining long-term engagement and productivity.

In conclusion: the current economic crisis in Europe’s manufacturing sector is undoubtedly challenging, but relying on outdated strategies like mass layoffs will only exacerbate long-term issues. Companies must begin to think beyond short-term financial gains and focus on building a resilient, engaged workforce. This not only ensures productivity in the immediate term but also lays the foundation for sustainable growth and innovation in the future.

As the landscape continues to evolve, those organizations willing to explore new ways of operating will emerge stronger, while those stuck in the past will struggle to compete in a world that demands adaptability and resilience.

If you’re in a leadership role and navigating these challenges, we will be happy to connect and discuss ways to develop long-term strategies that foster growth without sacrificing your greatest asset—your people.