Retail businesses are associated with low pay and high employee turnover–especially in the case of those retailers who offer low prices–and the same is largely true of customer-service call centers. It has been generally assumed that low wages in these operations are a necessary concomitant of low prices for consumers, and that only businesses serving a premium-price customer base can afford to pay high wages.
Comes now Zeynep Ton, arguing that the low-wage strategy is not the only one available to retailers and other customer-service businesses that need to offer low prices, and that indeed often–usually–it is not the best strategy. She draws connections between the pay and hiring strategy of a business and the operational basis on which it is managed. To wit:
Low pay and high turnover implies minimal employee training, because you can’t afford extensive training for employees who are going to leave in a matter of months. Minimal training implies less operational flexibility, because employees will not be cross-trained for other functions. An environment of high turnover and not-well-trained employees implies that employee functions must be strictly proceduralized, often to the point of excessive rigidity. And the lack of flexibility driven by minimal training and experience makes it harder to build in appropriate staffing “slack” to handle peak demand situations. The lack of slack and flexibility leads to endless emergency rescheduling of personnel, reducing morale and further increasing turnover. (She provides some vivid examples of what this endless and short-notice rescheduling can mean to the personal lives of employees.)
On the opposite site, higher pay can contribute to lower turnover, making more-extensive training economically viable. Better-trained employees can more easily perform multiple functions, so that absences or staffing imbalances have a less-harmful effect. Better-trained and more highly-motivated employees don’t need micromanagement, either by human managers or by systems and procedures.
Ho, hum, you say, what’s new?…people, especially consultants and professors, have been writing for years about why employees should be treated well and how it pays off to do so. How is this book different from a million of others?
The Good Jobs Strategy is, in my view, something quite different from the typical “just treat ’em right” sort of soft, warm, and cuddly advice often found in books and LinkedIn posts. The author ties the feasibility of the high-pay / high-expectations strategy to effective operational management, with the right systems, procedures, and incentives to enable such operational excellence.
An interesting example the author mentions is that of Home Depot. She credits much of the chain’s early success to its high-quality associates–“knowledgeable and helpful and willing to do whatever it took to help you, even if that meant explaining to you that you didn’t actually need what you came to buy.” The associates tended to be former plumbers, electricians, etc–and they were employed full-time. HD grew very rapidly–“customers were driving two hours to go to its stores and, once they experienced the service and great prices, they kept coming back”
But, with the growth came problems. There was a lack of discipline in the stores, in how the stores communicated with headquarters, how the company selected its products, and how it communicated with suppliers. “In 2000, bills and invoices were still processed by hand, and headquarters communicated to 1134 stores via fax because there was no companywide email.” In 2008, two senior IT executives (newly hired from Walmart) concluded that Home Depot’s IT systems were about where Walmart’s had been in 1991. In summary, HD had become “a classic example of a service company that did not fully appreciate the role of operations in making customers and investors happy…Operations are all those factory-like activities that a business has to carry out in order to provide whatever it is that it sells. ..In a retail store, for example, operations involves things like having the right product in the right place, having a fast checkout, and having a clean store.” Zeynep Ton says that internal measurement systems often don’t focus on such matters–at one retailer she worked with, “Twenty percent of the (store manager’s) score had to do with the store’s customer interactions.” In this chain, “mystery shoppers” would score the store on things like how the employees greeted customers and made eye contact. But, she notes, “kindness or friendliness won’t make up for operational incompetence. ..It is hard for your dry cleaner to make you happy if you can’t wear your favorite suit to an important interview because they didn’t get it cleaned on time.”
When Robert Nardelli became HD’s CEO in 2000, the systems and procedures problems were rapidly addressed. Gross margins and net profit margins increased substantially.
BUT, “the culture of cost-cutting was soon felt at the local level, where store employees, who were once at the center of Home Depot’s success and at the top of Home Depot’s inverted pyramid, became a cost to be minimized.” The company started hiring part-timers, in the name of both staffing flexibility and cost…the knowledge level of the typical employee encountered by a customer fell noticeably. By 2005, HD was ranked lower in customer satisfaction than was K-mart. Same-store sales growth fell and even became negative. Nardelli left the company in 2007.
Zeynep Ton summarizes: Operational designs don’t execute themselves. They depend on having the right people, and having those people motivated to do the right things.
The book discusses the actual complexity that exists in many seemingly-simple businesses, and the fact that individual employee decisions do make a difference. “If you are a supermarket employee shelving a case of toothpaste and all but two of the tubes fit on the shelf, should you take the two extras back to storage or would it be better to squeeze them onto the the shelf, even if it doesn’t look so good? If a tomato looks just a little soft, should you take it to the back room now or wait until it looks worse? Maybe it will be just fine for a customer who wants to make tomato sauce…it is hard, if not impossible, to make such work so simple and simple and standardized that anyone can do it without exercising judgment. Things happen in real time at retail stores, and employees have to learn to react.”
