Why Labor Cost Optimization Matters for Retailers

For years, the retail industry has been plagued with the increasingly high costs of labor. Labor cost optimization (LCO), a framework surrounding scheduling and timekeeping, is a sustainable solution that can elevate operational and human resource leadership out of their reactive cycles so they can focus on what they should be — business and talent. However, retailers need to have a thorough understanding of the framework of LCO to make it effective.

First, they must recognize that typically, payroll represents the largest operational expense for retail organizations. The rise of online shopping and consolidation in the industry bring together logistics and operational expense challenges. As consumers of the digital age become increasingly savvy, they bring with them heightened standards on service level and on price. With new consumer expectations, payroll expectations are impacted, too.

Retailers have responded with a variety of solutions, including kiosks, self-checkouts, industrial engineered processes, traffic counters, advanced scheduling, sophisticated algorithms for forecasting, mobility for scheduling flexibility and execution, store fulfillment towers, geo-fencing time clocks, you name it. With mixed results, however, these "fixes" are short term and only shift the problem to another person or area, which can undermine confidence in leadership as they don’t appear to have a grasp on true issues, and result in capital expense write-downs. More often than not, these responses are rooted in a siloed approach in response to the issues associated with effective payroll management.

To achieve a successful and sustainable response, the LCO framework must position a holistic approach to the optimization of labor and costs associated with it at the center of business harmonization and technology initiatives. Long-term scheduling and effective timekeeping workforce management solutions may require an enterprisewide focus on labor spend key performance indicators, cross-functional governance, and supporting technology and analytics — all of which can drive the flexibility necessary for sustainable solutions and align stakeholder groups to data-driven outcomes. When LCO framework is being practiced, we can have confidence that solutions minimize the risks associated with reactive labor management, resulting in increased productivity and the ability to proactively manage labor for cost containment.

3 Key Elements to Creating a Successful LCO Framework

1. Aligning Procedure, Policy and Process

The focus on outcomes, cross-functional governance and metrics serves to drive an enterprise or ecosystem view of workforce management and labor cost optimization where the benefits of enterprisewide process, procedure and policy harmonization take on concrete and measurable value. Process in the field already tends to be viewed as connected and harmonized, most apparently between HR and operations, logistics and visual and merchandising teams. Here, workflows are very much transactional and structured by daily store operations. A leading framework can take this connectivity and push it into leadership hierarchies of these stakeholder groups to drive accuracy and efficiency. For example, budgeting processes are directly informed by measurable and executable operational efficiencies when financial planning and reporting cycles come into better alignment with bottom-up season and selling debriefs. Capital expenditures on technology and IT development road maps can be prioritized based on process improvements with the highest impact. Compensation plans can be designed that meet HR’s competitive hiring and retention goals and still maintain neutrality targeted by financial commitments.

2. Stakeholders for Responsibility, the Realization of Benefits, and Accountability

Within LCO, workforce management governance takes the shape of a broad stakeholder group, directed by a central leader, typically HR, but not always. Decisions on labor spend and labor allocation have direct impact on outcomes for stakeholders across finance and accounting, merchandising, operations, IT, logistics, and HR. By organizing a coalition with a clear mandate, sufficient bandwidth and authority, an organization can expect to have a balanced and effective approach to solving labor spend issues. Each member must do what's best within their span of control for shareholders, for the customer, and for their peers.

3. Insights to Visualize Benchmarks and Thresholds

The governance group (often referred to as the workforce management office) is underpinned by technology in the form of advanced analytics and effective visualizations for KPIs for exception-based identification within established thresholds. Modern workforce management systems typically have a wealth of real-time or near real-time data available for extraction, visualization and analysis. By aligning on a clear set of measurable goals that are benchmarked appropriately and grounded in sound data science, a governance team can truly mark, add and quantify value on their progress. The vast landscape of data and the inherent complexity in time keeping, scheduling and managing operations too often pulls organizations away from the right metrics. A framework with a focus on outcomes and strong support for analytics helps ensure the best KPIs are driving top-down and bottom-up alignment on what success means to the bottom line P&L.

When combining these three key elements, this framework helps ensure that the broader, more apparent and higher profile means of addressing payroll overspend has targeted the impact of payroll leakage, an issue that typically flies under the radar. These are often hidden in process gaps and undetected at deeper levels within the data, which drive incidental overtime, cancelled or short meals, inefficient scheduling, and cause human error rates to be introduced when manual adjustments are required. This level of overspend can undermine the extensive measures implemented over years of increased competition in the market, significantly impact profitability, impair cash flow, and put the retailer at a disadvantage competitively in customer service and execution.

Nick Mina is the retail leader of Deloitte Consulting LLP's LaborWise, a workforce-focused analytics solution.