Working with a retailer, the management team started to panic at the lower than expected sales. In this holiday season, sales are higher than earlier in the year. However, they're slightly less than last year--probably due to the increased competition of internet retailers.
Okay, panic may be a strong term but they did seem to come to an illogical conclusion. They decided to cut back on labor hours in each of their stores. This is a typical response in many organizations when sales go down: cut labor.
Here's why it's illogical, at least for this retailer. What sets them apart from the internet sellers? The associates who can help customers cannot be duplicated on the web. Oh, certainly, the buying decision process can be mapped out. Online retailers have duplicated the "you might also be interested in..." patois of live salespersons. They can also duplicate alternate options if the targeted item is not available. They can provide reviews and other information to provide some knowledge about the pending purchase. They can duplicate browsing through the aisles too. What they can't duplicate is the shopping experience of interacting with other customers and the friendly dialogue with a sales associate. Internet shopping is comfortable--with my choice of music, my cup of coffee and my comfortable clothes--less crowded, quicker, more fuel efficient and with fewer interruptions (maybe). However, there's no joy of being treated as a person who is important and valued when I shop online. As long as I have a credit card, I'm the same as anyone else who spends the same amount as me. This retailer's associates have a chance to turn my grump into a grin. There's opportunity to get to know me and what's important to me, to laugh with me, cry with me, to shrink the isolation gap in this world despite the exponentially expansion of the social network by providing a guiding touch on the shoulder as the associate steers me toward the correct aisle.
Besides the damage reduced associates' availability causes to the customer experience, it's not even the source of the greatest costs. Labor may account for 5-15% of sales. Cost of the items probably average around 50%. Overhead is probably 30%. Inventory carrying costs are part of this overhead. Those carrying costs have been estimated at 25-55% of the value of the inventory. Some of the expenses here are shrinkage (loss) due to a variety of factors: damage, obsolescence, theft, excess inventory being returned to vendors at discounted value, in-store discounts (clearance) to get items to move, promotional sales for the same reason and matching other competitors' pricing to keep it moving. The costs also include insurance, taxes, loan interest, infrastructure to support excess inventory and other such costs. It also includes labor to count the inventory. It also includes the opportunity loss when cash is tied up in inventory that's not moving and generating profits; the money could be better invested in other ways.
Let's say this retailer's cost of carrying inventory is on the low end, at 25%. Let's say they have typical inventory turns of 6 (i.e. an inventory level equal to two months' revenue). That means it costs them half of their monthly revenue to carry the inventory--50% of revenue. These costs don't hit every day, week or month but they do show up to decrease the bottom line throughout the year. And 50% is greater than 5-15%, right? Increasing inventory turns to 12 reduces the costs to 25%. [Editior's note: if we annualize the carrying costs, then it's more like 25% of revenue initially on 6 turns. Still higher than the cost of labor.]
Therefore, it seems logical that, instead of cutting labor hours in the stores, this retailer should be investing in efforts to make the customers' experiences unique through interactions with the associates. If you want, think Pike's Fish Market in Seattle, famous for inspiring the workplace guide book called Fish! by Stephen Lundin. They should be investing in smart ways to reduce inventory carrying costs, like reducing inventory levels.
Cutting labor seems like the wrong thing to do. It could decrease sales even further, surrendering to the online retailers. And if the decision-making trend continues, more labor is cut. Less money in the pocket, less sales for others, more labor cuts, less sales, more labor cuts, less sales...until we have pushed our way into another recession, and all we have left is inventory.
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