No, You Can’t Make Your Company “Employee-Proof”

No, You Can't Make Your Company “Employee-Proof”

Even with good systems, you still need good people.

By Zeynep Ton

No, You Can't Make Your Company Employee-Proof

 

Zeynep Ton is an adjunct associate professor at MIT Sloan School of Management. Adapted from The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits with permission of Amazon Publishing/New Harvest. Copyright © 2014 by Zeynep Ton. All rights reserved.

The experience of low-cost shopping has become a hassle. More and more, it seems that you can't find what you want, things aren't where an employee tells you they are, and even the employee trying to help you can't find what you're looking for, although he's sure it's in the store somewhere. If you make it to the checkout line with what you came there to buy, you might have a long wait and you might find out the price is different from what it says on the tag.

These things happen so frequently that we customers think bad service is the price we have to pay for the low price of the goods or services. But, as U.S. manufacturers have learned, it is not the “true” price—it is more like a tax on low prices that are achieved by keeping labor costs to a minimum. That is, it's a tax on trying to manage a complex operating environment with employees who are not sufficiently trained, not sufficiently motivated, or just too few in number. Like all taxes, it is a choice, not a necessity. And while a tax is sometimes a useful choice, this choice by retailers is not.

In any service company, customer satisfaction and financial performance depend on two factors: managing operations and managing customer interactions. In some service environments, managing operations is actually a lot more important than managing customer interactions. Many companies miss this point. So do customers. When a restaurant's kitchen operations are sloppy, it's the server who gets blamed for the long wait or the wrong dish or the one person who's still waiting while all the others are halfway through their meals.

One retailer I worked with had a system for scoring a store manager's performance. Twenty percent of the score had to do with the store's customer interactions. “Mystery shoppers”—undercover evaluators hired by retailers—would come into the store, acting as ordinary shoppers, and score it for how the employees greeted customers, made eye contact, and answered questions.

But those factors, important as they may seem, had no effect on the store's profits. What mattered for profits was operations—measures such as how well the shelves were organized and labeled, the percentage of items that were supposed to be on display but stayed in the back room, and the percentage of poorly selling or obsolete goods that were supposed to be returned to the distribution center but remained in the stores.

Those measures were given only about a 10 percent weight in a store manager's score. In short, this retailer wasn't paying enough attention to what actually mattered for its own profits.

It's not that customers do not like to be smiled at or treated nicely. But kindness or friendliness won't make up for operational incompetence. It is hard for a grocery store to make you happy if it repeatedly doesn't have what you came in for, or if the checkout line is often long and slow, or if you get home and find that the sell-by date on the eggs you just bought has already passed. It is hard for an airline to make you happy if it loses your bags. It is hard for your dry cleaner to make you happy if you can't wear your favorite suit to an important interview because it's still not ready for pickup.

In addition, if certain businesses—think of home-improvement warehouses—try to operate without operational discipline, they can become unsafe for employees and for customers. Consider some of the products that Home Depot carries: heavy objects such as tiles, roofing shingles, doors, lumber, and bags of cement. If there are no standards in how products will be received, shelved, or put into storage, accidents are likely. Indeed, by the 1990s, Home Depot was suffering a disturbing number of accidents, some of which resulted in employee deaths.

Building efficient operations isn't enough, though. Even the best-designed operating system does not guarantee good outcomes if that design is not carried out every day by competent, motivated employees.

Put another way, good service rests on a foundation of good operations. But good operations rest on a foundation of skilled and motivated employees.

The quality of employees is, of course, a matter of whom you hire, but even more so, it's a matter of how you invest in them. Looked at in reverse, if you decide to go cheap on labor, you're going to undermine service, not only directly but indirectly through operations. And the extent of that indirect degradation is often much greater and more damaging than many service companies realize.

A Tale of Two Auto Plants

Research on many different industries has consistently found that operational performance depends not just on operational design but on people. Stores or factories with pretty much the same system—the same procedures and rules—nevertheless perform very differently. At one retail chain I studied, all the stores had similar layouts and the same process design, used the same IT systems, and offered the same employee incentives. And yet the performance of the best store and the worst differed by a factor of forty-three. Stores that had higher employee turnover, less training, and more workload for employees performed worse.

