The growing debate over raising minimum wages at the state level has prompted business leaders across the U.S. to ask a lot of difficult questions over the past few months: Do we need to increase the price of our product? Will I need to cut jobs? What do I need to change to accommodate a higher wage?
In a retail environment, labor is the largest controllable cost. But when looking at the total costs associated with running a successful business, many retailers do not always treat labor as their largest asset. From the sales floor all the way to a manufacturing line, employees have the biggest impact on growing top line sales.
While concerns about product price and production costs are all valid, there are many other aspects of a company that can be evaluated before making any drastic adjustments. To get you started, we’ve mapped out a few areas to keep in mind when deciding how to offset increased labor costs.
Balance your top-down financial model with an activity based model
Most retailers manage budgets based on a top-down model driven by the finance department, and will allocate a certain percentage of sales to cover labor costs. This strategy has multiple flaws because sales and prices can be affected by more than just labor, and the dollar value is not necessarily indicative of the work required to sell the products or services.
More progressive retailers balance their top-down model with an activity-based model, that connects activities with costs and then measures success rates based on product consumption patterns. Activity-based models are often more reflective of the true operations of the business because budgets are predicated upon all the actual activities (service and non-service) required to operate the business with consideration to volume, product mix and specific store characteristics. In addition, using an activity-based model allows the retailer to develop standard times using engineered labor standards per activity, and then build a labor model from those activities.
One company that excels in this area is Costco. Though different from competitors like Wal-Mart and Target, Costco is actually outperforming its big box store counterparts because of its operational excellence, limited product selection and empowered employee teams. While many retailers drive profits by paying employees less, Costco is able to pay employees more by cutting costs in other areas. The company believes that well-compensated employees will be happier and more productive at work, and will encourage customers to keep coming back.
Focus on improving the customer experience, not cutting labor
Reducing labor reduces sales, which reduces how much you can spend on labor, and perpetuates the retail death spiral. What retailersshould be asking is: How do we increase sales to cover the additional costs?
One of the best ways to drive sales is to analyze barriers to great customer service and look for operational inefficiencies in need of attention. Effectively, you want to minimize non-service activities and develop the service-focused activities. Measuring the time employees allocate to certain activities across the day enables operators to get a clear understanding of where the employees focus and how they balance their time. This provides operators with a very surgical way to identify and improve upon those processes that are distracting from doing the things that lead to great customer experiences.
Take a look at how a store is operating and determine if the customers’ wants and needs are matching up with what the retailer is delivering.
Improve store processes
Is there a better more efficient way to unload the truck? Is product unorganized in the back room making it difficult to find and restock or even leading to phantom stock outs? Is a separate customer service counter more labor efficient than blended in with regular check outs?
These process questions and many others like them can be answered through proper evaluation of their effectiveness. When building labor models for our clients, we typically find dozens of processes that can be improved upon, that in their current state, are wasting extraordinary amounts of labor dollars. Focusing on cutting the inefficiencies out of the identified processes alone will typically more than offset the increased cost in labor.
Among other reasons, labor costs are going up as a result of the minimum wage increases. Companies need to be as efficient as possible with every labor dollar spent to help offset those costs, and still drive business profitability.
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Jeff Peretin, Executive Vice President, Operational Excellence
Jeff Peretin, a thought leader and creative mind in workforce performance, partners with companies to drive operational excellence and improve customer experience through proven industrial engineering and lean methodologies. He can be reached at [email protected]
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