Reorganization, optimization, rationalization - Milan Krajnc
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Reorganization is not a state of work in a company. Work organization is set up in the enterprise.

If the strategy changes, the organization must also change, and this process is called reorganization. It is very difficult to change the structure and at the same time simplify the process. We change the structure so that the process is easier and we can save money. So you could call the reorganization a global optimization or the optimization is a correction of the reorganization.

Rationalization means “making business cheaper”, which is not only achieved by layoffs, but mainly by rationalizing materials, working hours, driving and more. We opt for rationalization above all when the financial crisis occurs.

What does it actually mean when we reorganize, optimize or rationalize a company or a process?

The terms reorganization, rationalization and optimization are becoming increasingly common in the public eye. We are most “startled” when we hear the word rationalization, because we think of dismissing employees. Do we really know what these terms mean? Do we use them in the truest sense of the word?

Reorganization

The word reorganization comes from the English word reorganize (or even earlier Latin reorganizare), which means to reorganize. Reorganize means to rearrange, to make changes. We also encounter the terms restructuring, reengineering, reforms and others. We carry out a reorganization when we are not satisfied with the current organizational structure, with the flow of data or when the work is not evenly distributed. In practice, this means that we change the decision-making hierarchy in the company, change responsibilities or competencies or abolish departments and create a project structure and so on. In short, reorganization is a change in the way decisions are made, systemic changes, and above all, we bring new approaches to the work environment. 

Reorganization, optimization, rationalization - Milan Krajnc

Reorganization is a logical consequence of a change in the vision, goal or strategy of the company. This usually happens when there is a change in management, ownership or market orientation. Work organization is changing and must constantly adapt to the current situation, so it is necessary to check
whether it is really the most appropriate one at the moment. Reorganization should therefore take place at any time and should not be subject to any restrictions.

One could also say that reorganization is very much in line with strategy: as the strategy changes, so must the reorganization. Reorganization is not a state of work in an enterprise. Work organization is set up in the enterprise. If the strategy changes, the organization must also change, and this process is called reorganization.

The biggest obstacle to reorganization are people, because we are used to working in a stable way, and reorganization prevents us from doing so because we have to approach tasks differently. So first we have to reorganize. Reorganization helps us not to fall into fixed patterns, but encourages us to constantly deal with ourselves. Therefore it is important that the whole team participates in the reorganization, as this is the fastest way to complete it. It is also important that we consider the suggestions of all employees, because they know the issue best themselves and if we consider their suggestions, they will be more motivated for change. The timing of introducing business changes therefore depends mainly on how quickly the team will adopt the new rules.The reorganization is successfully completed when everyone in the company starts working according to the new rules.

Practice has shown that a reorganization proceeds fastest when it is led by a person who is not directly involved in the company process during implementation, or when we engage an external institution. The reorganization must always be carried out at several levels (depending on the size of the company – the larger the company, the more levels there are), from global to personal. We have to constantly adapt the operation of the whole company, we have to monitor and adapt the profession, the reactions of the market and marketing approaches and last but not least we have to monitor and adapt ourselves. We must constantly educate ourselves, work on our physical and mental condition and build up our personality.

A practical example of reorganization

The production company with 25 employees was a permanent supplier of springs for a large foreign automotive group. Since the entire production was completely tied to only one customer, the company did not need any marketing. Contacts with the customer were maintained by the owner (who was also the director), the technologist ensured the smooth running of the production, and the accountant or administrator took care of the necessary documentation that had to monitor the
products and processes. During a visit abroad, the owner of the company found out that there would be a decrease in orders and additional requirements to increase quality. He was aware that his business was very risky as he only had one customer.

He searched thoroughly for new potential markets where he could offer his services. He hired a person to take over the sale of existing products to new potential buyers. Most often the companies demanded the ISO standard or a larger quantity than they could produce. So he hired a person who introduced a quality system and information support, he hired an external personnel agency for
additional production personnel (he did not increase the premises and machinery, but changed from one to three shifts). When the administrative workload increased, he hired two additional administrators and an accountant. Demand increased, so that the marketing employee was behind schedule with the offer. As a result, the company hired three more marketing staff. Due to the threeshift
work, two more new technologies, etc. were needed. In order for the company to survive, it therefore had to hire more employees and focus on other markets. Sales increased by up to 300 percent, the number of employees by 400 percent, costs by 350 percent, and profits were lower than before. Lacking precise control over expansion and responsibilities, the company needed to create a new organizational structure. Since the staff was hired for a specific purpose, the reorganization went very quickly, as everyone was aware of their responsibilities. He decided to reorganize only to improve the flow of data within the company. He decided on departments.

