Using Metrics to Measure Labor Productivity

Transcription

1 WHITE PAPER Using Metrics to Measure Labor Productivity How productivity metrics deliver daily, actionable insights into business goals Richard Givens, Solution Consultant Teri Hewitt, Workforce Management Strategic Advisor

2 How would we run our businesses without metrics? Metrics allow companies to set performance goals, track those goals, and analyze opportunities to improve performance to meet and exceed those goals. Whether your business sells goods, provides services, or is a leader in the hospitality industry, your primary objective is to maximize revenue while minimizing the costs of the resources (or expenses) used to generate that revenue. Measuring the components that drive profit becomes more important when viewed through this lens. By transforming labor and sales data into meaningful business intelligence, retail and hospitality businesses can make data-driven decisions that optimize workforce utilization, control labor costs, and drive continuous improvement. The right productivity metrics can be a powerful tool in normalizing the business for measurement as well as planning and driving the business for future growth. By transforming labor and sales data into meaningful business intelligence, retail and hospitality businesses can make data-driven decisions that optimize workforce utilization, control labor costs, and drive continuous improvement. WHY PRODUCTIVITY METRICS MEASURE UP While aggregate metrics such as total revenue, total labor costs, or net revenue are great indicators of the financial performance of a business, they don t always tell the whole story. This is where productivity metrics shine. They allow businesses to measure how effectively resources are being used to drive top-line metrics. This is particularly important when it comes to managing labor and the costs of labor. For most businesses, labor is the largest, most controllable expense, and understanding how to optimize labor costs to maximize revenue is critical. Metrics such as sales per labor hour, earned hours, payroll percentage, transactions per labor hour, and customers per labor hour are just a few of the productivity metrics retailers should look to for insight and actions into maximizing labor costs and improving workforce productivity. Productivity metrics allow businesses to plan their workforces to achieve business objectives. Whether you measure productivity in rooms or covers per labor hour or want to improve your customer experience by staffing your stores to ensure each shopper gets the appropriate level of service, the productivity metrics used to track this performance can be used to set standards for staffing to meet those objectives. EVALUATING LABOR PRODUCTIVITY Labor productivity metrics vary from industry to industry, but one that seems to carry across all is the cost of labor as a percentage of revenue. It s referred to by various names (payroll percent, selling costs, wage costs, etc.), but effectively, labor productivity is a measure of how well companies utilize their payroll expenses to generate revenue. Consider a simple example of weekly revenue at two locations: Location A generated $100,000 in revenue with a labor rate of 10% Location B generated $28,000 in revenue with a labor rate of 7% 2

3 Although location A contributed more top-line revenue to the business, location B was able to contribute three more percentage points to gross margin, making it more profitable. There may be other factors contributing to this difference in labor rate, but when a location is trending like this, it may be worth investigating further to see whether any operational efficiencies can be identified and leveraged companywide. This example highlights a key benefit of productivity metrics: They allow businesses to make comparative assessments across locations of different volumes. LEVERAGING SPLH FOR IMPROVED PRODUCTIVITY Historically, the quick and dirty method of assessing labor productivity in retail and hospitality uses the sales (revenue) per labor hour (SPH or SPLH) metric. This metric is commonly used to determine how effectively a store utilizes labor hours to generate sales. For example: Store A generates $50k in weekly sales Store B generates $30k in weekly sales However, these results don t necessarily indicate that Store A is more productive in generating sales than Store B. If Store A operates at an SPLH of $250 and Store B operates at an SPLH of $300, Store B may offer some operational insights to help improve productivity at Store A, by helping it squeeze more sales out of every labor hour paid for. If Store A operated with the same productivity as Store B, it would generate an additional $10,000 per week in revenue using the same amount of labor! MEASURING EXTRA HOURS EARNED Earned hours is a metric many industries use to determine whether a location has earned extra hours, based upon the performance from earlier in the week. Simply put, if your revenue was 10% higher than you planned for, then you have earned 10% more in labor hours to support the business. The converse is also true, since if the location had revenue that was 10% lower than planned, you have 10% less to spend based upon that performance. Earning hours on a 1:1 ratio is arguably a way to overspend your labor budget unnecessarily, or to cut your labor so drastically your teams don t have the opportunity to create more revenue. For example: You planned 100 covers for the day and your planned labor (per your labor standards) was 25 hours At the end of the day, your actual covers were 150, but you still spent 25 hours 3