When I taught operations management at Harvard Business School, I—like many others—held up Toyota as a best-practice example of a production system that delivered excellent quality. I always told my students how difficult it is to copy Toyota, but frequently a student who worked at some other auto manufacturer would object: “We have the exact same system at Acme Auto.” But there was a reason Acme didn't perform as well as Toyota.

The Toyota Production System is founded on standardization. As Steven Spear and Kent Bowen describe in a groundbreaking 1999 Harvard Business Review article, Toyota standardizes each task, communication, and process and even standardizes the process of process improvement. It uses a lot of tools to help workers on the assembly line do all this.

One of the tools for process improvement is the andon cord, a rope strung above the assembly line. Work is so standardized that workers know exactly what to expect each time they perform a task. If a worker sees any deviation from that expectation, he or she pulls the andon cord, whereupon music starts to play, alerting the team leader that there is a problem. Team leaders immediately come over to investigate the problem and try to solve it. They try to solve not just the immediate problem—whatever defect the worker spotted—but the problem that caused the problem: What caused that defect, and how did it get this far down the assembly line?

When you visit a Toyota factory, you see that workers and managers always adhere to the standards. The culture of discipline is immediately obvious. For me, it started with the little things the managers did as they showed our group of professors around. When we left the conference room, they erased the boards and put the chairs back where they belonged. The conference room looked as clean when we left as it had been when we walked in. When we toured the factory, the managers adhered to all the rules—staying within safety lines, wearing eye protection, and so on. As we strolled the factory floor, the andon music played so frequently that it almost felt like background music.

Acme Auto indeed had the same system, right down to the andon cord. In fact, when a different group of professors, including myself, met with Acme managers, they were holding a copy of the Toyota case study we taught in our classes and telling us they used the same system. But when we left the conference room, they didn't erase the board and put the chairs back. When we were walking around the factory, it was OK for them or for us to break the rules a little. We didn't stay inside the line designated for visitors.

And when I watched the workers, I saw that they, too, were breaking little rules. I watched one worker whose job included inspecting each car's left back-door frame and then putting the rubber trim between the frame and the window. Eventually, a car came down the line with a small dent right where he was supposed to put the rubber trim. But instead of pulling the andon cord, he hammered out the dent with a mallet, and off it went to the next station. That car was probably OK, but whatever problem had caused the dent was still in the system. We saw another worker encounter a problem with his welding equipment. He didn't pull the andon cord—he jumped up onto the equipment and did something to get it working again. It was impressive, even heroic, but clearly dangerous and only a short-term fix, not a real solution to the underlying problem.

It is no wonder, then, that this plant did not produce cars of Toyota's quality. Management had adopted the Toyota system on paper, but it had not invested enough—whether in salary or training or just attention to and insistence on discipline—to build a workforce that could execute the Toyota Production System minute by minute, day by day.

Great performance, whether in customer service or the quality of manufacturing, requires operational excellence. Operational excellence requires a great operational design and great people to carry it out. Neither can make up for the lack of the other.


How Much Do Employees Matter?

We've seen the importance of great people for operational excellence in the manufacturing sector before. Remember the U.S. manufacturing crisis in the 1970s and 1980s? Just as today's retail workers are now, factory workers then were often unmotivated and poorly trained. The result was a plague of inefficiencies and quality problems. Cornerstone American industries began losing out to foreign companies that took a different view of labor.

Researchers who studied manufacturing performance—from steel minimills to auto assembly plants—found that HR practices that improve employees' skills and motivation contribute to higher performance. They also showed that HR practices such as job rotation, performance-based compensation, and training work best when they are practiced together and when they are used in combination with specific manufacturing principles such as low inventory and repair buffers. That is, operational excellence requires both a good operational design and great people.

You may be thinking that manufacturing environments are highly complex operating environments that require great people. You may also think that a retailer like Home Depot is a special case: Employees not only have to put the right product on the right shelf, they also need to know about thousands of products—ranging from little screws to large air conditioners—and how to use them; they also need to be able to interact well with customers, many of whom come to the store expecting help with their projects, not just their purchases.

