124 Harvard Business Review January–February 2012
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124 Harvard Business Review January–February 2012 HBR.ORG Zeynep Ton is a visiting assistant professor in the operations management group at MIT Sloan School of Management. PHOTOGRAPHY: STEVE WEBSTER PHOTOGRAPHY: lmost one-fifth of American workers Some companies are have bad jobs. They endure low wages, poor bene ts, schedules that change investing in their workers with little—if any—notice, and few opportunities for advancement. and reaping healthy profi ts. The conventional wisdom is that many companies have no choice but to o er bad jobs—especially re- by Zeynep Ton tailers whose business models entail competing on low prices. If retailers invest more in employees, customers will have to pay more, the assumption January–February 2012 Harvard Business Review 125 WHY “GOOD JOBS” ARE GOOD FOR RETAILERS goes. Indeed, it is easy to conclude that employee- retailers—that currently don’t invest adequately in friendly Wegmans and the Container Store can o er their workers could be part of the solution. great jobs only because their customers are willing to pay higher prices. Why Do Retailers I have studied retail operations for more than 10 Underinvest in Labor? years and have found that the presumed trade-o be- If investing in retail labor is such a good idea, as my tween investment in employees and low prices can be research suggests, why isn’t everybody doing it? The broken. Highly successful retail chains—such as Quik- main reason is that labor is often a retailer’s largest Trip convenience stores, Mercadona and Trader Joe’s controllable expense and can account for more than supermarkets, and Costco wholesale clubs—not only 10% of revenues—a considerable level in an indus- invest heavily in store employees but also have the try with low profit margins. In addition, many re- lowest prices in their industries, solid nancial perfor- tailers see labor as a cost driver rather than a sales mance, and better customer service than their com- driver and therefore focus on minimizing its costs. petitors. They have demonstrated that, even in the Accordingly, they often evaluate store managers lowest-price segment of retail, bad jobs are not a cost- on whether they meet monthly (or weekly) targets driven necessity but a choice. And they have proven for payroll as a percentage of sales. These manag- that the key to breaking the trade-o is a combination ers don’t have much control over sales (they almost of investment in the workforce and operational prac- never make decisions on merchandise mix, layout, tices that bene t employees, customers, and the com- price, or promotions), but they do have a fair amount pany. This article explains those practices. of control over payroll. So when sales decrease, they Although my research has focused on retailing, I immediately reduce sta ng levels. The pressure to believe that the model these retailers have created can reduce payroll expenses is so high that store manag- be applied in other service organizations where there ers at several large chains, including Walmart, have are large uctuations in customer tra c and employ- been widely reported to have forced employees to ees perform both production and customer service work off-the-clock, paying them for fewer hours tasks. These include hospitals, restaurants, banks, than they put in. and hotels. Moreover, the nancial bene ts of cutting em- The United States needs better jobs, not just ployees are direct, immediate, and easy to measure, more jobs. Service businesses—including low-price whereas the less-desirable e ects are indirect, long TOO MANY U.S. RETAIL WORKERS HAVE BAD JOBS WAGES FULLTIME PARTTIME In 2010, an At But there is no guarantee American cashier that store employees are % made an average of even that fortunate: hours a week, that of retail workers are translates to only % $ part-timers. Their hourly . wages are 35% lower of retailers call anyone an hour, $, than those of full-time a year. working more than employees. Moreover, they often do % not receive health benefi ts hours and are scheduled too few a week a full-timer. below the average hours to earn a living. for all occupations. SOURCE FRANCOIS J. CARRÉ, CHRIS TILLY, AND LAUREN D. APPLEBAUM 126 Harvard Business Review January–February 2012 HBR.ORG Idea in Brief Retailers have long believed that the only But a growing body of research— OFFER FEWER SKUs and promo- way to compete on price is to off er work- including the author’s studies of tions in order to reduce complexity. ers low wages, poor benefi ts, constantly Borders, Home Depot, QuikTrip CROSSTRAIN WORKERS so that changing schedules, and little opportu- convenience stores, Mercadona they can perform multiple tasks nity for advancement. and Trader Joe’s supermarkets, and instead of varying the number of Costco wholesale clubs—suggests employees to match changes in that there is an alternative to provid- customer