In tough times, it’s tempting to cut costs without thinking very carefully about unintended consequences. Costs can be squeezed by reducing inputs of factors of production such as labor. But, at some point, the remaining factors will be overworked, resulting in lower productivity and profitability. The current tough economic climate will inevitably tempt retailers to reduce head count in a bid to improve profitability. According to this paper by Zeynep Ton—just as an economist would predict—when staffing levels at a national retail firm were reduced too much, overall profitability fell.
Ton devoted four years to studying a retailer with more than 260 stores. He found a direct link between staffing levels and overall profitability. When the number of employees was reduced too much, “conformance quality” suffered. That is, the remaining overworked employees did less well at following specific processes, such as restocking shelves or returning unsold products to the manufacturer, leading to higher levels of customer dissatisfaction and lower profitability. Ton found that even a slight increase in conformance quality led to a 4 percent increase in store profit margins. Overworking a smaller number of employees also hurt service quality—the extent to which customers have a positive service experience at the stores.
Reducing head count is bound to appeal to retailers, given that in 2006 they spent $393 billion on employee wages—more than 10 percent of their revenue and more than their inventory holding costs. Retail managers may well be aware that staffing levels affect both conformance quality and service quality, but probably have little idea of precisely how these factors affect profitability. Ton’s study helps to clarify the picture, allowing managers to make smarter staffing decisions.
The author notes the importance of designing processes that are simple and easy to follow, especially in a high employee turnover environment (such as in retailing) and in a self-service environment. Good process design should be supported by an organizational culture that emphasizes conformance to these processes, otherwise employees will alter processes in ways they believe work better. Ton also says that a heavy emphasis on payroll management can degrade employee morale.