Measuring Retail Productivity: Sales per Labor Hour or Items per Labor Hour?
Senior Industrial Engineer and Project Manager
There are many of ways to measure productivity in a retail environment. Determining the best method is the dilemma many retailers face daily. Time is money. The single greatest impact on productivity is how time is spent on the sales floor and in production areas (back of house). In the retail industry, most times are in budgeted sales per labor hour (SPLH) and or budgeted items per labor hour (IPLH), which makes “an hour” a highly prized commodity.
What are budgeted sales per labor hour?
Budgeted sales per labor hour (SPLH) measures the budgeted sales for every hour worked as defined by your organization. For example, if your budgeted sales for the week are $480,000 and your targeted SPLH is $130, then your budgeted hours should be 3,692, or put it another way, you plan to schedule one hour of work for every $130 in budgeted sales.
What are budgeted items per labor hour?
Budgeted items per labor hour (IPLH) measures the budgeted items sold for every hour worked as defined by your organization. For example, if your budgeted items for the week are 175,822 and your targeted IPH is 48, then your target targeted hours are 3,662, or put it another way you plan to schedule one hour of work for every 48 items sold.
The calculation for Sales per Labor Hour and Items per Hour:
- Accumulate all the labor hours worked for the week (including all sales floor, production areas and part-time hours).
- Add all the department and sub-department sales and or items total together for the workweek.
- Divide the total store sales and or items by the total hours worked to get the store’s weekly sales per labor hour or SPLH and/or items per labor hour (IPLH).
- Now compare your budgeted sales per labor hour and or items per hour budget vs your actual calculated sales per labor hour and/or items per hours to see how efficiently your store performed.
Targeted Sales per Labor Hour versus Items per Labor Hour: As a measure to improve productivity and profitability
The two components; SPLH and IPLH – sales/items and labor hours – are used as measures for productivity and profitability. Each of these components has unique drivers. Sales and items are primarily driven by customer demand, and labor hours are controlled by company based on key performance indicators (KPI).
Let us examine the pros and cons of each metric
Sales per labor hour is more a measurement of labor efficiency than of profitability, however efficiency and profitability have a significant relationship. Since SPLH is strictly the relation between hours worked and department/store sales, and since department and/or store managers have full control of their department’s schedule, it is a key indicator for which a manager can be fairly held accountable.
Sales per labor hour alone will not provide clear insight to the correct number of hours a store should use. One factor to consider is the volatility of an item average retail value. In other words, both stores with similar sales volume wouldn’t necessarily require the same number of hours since average retail value varies from store to store. Another factor to consider with similar volume stores is Direct Store Delivery (DSD) volume; one store may sell more DSD product versus the other which in turn would require less direct labor, versus a similar store that moves more warehouse driven items.
Items per labor hour is more of a measurement of profitability and labor efficiency as a primary driver of hours and brings you closer to the desired number of hours needed to help drive sales. Although the average item value may vary from store to store, it’s a more specific integer by which to measure productivity. It’s a more attainable and achievable measurement to use that is not impacted by DSD sales. Using Items per hour offers a more realistic approach to productivity. Said another way, realistic goals are potentially challenging but not so challenging that the chance of success is small. They can be accomplished with the tools that the person has at their disposal.
Although IPLH is more of a measurement of profitability and a labor efficient driver of hours, on its own, it will not provide you with a clear insight to the correct number of earned hours a store should use. A major factor to consider here is that the items sold are not tied to a specific unit of measure, and therefore this process would not drive the earned engineered labor hours required to produce and stock the items for sale. Put another way, items vary in their complexities to be produced and stocked which would require longer or shorter earned times.
Key performance indicators are not equal
Key performance indicators (KPI), varies from retailer to retailer. The SPLH and IPLH calculations are used as an internal labor productivity tool. Adjusting labor based on the work content tied to a specific unit of measure is a more desired approach when assigning earned labor.
Without a Workforce Management (WFM) system in place, where the unique work content of each individual item produced and stocked is tied to a specific unit of measure, determining the impact of too much labor, reducing hours and layoffs are usually painful processes. Sharing and discussing WFM tools with employees provides management a simple, all-encompassing tool to help everyone achieve the desired outcomes.