retail resolutions understanding overtime impacts

Retail Resolutions: Effectively Understanding, Monitoring and Managing the Impacts of Overtime

Jeff Duce
Senior Manager, Product Management 

It’s a tradition: January kicks off a stream of New Year’s resolutions, both professional and personal. It is the beginning of a brand-new year, full of new possibilities and a chance for a fresh start. In retail, a common and definitely worthy aspiration is to improve operational efficiency and costs. If this resonates, then one area that warrants a deep, hard look is overtime at your stores. Understanding the sometimes surprisingly far-reaching cultural and monetary impacts of overtime is the best first step.

What is your company policy when it comes to overtime?

Labor is the largest controllable expense for retail companies—and within that expense is overtime. Sometimes overtime is paid daily after 8 hours, and it’s always paid to hourly associates in excess of 40 hours per week. Either way, you should have a practice in place to manage it daily.

If you don’t have a formal policy when it comes to overtime, then you may also have little to no focus on controlling it. Are your associates diligently avoiding unnecessary overtime, or do they know it’s an unmanaged expense that ultimately gives them additional dollars in their paycheck each week? Companies without a discipline in place for overtime may unwittingly be condoning the added expense, gladly accepted by associates. This ends up being perceived as an entitlement by most employees. If in doubt, try taking overtime away and watch employees’ reactions. Common employee responses include complaints that deserved paychecks are getting smaller and views that a right is being taken away. Remember, this isn’t their fault; Rather, your lack of policy has become the policy.

Where does overtime come from and how big of a cost is it?

There is good overtime and bad overtime. Overtime is typically a product of poor planning and lack of discipline. Poor planning can include a bad sales forecast that under-forecasts what your true sales will be. A bad under-planned forecast will typically get you a bad schedule, and a bad schedule can lead to overtime. Make sure you’re first creating good forecasts and on top of that, good schedules. If those are both in place and you still have overtime, then it’s time to evaluate the overtime reasons by employee.

Begin by looking at each employee daily who is creating overtime. As I stated, there is good and bad overtime. To illustrate the difference, here are a few examples. If a delivery was late and Billy had to stay late to process that delivery, this may be considered good overtime. However, if Billy had overtime simply because he wanted to get a few “extra” things accomplished, then that may be considered bad overtime. Employees who continually have 10 minutes extra on the clock because the boss never says anything, that’s bad overtime. If work could have been delegated to another employee to avoid the overtime, then that was bad overtime. Some overtime may be due to seasonal sales changes and may be short term. Maybe you can’t hire enough short-term employees, and overtime is a fact for your business occasionally. But if it is due to understaffing that is within your control, then get to hiring.

Let’s put some costs to overtime with the following scenario

The Bureau of Labor Statistics states that employees average around 3 hours of overtime per week. Let’s say you have 10 employees per store that average $18 per hour and have the statistical overtime average of 3 hours. Furthermore, let’s assume you have 40 stores in your company. Overtime is costing your company an estimated $1.68 million annually. Even if you converted the overtime hours to regular hours, it’s still costing over $560,000 annually. That’s more than enough to rethink your strategy and execution!

Where to start?

First, determine if you have an overtime issue that needs to be controlled. Although your company must identify what’s an acceptable amount of overtime, my suggestion is that it should be something less than 0.50 percent of total labor, and it is better to be closer to 0.30 percent of total labor.

So, for a store that has 5,000 total hours, 0.30 percent would be 15 overtime hours. Start with a policy for overtime that also includes a goal for the percentage of overtime. Communicate the policy and help associates with change management. Remember, you don’t have to eat the elephant all at once. Make incremental improvements over time, and it will be easier for your employees to accept the change. Hold your store managers, assistants and department manager accountable for explaining overtime. Never accept “I don’t know why” as the answer. Have expectations of detailed communications for any overtime, and action plans to correct it in order to prevent it in the future.

Measure what you manage?

Being able to measure and analyze overtime is obviously critical to the ability to effectively manage it. This should be part of your strategic reporting within your workforce management system. Overtime should also be a primary KPI on your company’s dashboard. Here are some best-practice tips and key metrics to help you gain essential visibility into overtime and steps to improve.

Monitor overtime as part of your review of stores’ week-in-progress reporting. Utilize projection reports that can tell you for any day of the week, how your weekly overtime will end up. This is done by looking at current overtime plus overtime that will occur if nothing is done within scheduling.

Another report that adds value in managing this expense is a weekly overtime ranking report. Views should include weekly trending for the year by department. Also, data presented graphically is a great way to visualize performance to control this expense. Reporting is always more impactful when district managers and store manager names are associated with store data for accountability. Ranking on highest-opportunity districts and stores will always get everyone’s attention while highlighting areas for immediate focus.

Follow-up daily with those who are accountable to you and press for improvement. And be sure to acknowledge successes and work with individuals needing help to meet expectations.

In summary

Whether part of a New Year’s resolution to improve efficiency or a year-round initiative, critically examining overtime is warranted in any exercise evaluating retail store operational efficiency and labor costs. Understanding the impacts of overtime, your company’s current policy regarding overtime and modifying it if needed to control costs are huge first steps. Gaining insight into what to measure is another critical step. In an upcoming post, we will take it a step further and see how you can use advanced scheduling concepts to further decrease overtime and improve use of labor. Stay tuned!