Articles

Written by: Robin Scott, Partner, Claris Solutions

There is no getting around it, times are tough. It is a cruel paradox that retailers face in a bad economy: Management is pushing for cost reductions while customers are demanding a better shopping experience. And where is that paradox most painfully felt? Store payroll.

In the short term, payroll reductions may have a positive benefit in reducing operating costs and can be effective in working through a temporary downturn in business. However, prolonged payroll reductions are not sustainable. Continuous payroll cuts will have a significant detrimental impact on financial performance and could force a retailer out of business.

A Wrong Path Taken
It should be remembered that one of the steps Circuit City took early in its downward spiral to bankruptcy was to reduce payroll expense by going away from sales commissions and eliminating its most experienced and productive sales people and replacing them with novices. At one time Circuit City was highly praised for its knowledgeable employees. This was frequently cited as a differentiator for the retailer. In addition to the drastic payroll-related measures, Circuit City all but eliminated its training program, which at one time produced the most knowledgeable employees in the industry. It is unlikely that these steps alone caused the demise of the previously-number one appliance and electronics retailer, but these steps certainly contributed to the failure of the company.

Making Tough Choices
The second largest, some will argue the largest, controllable expense in retail is store payroll. Every retailer seeks to minimize their payroll per cent to sales ratio without jeopardizing customer service. In tough times like these, some retailers simply reduce hours in their stores to reduce payroll expenses. In doing so, store managers face the dilemma of giving up customer service, lowering the quality of the store environment or both. Both have several negative effects including:

DEGRADED CUSTOMER SERVICE	LESS ATTRACTIVE STORE ENVIRONMENT
Reduced conversion rates	Merchandise not properly displayed
Long lines at the register and walked business	Unstocked shelves and fixtures
Lower items and sales per ticket	Untidy dressing rooms
Reduced up selling and cross selling	Out of date signage
Untimely and/or incomplete markdowns	Lack of cleanliness in the store and rest rooms
Increased stock outs
Increased shrink

The result of this cost reduction tactic is essentially a business death spiral as customers are driven to competitors, thus further reducing sales and forcing additional cuts in staffing. Ultimately, the business will fail as customers become so dissatisfied they no longer shop in the store. To avoid this outcome, retailers must efficiently and effectively use payroll hours to achieve desired customer service objectives while ensuring that store operations live up to customer expectations and company standards.

Customer Service is Strategic
Establishing the correct customer service level and the most effective company image for a retailer are strategic decisions. They define the persona of the retailer. Management determines the level of customer service based on a risk/reward strategy and establishes a store image that communicates how customers should expect to be treated. Every investment decision should be based on whether the expenditure supports or enhances customer service and company image.

A high level of customer service, a la Nordstrom or Ukrop's Supermarkets, has a higher cost than providing a lower level of customer service. Management believes that by delivering a premium customer experience, they can obtain premium prices for their merchandise and services while maintaining a high level of customer loyalty. Retailers such as Costco, DSW Shoes and BJ's successfully project a value-based image through their store formats that influences shoppers seeking the best prices regardless of the level of service offered in the store.

Store Operations is Tactical
Store operations is a series of tactical decisions supporting the service level and company image strategies. Processes that execute the tactics in the store should be under constant scrutiny to ensure high levels of efficiency, quality and compliance. It does no good to have a strategy that recognizes that fully stocked shelves are a factor in the success of the business unless there are processes and controls in place that ensure merchandise received in a store is actually placed on the shelves in a timely manner.

Store Managers Feel the Pain
Store managers are constantly asking for more staff hours. Often, they must meet a payroll per cent to sales or hours goal established centrally based on the financial plan, annual budget or short-term sales forecast. While this method serves as a useful guideline, it does not properly reflect the ever-changing day-to-day conditions and events at individual stores. Often these arbitrary objectives are based on a one-size-fits-all formula and do not recognize the differences in demography, local economies, traffic patterns and other factors that affect store sales.

Because store managers are in the store every day and are attuned to the local culture, conditions and events, they are better predictors of traffic flow in the near term than a central operations or finance organization. This is especially true the larger a chain grows. Store managers are usually right about their staffing needs, which tend to be higher than the corporately sanctioned budgets. They spend a significant amount of time negotiating with their district managers for more hours. However, instead of simply more hours, what store managers really need is the right hours for their individual store. That is, they need the appropriately skilled staff on hand to meet the customer service objective and to complete the task work that is essential to providing the most attractive shopping environment.