4 This means your teams were much more productive with the hours they had. Certainly, those 125 covers could have been better served if you had added more labor but only if you had added labor at the time those covers were in the restaurant. Adding more hours after the day passed is simply spending more labor. Now, consider the opposite scenario: Your planned revenue for the day was $10,000; planned labor was 20 hours Unfortunately, sales for the day were low and you only made $5,000 At the end of the day, you should have only spent 10 labor hours to support the $5,000 in sales, but that s not what happened. And it wouldn t make sense to take 10 hours away from the rest of the week that would be penalizing future days for something that should have been managed the day it occurred. Additionally, when performing higher or lower to your plan, should your earned hours be calculated at a full 1:1 rate? Meaning, if you are 10% above plan (regardless of whether that plan is for revenue, covers, rooms, transactions, etc.), should you be spending 10% above your planned labor? A smart use of metrics would be to answer no and instead, direct your efforts toward increasing productivity with that increased revenue. It may be that a 5% spend above labor is appropriate, or maybe 7%; the exact number should be determined by your company. Simply put, the earned hours metric is not linear with revenue. After all, if you were 10% down compared to plan, is spending 10% less the right response? We would argue that this is an instance where you could afford to lose some productivity by keeping people staffed so you can try to drive more covers or revenue. MEASURING PRODUCTIVITY AGAINST AVERAGE HOURLY WAGE When staffing labor, it s important to understand the relationship between your productivity metrics and your average hourly wage. Consider the payroll percentage universal metric. We know it as the cost of labor as a percentage of revenue. What often gets overlooked is that payroll percentage is also the ratio of labor costs per hour to revenue per hour. For example, if a business sets a goal that payroll costs should be no more than 10% of revenue and the average hourly wage is $15 per hour, then the location must earn revenue at a rate of $150 per hour (SPLH) to maintain payroll objectives. If the average hourly rate increases by $1, then you must increase productivity by $10 per hour to sustain the 10% payroll cost objective. The following examples show the relationship between hourly labor costs and productivity metrics and demonstrate how they can be planned, measured, and monitored to achieve financial objectives. 4

5 Figure 1. Productivity Impacts on Labor Cost Percentage Headcount (Labor Hours) Labor$/Hour Sales per Labor Hour (SPLH) Labor % 9:00 a.m. 8 $15.00 $ % 10:00 a.m. 8 $15.00 $ % 11:00 a.m. 8 $15.00 $ % 12:00 noon 8 $15.00 $ % 1:00 p.m. 8 $15.00 $ % 2:00 p.m. 8 $15.00 $ % 3:00 p.m. 8 $15.00 $ % 4:00 p.m. 8 $15.00 $ % 5:00 p.m. 8 $15.00 $ % 6:00 p.m. 8 $15.00 $ % 7:00 p.m. 8 $15.00 $ % 8:00 p.m. 8 $15.00 $ % 9:00 p.m. 8 $15.00 $ % TOTALS 104 $15.00 $ % Total Revenue $11,370 In Figure 1, a fixed hourly cost of $15 per hour is defined. Over the span of a 12-hour day, 104 labor hours are used and total revenue of $11,370 is generated. Notice that as the SPLH increases or decreases, so too does the labor percentage, despite the fixed hourly labor costs. Figure 2. Average Pay Rate Impact on Labor Cost Percentage Now, compare that to an example that uses fixed SPLH with varying hourly costs: Headcount (Labor-Hours) Labor$/Hour Sales per Labor Hour (SPLH) Labor % 9:00 a.m. 8 $15.00 $ % 10:00 a.m. 8 $15.00 $ % 11:00 a.m. 8 $18.75 $ % 12:00 noon 8 $18.75 $ % 1:00 p.m. 8 $31.25 $ % 2:00 p.m. 8 $31.25 $ % 3:00 p.m. 8 $31.25 $ % 4:00 p.m. 8 $31.25 $ % 5:00 p.m. 8 $31.25 $ % 6:00 p.m. 8 $25.00 $ % 7:00 p.m. 8 $25.00 $ % 8:00 p.m. 8 $25.00 $ % 9:00 p.m. 8 $25.00 $ % TOTALS 104 $24.90 $ % Total Revenue $11,370 5