traffi c. ing “bad jobs.” ELIMINATE WASTE everywhere Retailers can break the trade-off except in staffi ng in order to increase between low prices and investing labor productivity. in employees by adopting a set of EMPOWER EMPLOYEES to make operational practices: small on-the-spot decisions. term, and difficult to measure. Home Depot is a that this could hurt sales and profits. Indeed, my well-known example. When former GE executive research suggests that understaffing retail stores Robert Nardelli became CEO, at the end of 2000, he amounts to a missed opportunity: In my analysis of cut sta ng levels and increased the percentage of data from 1999 through 2002 from more than 250 part-timers to reduce costs and boost pro ts. Those stores of Borders, a major bookstore chain at the moves achieved both goals immediately, but they time, I found that a one-standard-deviation increase eventually caused Home Depot’s excellent cus- in labor levels at a store increased pro t margins by tomer service—the company’s claim to fame and, 10% over the course of a year. Research by Marshall arguably, primary source of competitive advan- Fisher, Serguei Netessine, and Jayanth Krishnan tage—to su er, customer satisfaction to plunge, and supports my ndings: Their analysis of 17 months same-store sales growth to drop and even go nega- of data from a large retailer shows that for every $1 tive in some years. increase in payroll, a store could see a $4 to $28 in- What happened to Home Depot is common. crease in monthly sales. Many store managers at various retailers told me Of course the relationship between sta ng levels that the pressure to meet short-term performance and pro tability is not linear: After a certain point, in- targets led them to reduce employees even though creasing the former will reduce the latter. But instead they knew that the workers who remained would of responding to short-term pressures by automati- cut corners and make mistakes. And they suspected cally cutting labor, stores should strive to find the TOO MANY U.S. RETAIL WORKERS HAVE BAD JOBS SCHEDULES EFFECT ON SOCIETY In addition to poor wages and Employers’ underinvestment benefi ts, retail employees have in retail employees is costly unpredictable work schedules. for society. Retail employees - to - receive disproportionately In an eff ort to match staffi ng hour shifts are common, and more public assistance than levels to customer traffi c, retail employees are often asked employees in other industries. chains schedule employees only to be on call. They are clearly on the losing Changing shifts on such short end of the large income gap in week in notice can make it diffi cult, the United States. advance, if not impossible, for workers to meet family commitments, and even those schedules can change at the last minute. perform other jobs, and arrange for child care. It also can wreak havoc on increas- ingly fragile family budgets. January–February 2012 Harvard Business Review 127 WHY “GOOD JOBS” ARE GOOD FOR RETAILERS RETAILING’S VICIOUS CYCLE LOW LABOR BUDGETS LOW SALES sta ng level that maximizes pro ts on a sustained to make trade-offs between dimensions of perfor- AND LOW PROFITS QUALITY basis. In many cases, that will mean adding workers. mance: Should they answer a customer’s question if ANDOR QUANTITY Retailers do not just underinvest in the quantity that keeps them from restocking a popular product? OF LABOR of labor. They treat the quality of labor the same Should they go looking for something a customer POOR OPERATIONAL way—paying low wages, offering insufficient ben- can’t nd if that prevents them from putting up next EXECUTION e ts, and providing inadequate training. The short- week’s promotion? term pressures are just too di cult to resist. The in- When these nitty-gritty, ongoing operational is- evitable consequences are understa ed stores with sues are handled by low-paid employees at under- high turnover of low-skilled employees who are of- sta ed stores, the consequences for operational ex- RETAILING’S VIRTUOUS CYCLE ten part-timers and have little or no commitment to ecution can be severe. their work. HIGH LABOR Retailing’s Vicious and Virtuous Cycles BUDGETS The Eff ect on Store Operations Extensive research in operations management links HIGH Let’s look closer at what happens when, say, a su- employee turnover and poor training to poor perfor- SALES permarket manager cuts staffing to meet a payroll mance, especially in manufacturing settings. The AND GOOD PROFITS QUALITY or pro t target. A typical supermarket is a complex same is true in retailing. When my colleague Ananth AND QUANTITY operating environment. It carries close to 39,000 Raman of Harvard Business School and I rst started OF LABOR SKUs, ranging from an Idaho potato to a 6.4-ounce working with Borders, we found that there was a GOOD OPERATIONAL tube of Crest fluoride anticavity toothpaste with huge variation in operational performance among EXECUTION tartar protection.