Thinking Twice About Supply-Chain Layoffs

Cutting the wrong employees can be counterproductive for retailers, new research from Harvard Business School professor Zeynep Ton concludes. One suggestion: Pay attention to staff who handle mundane tasks such as stocking and labeling. Your customers do. Key concepts include:
  • It may be employees that customers rarely see—stockers, shippers—whose work has a high influence on the shopping experience.
  • When floor labor is insufficient, merchandise is often unavailable or too inaccessible for the customer to trouble with.
  • Increasing the amount of labor at a store is associated with an increase in profit margin.
by Julia Hanna

It's the most wonderful time of the year—or that's how the song goes. But this year's decline in retail sales has resulted in definitely uncheery employee layoffs and payroll cuts, a trend that is likely to continue.

While the vicious cycle of declining sales and layoffs is to some degree unavoidable, research by HBS assistant professor Zeynep Ton suggests that retailers should make labor decisions thoughtfully.

"Many retailers see labor more as a cost driver than a sales driver."

Her advice: Consider the supply-chain foot soldiers—stock clerks, trucking coordinators, inventory managers—as potential profit drivers rather than the first troops to cut in a downturn.

Ton's working paper, "The Effect of Labor on Profitability: The Role of Quality" [PDF], examines how mundane activities such as stocking shelves, setting up displays, labeling, and returning unsold merchandise to distribution centers can seriously affect an organization's bottom line and undermine its strategy.

"My research reveals that what happens in the last 10 yards of retail supply chains is really important. Customers often experience stockouts not because the supply-chain plans are poor, as we often assume, but because they are not executed well at the stores."

Boots on the ground matter a lot. "When there aren't enough workers on the selling floor, it's those ‘boring supply-chain activities' that are affected first," Ton observes. "If employees are spread too thin, they're going to be rushed. Then they either make mistakes or take shortcuts to get their work done."

Merchandise ends up being misshelved, or not shelved at all. The store claims to have it, but neither the customer nor employees can find it. If other stores have the same product, customers will go there instead—and may never return.

Labor As Profit Driver

"Many retailers see labor more as a cost driver than a sales driver," says Ton. The findings from her four-year study of 268 stores owned by a large specialty retailer tell a different story. Based on extensive fieldwork, interviews, and quantitative data, Ton's research indicates that increasing the amount of labor at a store is associated with an increase in profit margin. This did not come about through the impact of more labor on service quality, but through its impact on conformance quality—those "boring supply-chain tasks." For this retailer, Ton calculated that a one-standard-deviation increase in store labor brought about a 10 percent increase in profit margin.

These findings ran contrary to the thinking of store managers that Ton interviewed. They consistently identified service quality as a top indicator of store performance, and their evaluations by higher management gave service quality (e.g., clean bathrooms and employees greeting customers and making eye contact) a 20 percent weight in importance, as compared with 10 percent for store conditions (e.g., shelf organization, labeling, and general presentation) and less than 1 percent for returns of unsold inventory to distribution centers.

"I call these people supply-chain foot soldiers."

Having items in storage areas but not on the selling floor didn't count at all in their evaluations, but it counts a lot in customer satisfaction and customer retention, and it wastes a lot of time for store employees.

"What's not to like about an enjoyable service environment and knowledgeable employees? But they aren't always the key to profits," Ton says. "My findings suggest that for retailers that sell undifferentiated products, offer a self-service environment, and compete on the basis of product availability, having the right product in the right place at the right time with the right label and of course with the right price may be what really drives customer satisfaction."

Another significant factor was an emphasis on minimizing payroll expenditures, a not-uncommon strategy for retailers that view it as an obvious way to cut costs. At Ton's research site, in fact, as at other organizations, a manager's evaluation depended in part on meeting or going below the monthly payroll plan.

"Of course managers will err on the side of having too little versus too much payroll, especially when they have limited control over sales," says Ton. "And of course, those boring supply-chain tasks won't get done."

"Retailers have to cut labor to some extent when sales are lower," Ton says, "but they need to be careful about how low they go." She acknowledges the difficulty of pinpointing this ideal number of payroll hours in an industry full of uncertainties.

"In an optimal world, a manager would know exactly how much workload would exist at a store in any given month. In reality, that's never clear—some customers require more time than others, and sometimes shipments are delayed. What's worse, with high levels of turnover and absenteeism, store managers never really know exactly how much labor they'll have."

Ton has more on her mind than operational excellence. She has interviewed dozens of retail workers and store managers and gained a good feel for their concerns.

Supply-chain Foot Soldiers

"I call these people supply-chain foot soldiers," Ton says. "The folks who work in retail stores and distribution centers and the truck drivers who move between them. In general, they are lower-wage employees who are on the losing side of the widening income gap." Many work multiple jobs. When a manager changes his or her hours, it can upset a delicate balance of work schedules, family commitments, and child care, which in turn can derail increasingly fragile family budgets. In a survey of Wal-Mart employees, for instance, scheduling even beat out health care as workers' most pressing concern.

"Someone asked me why I'm interested in labor in the supply chain. The answer from my head is that we have evidence of how important people are to the total equation. So my future research will definitely focus on identifying better process designs and labor management practices at stores and distribution centers with the goal of improving operational performance and ultimately increasing profits and wages and offering a better work environment. The answer from my heart is that I would like to help improve the working conditions of so many hardworking, hard-pressed people."

That kind of progress could bring year-round joy to everyone in the world of retail.

About the Author

Julia Hanna is Associate Editor of the HBS Alumni Bulletin.