Labor Standards – what is the correct level of detail?

In retail the highest controllable expense is the labor spent to ensure the store shelves are stocked and customers are serviced. Labor management is critical to controlling that expense ensuring we have the right people at the right place and time.  Retailers use varying methods to help understand the labor needed to ensure they control this cost.

A lot of retailers today still use payroll percent or sales per labor hour to generate labor needs whereas others leverage very detailed engineered labor standards. We can help you determine what is right for your organization prior to you taking the full dive into the labor standards pool.

Payroll percent and sales per labor hour (SPLH) are no longer appropriate means of controlling the labor used in your stores. No two stores are created equal. There are too many variables that play into the amount of labor needed to handle business and offer exceptional customer service. The mix of product sold, and the cost of that product is a key detractor to using SPLH or Payroll %. Using an example from the grocery industry, let’s consider store A and store B that both do $5000 a week at the deli counter. If Store A sells mostly Bologna at $1.99 a pound and Store B sells more upscale meats like Roast Beef at $8.99 a pound, should one earn more labor than the other? SPLH would give them both the same hours.

• Store A sells $5000 a week at $1.99 a pound selling approximately 2500 pounds of meat that needs to be sliced, bagged, labeled and handed to the customer.
• Store B sells $5000 a week at $8.99 a pound selling approximately 560 pounds of meat that needs to be sliced, bagged, labeled and handed to the customer.

Both have the same sales – if they were both held to the same SPLH or Payroll % they would both earn the same number of hours to slice the meat.

If we looked at a Reasonable Expectancy or a Labor Standard of 1.5 minutes per pound to slice, package, label and hand to the customer they would earn accordingly:

• Store A with 2500 pounds would earn 62.5 hours
• Store B with 560 pounds would earn 14 hours

Although this is one example, in one department, in one industry; the same thought process can be applied across retail.   Differences in transactions, case and unit quantities and average item value can drive this divide across store locations.

In understanding that SPLH and Payroll % are not the proper means of earning labor hours in retail we then turn to Reasonable Expectancies or Labor Standards to drive the labor required. Over the past 10-15 years many retailers have gone from no labor standards to very detailed labor standards. The more detailed labor standards mean a very finite understanding of the labor needed to run a department and store. The standards also need to be regularly managed and adjusted as processes change. The detail allows the retailer the ability to truly understand the cost of doing business and allows them to perform a detailed activity-based costing of each task.

Concerns that arise from this level of detail include:

1. Time and effort to maintain the standards
2. Translation of labor standards to operations and stores being able to grasp the detail
3. Operations teams that do not buy in to the standards and add “productivity factors” to achieve their perception of the appropriate labor costs

tSCG helps organizations right-size their labor management model to appropriately capture the differences between departments and stores.  We help assign roles and responsibilities for labor management teams to ensure the program is sustainable.  We help the organization tie labor standards to store expectations and specific goals.  We help align the corporate labor support staff /industrial engineering teams with operations to ensure strategies are in sync.  We help store operations understand how to flex labor up or down based on sales exceeding or missing projections.  We assist the team with aligning labor projections to fiscal budgeting and ongoing P&L analysis.

In short, tSCG recommends that organizations move away from budgeting based on Payroll % and SPLH and move to labor model that aligns with the nuances of each location.  Not only does this more accurately reflect the needs of the business, it allows for a level playing field and accountability across the organization.