The fallacy of the overhead quick fix.

Abstract

Facing pressure from a few large, low-cost competitors, Thornton, an old-guard specialty-equipment manufacturer, fought back by eliminating overhead. Over two-years, it outsourced components and consolidated operations. But instead of cutting overhead, it added more and became still more uncompetitive. Thornton is not alone in either its predicament or its failed reaction. Many large manufacturing companies are finding themselves at a cost disadvantage in markets they have dominated for years. One reason is excessive overhead structures, the result of an unchecked buildup of indirect employees needed to control rising organizational complexity. Another reason is the emergence of the "robust" competitor, comparable in size and product scope but able to produce at a lower unit overhead cost. Data collected from more than 100 manufacturing plants worldwide illustrate the differences between overhead cost structures of bureaucratic, niche, and robust companies. The gulf between these groups highlights the need for action by bureaucratic companies, and, in some cases, by niche companies. But high-overhead companies are doomed if they cut overhead out of the system either by outsourcing or downsizing. If they expect to retain their size and also become more cost competitive, they must rethink their manufacturing systems. Well-designed and well-controlled processes mean higher product quality, faster cycle time, improved flexibility, and lower overhead costs. Sustainable overhead reduction means a commitment to continuous improvement. This includes segmenting, mapping, and measuring existing processes and then working to improve them.(ABSTRACT TRUNCATED AT 250 WORDS)

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