Labor expense is the largest controllable cost to any retail business. As such, managing labor costs effectively is paramount to getting the most out of your limited labor resources. Full-circle management also extends to the ability to produce effective retail reporting that provides critical visibility for proactive course correction and/or to commend those achieving their goals. Visibility is power, as you can’t measure or analyze what you don’t know.
While labor management and reporting are complex functions, it helps to break down some of the elements to understand how they work and where they fit within a retail organization’s operations. In this series, we’ll take a look at common labor management approaches, and in part 2, we will explore key approaches to KPI reporting to support goal achievement.
Let’s start by examining five typical approaches to measuring labor performance and goals: Wage Percent, Sales per Labor Hour (SPLH), Fixed and Variable Factors, Dynamic Standards-Based Earned Hours, and Labor Task-Based Earned Hours With Production Planning.
#1: Wage Percent (Sales ÷ Wage $ = Wage %), also known as Labor Percent
This is typically a more finance department-set metric than an operations department-set metric. Why do I call this a finance metric versus an operations metric? It’s because this metric is purely dollars-based, whereby the hours are driven by the wage rate versus real work content. Although it may serve the finance department well enough, the company operations department is left with hours as an afterthought based on the wage rate applied. Unless a second approach to managing the hours needed to perform the work is also factored in, stores can be left with the burden of trying to achieve the labor percent goal without first deriving the hours needed to both meet store operational needs and to properly serve customers. In this approach, work content isn’t necessarily considered, and payroll associated with overtime and premium rates will be very impactful even if they cannot be avoided.
#2: Sale per Hour (Sales ÷ Hours = SPH), also known as SPLH or Sales per Labor Hour
This is a very typical retail industry metric that is used by companies both big and small. It typically has no variability factored in for high sales weeks versus low sales weeks. Fixed hours are not protected in this metric, and all hours become variable based on sales. Stores that are trying to meet this goal consistently week after week, struggle on the low sales weeks and have an easier time making that goal on the high sales weeks. Much of this is related to the fixed hours.
The biggest concern is that customers are not being serviced properly in the low sales weeks, and employees are less productive on the high sales weeks. Additionally, the SPH approach does not work well with inflation, deflation or promotions that create volatility in the price per item. Likewise, changes in product mix that impact labor content are also masked. Many of these issues arise in holiday weeks. And organizations too often make the mistake of imposing goals across stores when the work content is very different store to store. So, while SPH is a common industry approach to deriving hours, it has considerable drawbacks versus other approaches to labor.
#3: Fixed and Variable Factors
This is a better choice for deriving hours. Variable hours go up or down based on the change in sales. Fixed hours always stay the same and would only change if fixed activities change.
One major difference between the SPH approach versus Fixed and Variable is because variable hours are earned differently based on the sales change for each individual week. The variable hours earned in each week allows the same Items per Hour and Customers per Hour to be consistent even though the sales are very different. This means that the processing time and customer service-level time are held to a constant standard. For these reasons, this approach is a better method than the SPH approach, which doesn’t allow for variability. Note that this process as well as the SPH still requires management of employee rates and overtime to deliver any labor percent goal that may be set.
#4: Dynamic Standards-Based Earned Hours
This is a best-practice approach. It requires either your own labor management team that is fully trained in a standards-based system and trained in creating and maintaining standards, or it requires support from a workforce management company with trained industrial engineers to do the required standards building.
A labor standard is the amount of time expected to complete a task by an average person at an average rate of speed. Standards quite often require specific store information or store characteristics applied to the standard. The number of steps or footage from one point to another is a common characteristic that would be applied. Other unique store information may be the type of equipment used in a specific process. Standards are applied to many information types, such as items—either at the UPC or category level—customers, transaction types and so on.
Hours planned and earned by department completely support work content and are driven by cases, items, customers and other volume drivers; not just sales.
#5: Labor Task-Based Earned Hours With Production Planning
Although I’ve listed Dynamic Standards-Based Earned Hours as a best practice, Labor Task-Based Earned Hours With Production Planning takes things to the next level of program sophistication. It combines standards-based earned hours with labor task-level work planning. This provides your employees with a clear list of work activities that you provide, so they know exactly what is expected, what the tasks are that have been assigned, and when they should be completed. Also, this process includes production planning along with dynamic week-in-progress replanning as sales and sales expectations change.
Imagine your employees coming to work knowing all of the work tasks ahead of them. And not only knowing the tasks that they must perform, but also—if they are in a production department—having a clear list of what products to make, how much to make, and when to make them. Full production planning would also include packaging, labeling, scaling and stocking. With all employees assigned their particular tasks, the process can efficiently run through the full production cycle.
Wrapping it up
As we’ve seen, there are several approaches that can be used to set retail labor goals and manage performance, each with their own implications, uses and levels of sophistication. The first step is to determine an approach to managing labor that will yield the best results for your organization. Once you’ve outlined your labor approach, accurate reporting on your metrics is essential. We’ll cover that in part 2 of this Setting Labor Expectations and Effective Retail Reporting series. Stay tuned!