During a reorganization, it is not always necessary to save money, but the results can be very different. Before we start a reorganization, we must set a goal and ask ourselves what we want to achieve. In the case described, the primary purpose of the reorganization was to maintain the company. The goal of
the reorganization can therefore be different, from increasing the quality of the product, the image of the company to the division of responsibilities. So, first we have to perceive the problem and the need for change, only then we start the reorganization. It is best to tackle it on “paper” first. As long as we have not anticipated all possible “scenarios” of reorganization, we should not put them into practice.

Optimization

Optimization comes from the English word optimal (formerly Latin optimus) and means to do what is best under the given circumstances (optimal). You could say that it is a combination of rationalization and reorganization, because with optimization we remove various administrative and technological barriers, we simplify processes. Some changes have to happen first. It is very difficult to change the structure and simplify the process at the same time. We change the structure so that the process is easier and we save money. So you could call the reorganization a global optimization or the optimization is a correction of the reorganization. Only when a general change in the way we work has taken place and this has been “tested” for some time can we start to optimize the processes that we had previously only predicted theoretically, and only the implementation of the reorganization shows us which changes have really brought about an optimization.

S spremljanjem posameznih procesov oziroma podrobnosti lahko začnemo optimizacijo, kar pomeni poenostavitev nekaterih postopkov, pravilno razdeljevanje odgovornosti glede na sposobnosti posameznika, pravilno nastavitev strojev, izbor izvajalcev ali dobaviteljev in tako naprej. Lahko rečemo, da je optimizacija »piljenje reorganizacije«.

By monitoring individual processes or details, we can start to optimize, i.e. simplify some procedures, assign responsibilities according to the skills of the individual, set up machines correctly, select contractors or suppliers, and so on. We can say that optimization means “sawing reorganization“.

Reorganization, optimization, rationalization - Milan Krajnc

A practical example of optimization

In the previous case, we saw how the company developed, but despite the higher turnover, profits declined. Therefore, the owner decided to investigate the current process more closely. He found that a number of features were duplicated and that he could save a lot of money with some simplifications. He decided to move from departments to project teams. The project structure is much more flexible, it
is on the design all the time, while the departments become rigid over time. So they have further improved the information system in production and marketing. In marketing, they introduced a customer management system that automated some processes, reduced administrative work and lowered the cost of materials. As there was less work in administration, one person switched to marketing, which further increased traffic for a particular batch (Figure 4). As a result, by improving the machines and simplifying the production processes, some tasks were simplified.

Although the main purpose of the reorganization and optimisation is to reduce costs, its introduction causes some costs for the company. However, we must be aware that we have been doing this for a long time. We have to define exactly how long we want to reduce the costs and burdens on individuals. Optimisation must be measurable in terms of time and money, which means that we must
know exactly where, how much and why we are saving. The greatest optimisation tool is development. With development, we primarily improve quality and simplify processes. However, since development is very expensive and cannot be done overnight, we can only afford it if we have a very well developed long-term plan.

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Rationalization

Rationalization means “making business cheaper“, which is achieved not only by layoffs, but above all by rationalizing materials, working hours, driving and more. We opt for rationalization especially when the financial crisis occurs. We see that optimization and rationalization are very complementary. Rationalization has only one goal – financial savings. We can save with time optimization, choice of materials and more.

Rationalization is the result of optimization.

We make the biggest mistake in rationalization when we rationalize by laying off employees and choosing cheap materials, because rationalization should not reduce costs by laying off employees, but by redirecting employees to other profitable activities. In such a case we can say that optimisation and rationalization are one and the same thing.

If we opt for any form of change, we must have a clearly defined objective.

What do we want to achieve? If we set ourselves the goal of reducing costs, then we will reduce them until they no longer exist – and the company will fail as a result.

Cost reduction is only a logical consequence of the realization that we want to achieve something. If we do something, the result depends directly on others – if nothing else, then we need electricity, transport, telephone. So we see that costs cannot be completely eliminated.

The lowest costs are usually for service companies and the highest for construction and production companies. So we cannot completely eliminate the costs because we cannot create if we have nothing. The greatest effort is our time, which we forget. That is why we must first and foremost think about
how we can reduce our presence in the company through reorganization, optimization and rationalization.

So we see that all activities are connected and that one cannot exist without the other. Everything brings change, and change brings progress.

PRACTICAL NOTE

If we want to constantly monitor the results of the reorganization, it is very important to adapt the business information system.

Avtor - Milan Krajnc
Author of the article: Milan Krajnc, pedagogue, entrepreneur & crisis manager I teach you to look “at yourself” as a third person. For more information or an introductory meeting, write to me at official@milankrajnc.com

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