6 In Figure 2, the SPLH is fixed throughout the day at $109/hour. The staffing level and total revenue generated for the day are the same as in Figure 1. However, as the hourly labor costs for each hour fluctuate, so too does the labor percentage increasing as labor costs rise and decreasing as they fall. Comparing the 2 p.m. and 3 p.m. hours of both scenarios, in Figure 2, the labor costs are much higher during these hours, driven by both a higher hourly labor cost and a lower SPLH. In order to match the 10% labor costs achieved in Figure 1 during the same timeframe, the labor costs per hour would need to be cut to $10.93, or revenue per hour would need to increase by over $200! To justify those hourly costs means the most expensive workers must maximize their revenue productivity in order for the business to remain profitable. MAXIMIZING CONVERSION OPPORTUNITIES For retailers seeking to create a conversion plan, analyzing the planned or forecasted transactions per labor hour (TPLH) and customer per labor hour (sometimes referred to as C-to-A ratio) metrics offers some great insights. While TPLH measures how productively labor hours are being used to generate sales transactions, the C-to-A ratio is more an indicator of staffing levels and should be used as a guide to understand how a retailer is staffed versus customer traffic. This ratio usually varies from retailer to retailer, depending on which space they operate in (specialty, big box, etc.) and even from company to company. The C-to-A ratio is a good indicator of the type of sales experience a retailer can expect for their customer. The C-to-A ratio is a good indicator of the type of sales experience a retailer can expect for their customer. A 5-to-1 ratio indicates a retailer who might invest payroll to provide a more personalized, one-on-one customer shopping experience, whereas a 15-to-1 ratio might indicate a retailer with more of a self-service retail model. Conversion planning merges these two planned metrics to establish productivity goals. And combining this productivity information with other traditional retail KPIs provides increased insight and guidance when setting goals. Let s assume a retailer has established a C-to-A ratio of 10 as a company standard and would like to have a conversion rate of 27% to support the company s sales goals for the year. Achieving this goal would require the company to produce roughly 3 (2.7) transactions for every hour worked. Figure 3 illustrates that as the TPLH increases versus a fixed C-to-A ratio, so does the conversion rate. 6

7 Figure 3. Transactions per Labor Hour vs. Conversion Percentage (Fixed C-to-A = 10.0) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Conversely, assume the retailer instead decides to establish, based on history, a TPLH goal of with the same conversion goal of 27%. To achieve this conversion goal, the retailer should plan to reduce its C-to-A ratio from 10 to approximately 8.8, essentially investing more payroll hours to help support the company s objectives. Of course, investing the hours is only part of the solution. Understanding where to invest those hours will be critical to achieving the company s objectives. Figure 4 illustrates how with fixed TPLH, as a company s planned C-to-A ratio decreases, the conversion rate increases. Figure 4. Customer to Associates Ratio vs. Conversion Percentage (Fixed TPLH = 2.375) 25% 20% 15% 10% 5% 0% A variance analysis of these two metrics can help retailers identify whether conversion issues are related to employee productivity, a lack of payroll investment, or a combination of the two. CONCLUSION It s worth bearing in mind that the examples discussed in this white paper are fairly small, simple examples. In the real world, several additional factors will be at play when monitoring and analyzing the performance of the business, but the benefits of using productivity metrics to set, measure, and analyze goals is evident. 7

8 Using productivity metrics in conjunction with standard KPIs and other traditional financial health indicators delivers many benefits to retail and hospitality businesses. Selecting the productivity metrics that are appropriate to your business requires due diligence. Make sure that your productivity goals make sense for the realities of your business. Look at how the numbers compare to historical goals, whether the goals support your company objectives, and how you ll communicate goals and help the field achieve them. If you d like to learn more about implementing a dynamic labor model in a competitive retail environment, please read Today s Challenges with Planning Retail Labor. ABOUT KRONOS Kronos is a leading provider of workforce management and human capital management cloud solutions. Kronos Services is committed to providing smart value fast with a wide range of strategic service offerings all delivered with the industry expertise and domain knowledge of a technology leader. We re dedicated to helping customers achieve a rapid time to value from their workforce solution investment while delivering the experience they expect. Learn more at kronos.com/services. Kronos: Workforce Innovation That Works. Richard Givens ABOUT THE AUTHORS Richard Givens joined the Kronos team as a consultant with more than seven years of retail operations experience optimizing processes, procedures, and labor models to support the needs of the business. He has a Bachelor of Science degree in Industrial Engineering from the University of Pittsburgh. Teri Hewitt, retail strategic advisor, has been in the retail industry for almost 25 years. Teri worked in stores and supported labor scheduling for a Fortune 100 retailer and has consulted on workforce management projects in the U.S. and abroad for the past seven years. She holds a B.A. in Psychology from the University of Minnesota. Teri Hewitt kronos.com 2018 Kronos Incorporated. Kronos and the Kronos logo are registered trademarks and Workforce Innovation That Works is a trademark of Kronos Incorporated or a related company. Kronos Workforce Ready and Kronos Payroll Services are provided by and contracted with Kronos SaaShr, Inc., a wholly owned subsidiary of Kronos Incorporated. For a full list of Kronos trademarks, please visit the trademarks page at All other trademarks, if any, are property of their respective owners. All specifications are subject to change. All rights reserved. SV0287-USv1