Minimizing the Costs of a Minimum Wage Increase

The ongoing debate over raising minimum wages at state and federal levels has prompted business leaders across the U.S. to ask a lot of difficult questions: Do we need to increase the price of our product? Will I need to cut jobs? What do I need to change to accommodate a higher wage? The answers to these questions are only complicated by current inflationary pressures. In a retail environment, labor is the largest controllable cost. But when looking at the total costs associated with running a successful business, many retailers do not always treat labor as their largest asset. From the sales floor to the manufacturing line, employees have the biggest impact on growing top-line sales. Their day-to-day work directly impacts sales conversion and product availability—perhaps two of the most important retail KPIs. While concerns about product price and production costs are all valid, many other aspects of a company can be evaluated before making any drastic adjustments in those areas. By focusing first on labor modeling, you can realize improved efficiency in your workforce that helps lessen the impact of a higher minimum wage. The most effective route to greater efficiency will differ for each business. To get you started discovering which methods are most applicable to your company, we’ve mapped out three areas to keep in mind when deciding how to offset increased labor costs. For a more in-depth discussion about what’s best for your company, reach out to us for a consultation.

Balance Your Top-Down Financial Model with an Activity-Based Model

Most retailers manage budgets using a top-down model driven by the finance department. They will allocate a certain percentage of sales to cover labor costs. This strategy has multiple flaws. Sales and prices can be affected by more than just labor, and the dollar value is not necessarily indicative of the work required to sell the products or services.

More progressive retailers balance their top-down model with an activity-based model, that connects activities with costs and then measures success rates based on product consumption patterns. Activity-based models are often more reflective of the true operations of the business because budgets are predicated upon all the actual activities (service and non-service) required to operate the business with consideration to volume, product mix and specific store characteristics. Along with budgetary impacts, these activities also all have an impact on sales either directly or indirectly. It only makes sense to measure them. Using an activity-based model allows the retailer to develop standard times using engineered labor standards per activity, and then build a labor model from those activities.

One company that excels in this area is Costco. Though different from competitors like Wal-Mart and Target, Costco is actually outperforming its big box store counterparts because of its operational excellence, limited product selection and empowered employee teams. While many retailers drive profits by paying employees less, Costco is able to pay employees more by cutting costs in other areas. The company believes that well-compensated employees will be happier and more productive at work, and will encourage customers to keep coming back. It’s an example of the power of employee engagement that all retailers can learn from.

Focus on Improving Customer Experience, Not Cutting Labor

Reducing labor reduces sales, which reduces how much you can spend on labor, and perpetuates the retail death spiral. What retailers should be asking is: How do we increase sales to cover the additional costs?

One of the best ways to drive sales is to analyze barriers to great customer service and look for operational inefficiencies in need of attention. Effectively, you want to minimize non-service activities and develop service-focused activities. Measuring the time employees allocate to certain activities throughout the day enables operators to get a clear understanding of what the employees focus on and how they balance their time. This gives operators a surgical way to identify where process improvements can be made, and insights into ways to create great customer experiences.

Take a look at how a store is operating and determine if customers’ wants and needs match what the retailer is delivering.

Discover Process Improvements in Stores

Is there a more efficient way to unload the truck? Is inventory unorganized in the back room, making it difficult to find and restock or even leading to phantom out-of-stock items? Is a separate customer service counter more labor-efficient than one blended in with regular checkouts? These process questions and many others like them can be answered through proper evaluation of their effectiveness. When building labor models for our clients, we typically find dozens of processes that can be improved upon. Processes that, in their current state, are wasting extraordinary amounts of labor dollars. Focusing on cutting the inefficiencies out of the identified processes alone will typically more than offset a minimum wage increase. As higher minimum wages, along with economic conditions, increase labor costs the importance of continuous improvement in labor modeling becomes all the more evident. Companies need to be as efficient as possible with every labor dollar spent to help offset those costs, and still drive business profitability. It’s an ongoing process that—similar to what’s needed for success on the retail level—is most successful when the right people work together on implementation and analysis. If you’d like to discuss how to implement these and other operational improvements with our expert team, click here to sign up for a free consultation.  To learn more about our LaborPro™ engineered labor standards software, click here.

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