(It is incredibly refreshing to see a B-school professor thinking and writing at this level of detail and specificity)
One interesting company discussed in the book is QuikTrip, a large chain of convenience stores combined with gas stations. The company is very selective in its hiring….the author compares getting hired there with the difficulty of getting into an Ivy League college. In the Atlanta area, 90% of applicants don’t even quality for an interview, and of those who do, only one out of five is selected. Turnover rate among QuikTrip employees is only 13%, far lower than the industry as a whole. The chain emphasizes speed and flexibility…”QuikTrip’s fast checkout is a site to behold. One thing that makes it so fast is that any employee can use any register at any time without making the customer wait. If you regularly shop at a supermarket, you know it’s no fun waiting for the cashier do a changeover. The other thing that makes QuikTrip so fast is that employees have been trained to ring up three customer per minute.” She says that the employees can even calculate change in their heads!
Other examples discussed include Costco, Trader Joe’s, In-N-Out Burger, and the Spanish supermarket chain Mercadona.
At Mercadona, there is a formal process improvement program: for example, an employee suggested that vegetables used in stew should be displayed near the stew meat, so that customer could find all the ingredients they need for stew without heading over to the produce section. Like all such proposals at Mercadona, the proposal was first tested in a single store, then in a region, then finally rolled out to the entire chain. (I have some questions about how this actually worked in practice: what about the customer who wants, say, carrots or celery for some purpose other than stew-making? I’d think you’d have to stock the vegetables in two areas, requiring double restocking activity…whatever the solution, apparently Mercadona found the change to be worth it.)
The author devotes much attention to inventory management and its pathologies. Wal-Mart and Target are both famous for the amounts of data they collect and the uses to which they put it…but:
A former Target cashier said she was under so much pressure to ring up sales as quickly as possible, so if a customer bought 10 bottles of Gatorade–in two flavors–she would scan the first one and then hit the quantity key for ten. The inventory system thought the store had sold 10 lime-flavored Gatorades and no cherry-flavored Gatorades, rather than the mix that had actually just been sold. And the cashier, who had received only 8 hours of training before starting work, probably wasn’t even aware of the problem she was creating via this shortcut.
The author cites a study of another company ($10 billion in sales) which found that the system had the right information for only 35% of the products…for the other 65%, the discrepancies between the system inventory balances and the actual quantities available averaged 5 units…a third of the target stocking levels. In one case, a certain item was continually out of stock, to the frustration of a regular customer. It turned out that the inventory system thought there were 42 of these on hand, whereas there were actually none. AND, since this particular store hadn’t sold any units in several weeks (because they didn’t have any to sell), the system automatically reduced the target stocking level for that item!
(Faust, in Goethe’s eponymous play, asserted that “One mind is ample for a thousand hands”…an approach that has definite limitations, even/especially when the mind is an electronic one.)
Poor inventory data can lead to strategic constraints as well as to operational inefficiencies: In the case of Borders Books, it was not feasible to integrate online shopping with delivery from the then-existing stores, because the “phantom stockout” level was so high–“Imagine what would happen if, say, 18 percent of time time, online customers who zipped over to a store because the book they wanted was supposed to be there wasn’t–or at least found that no one could find it.”
Zeynep Ton believes that retailers tend to get caught in a vicious downward cycle:
“At most retail chains, payroll budgets are determined as a percentage of sales. For each month or week, store managers are given a target for payroll as a percentage of sales. So when sales drop, store managers will do whatever they can to bring their labor budgets down in proportion. They will schedule fewer hours or shift the mix of employees toward more part-timers.” But if the reason for the drop in sales is that customers are responding to poor customer services, then cutting employees will likely make things worse…leading to still further drops in sales and consequent further drops in customer service levels. This is a malign positive feedback loop, aka a vicious circle.
In manufacturing, productivity improvements allowed broad-based increases in wages and standards of living, a famous example being Henry Ford’s five-dollar day. Indeed, some of these productivity improvements demanded higher wages…one reason for Ford’s pay increase was that workers found assembly-line work so unpleasant that they wouldn’t put up with it, otherwise. Can something of the same sort happen in the lower-paid realms of the American service sector?
Certainly, there are millions of people who can perform well at a higher level and in a more flexible environment than their jobs now provide–and certainly, there are a lot of mediocre-to-outright-terrible systems and procedures in American retail and service operations. And with an improving economy, higher wages and/or better work environments are going to be required to retain employees who do have alternatives, just as Henry Ford had to pay his workers more to keep turnover within manageable levels.
Not everyone can perform in the environments represented by the companies presented as positive examples in this book, of course. Some individuals have severe educational deficiencies…what % of American high-school graduates could do change-making in their heads, as is apparently expected of QuikTrip people?….and some have unfixable attitude problems, such as a strong dislike for making decisions and taking responsibility. But such people are hopefully a considerable minority.
Overall, a valuable and thought-provoking book. Highly recommended.