Right Place, Right Time, Right Number, Right Skills — Right Answer
In very simple terms, staff responsible for customer facing tasks should be in place to serve customers in the right numbers to accommodate traffic flow. Those places can be behind a register, at the front door, in a dressing room or in a department aisle. The number and assignment of staff are based on the service level objective. For example a customer service checkout objective may be that there will be no more than three people in line at a register 99% of the time. There may be a greeting-the-customer service level that demands that every customer coming through the door is greeted and guided to the appropriate area of the store.

At the same time, there must be sufficient staff in place to handle the non-customer facing tasks such as receiving, stocking, recovery, signing and markdowns. These tasks must be prevented from "robbing Peter to pay Paul" by taking customer facing staff from their assigned activities to perform non-customer facing tasks and vice versa.

The total number of hours required to meet the customer service and task work requirements is called the Work Demand. The Work Demand for a store is used to determine the number of employees with the necessary skills who should be scheduled at any given point in time throughout the day. Scheduling increments can vary from 15 minutes to full shifts. The skill requirements should be based on the tasks to be performed and individual assignments should be based on the employees' productivity in those tasks.

Understanding a Store's Unique Work Demand is the Key to Profits
There are two primary work drivers in stores collectively called the Work Demand. They are:

• Customer facing tasks
• Non-customer facing tasks.

Each is necessary and difficult to balance to find the most efficient mix of both. Complicating this balancing act is the inconsistency of customer traffic flow during the day and on different days of the week. Variability in store task execution schedules compounds the problem of ensuring the proper people are in the proper place at the proper time.

Rather than using a top-down approach driven by payroll per cent to sales assigned centrally, a store's Work Demand is built from the bottom up in the actual store operating environment. The following are the key steps in determining a store's Work Demand model.

• Determine the customer traffic flow over the smallest time interval that can be managed
• Determine the time spent in each type of customer facing transaction and the volume of these transaction
• Determine minimum coverage requirements
• Analyze every non-customer facing task in the store
• Establish the schedule for each non-customer facing task
• Improve the efficiency of every task in the store
• Determine the skills required to accomplish each task
• Standardize task performance requirements
• Implement compliance controls

Once the Work Demand has been determined, the resulting data can be used to build the optimum schedule for the store.

It is probably unnecessary to develop a Work Demand model for every store in a chain. If all stores in a chain have similar operating environments, a single Work Demand model can be used for all stores. However, if stores differ significantly based on their geography, sales volume, operating hours, assortment or other factors, these stores should be categorized based on those characteristics and a Work Demand model should be developed for each category of stores.

There is Big Money in Efficiency
The importance of eliminating, or making more efficient, every task that occurs in a store prior to developing the Work Demand cannot be emphasized enough. While there is payback to be gained by accurately scheduling staff to the current workload required to accommodate customer and non-customer facing tasks, the real payback is in being able to answer yes to the following questions.

• Have all unnecessary tasks been eliminated?
• Has automation been applied to all possible tasks?
• Are all manual tasks being performed as efficiently and effectively as possible?
• Are the appropriate controls in place to ensure the answer to the above is always yes?

Store and Corporate Operations staff should be consistently analyzing processes to determine if they can be improved and evaluating new technology that can automate or eliminate work performed in the store. The multiplier effect of just a few minutes a day in time savings in all stores in a chain can quickly add up to significant profit improvements. For example, in a 500-store chain saving one hour per day drives an annual bottom-line improvement of $1,825,000 at an average wage of $10.00 per hour, not including benefits.

Avoid Efficiently Scheduling at the Expense of Scheduling Efficiency
Retailers must resist the temptation to simply install the latest scheduling application thinking that making the scheduling process itself more efficient will reap significant financial benefits. The most likely result will be disappointing and the retailer risks spending up to a year to fully implement a costly scheduling application that does not provide the anticipated payback. In fact, it may be unnecessary to install a new application if retailers take the few weeks required to analyze current operations and make them more efficient. The current application may work very well if provided with the right Work Demand data. Retailers should utilize either internal or external resources with specific industrial engineering and store operations expertise to develop the optimum Work Demand for their stores.

Winning with Work Demand
It is significantly more profitable to build a Work Demand model for each store than using a top-down approach. When performed properly, labor scheduling based on Work Demand ensures the right number of hours are assigned to stores and eliminates the arbitrary assignment of hours based on sales figures that do not adequately address the local environment. Only when store staffing reflects the store's unique Work Demand based on the most efficient processes, accurate traffic patterns and the required customer service level, will a retailer realize the maximum return on its payroll investment. The savings potential is millions of dollars for many retailers.

To learn more about Work Demand and optimized store labor scheduling, contact Robin Scott at robin.scott@claris-solutions.com.

Free Retail Solutions Online Newsletter