But does service—and its interactions with operations—matter as much in low-cost retail, where there is not much customer interaction? Does the nature of work in that environment really require much investment in people? Can't we standardize every task in such detail and make it so easy that it doesn't matter who performs it? Can it be made “employee-proof”?

Pulling all that off is not as simple as it seems.

Let's take a careful look at a familiar low-cost retail setting: a supermarket. A typical supermarket carries close to forty thousand products, runs hundreds of promotions a week, and serves about 2,500 customers a day. Each day, the store receives deliveries from manufacturers and distribution centers. These deliveries typically come on pallets, which usually hold sixty to eighty cases of an item, but sometimes a lot more. Store employees process the new shipments and open the pallets. Some of the cases unloaded from the pallets remain in the back room—the store's own storage area; employees take other cases to the selling floor—the part of the store where the customers shop.

But sometimes there isn't room on the selling floor for all the products in a particular case. Now what? Employees shelve the units that fit on the selling floor and take the extra units back to a storage area. Much of this happens at night when there aren't many customers or the store is closed. And this work is physically demanding. Some products such as beverages are heavy and not easy to move. Some, like eggs, are fragile and require extra attention.

During the day, as products on the selling floor are sold, employees are supposed to bring those extra units from the storage areas to the selling floor. Notice that the employee who placed the extra units in the storage areas is not the same employee who replenishes from the storage during the day. So if the night employee put something in the wrong place in the back room—possibly from carelessness, possibly from not knowing better, or possibly because the correct place was blocked off by other pallets—the replenishment process can be difficult. Most back rooms are small and do not have a designated space for every product, so it's not necessarily clear what the “right” place to put something is.

Of course, in a typical supermarket, many products can be damaged and the perishable products can expire. But these are not tracked by IT systems, so store employees are supposed to keep an eye out and bring the expired or damaged products to a disposal or return area.

As you can see, there is a lot of moving stuff around. And we haven't even mentioned promotions. For most products, it's the employees who create the promotional displays. Have you noticed how frequently the prices of things change? It is the store employees who change the prices on the shelves and on the products.

Amid all this activity, employees are required to make a lot of judgment calls. It may not be obvious to retail executives, but even in a highly centralized environment, store employees still have a lot of decisions to make. 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 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. If you notice that a shelf has ten cans of black beans and there is room for twenty more, should you bring twenty from storage right now or wait until the shelf has close to no cans left? If black beans and red kidney beans are supposed to be shelved right next to each other and there are not enough red kidney beans in the store but plenty of black beans, would it be okay to use the shelf space dedicated to red kidney beans for the black beans? Or should the space allocated to red kidney beans stay empty, which of course means that some black kidney beans will have to go to storage?

It is hard, if not impossible, to make such work so simple and so standardized that anyone can do it without exercising judgment. Things happen in real time at retail stores and employees have to learn how to react.

Meanwhile, customers are coming up to you with questions. Should you spend time answering them if doing so keeps you from restocking a popular product? Should you go looking for something a customer can't find if that keeps you from setting up this week's promotion? As one Walmart employee told me: “You can only do as much as you can. So . . . you're shelving stationery . . . and a customer comes and asks you a question. They say, 'Oh, where is Pantene shampoo?' . . . I answer their question to the best of my ability. Of course, it is true that it does create sort of an adversarial relationship between the employee and the customer, in that you can't help but feel, 'Oh, well, this person is asking me this frivolous question, but I'm being held accountable to meet this time frame and I have to get this work done.' So instead of properly taking the customer to where they could find the product. . . . I just point, 'It's over in that corner of the store. Take a right down that aisle.' That's not proper customer service, and it's not striving for excellence, as Walmart claims to want to do. But you can only do what you can.”

Every day, each store employee has to make decisions such as these. Is she motivated or unmotivated? Does she understand the consequences of her choices or not? Does she even have time to do the right thing? Does she see the possibility of any reward for doing a good job or not? Does she identify with the store and want to do right by it, or does she feel her employer is ripping her off and deserves to be ripped off in return? The answers to these questions determine whether customers find what they're looking for and buy it or give up and buy it somewhere else.

Complexity Is Winning

For over sixty years, retail stores have become bigger and more complex. In 1949, a typical supermarket offered around 3,750 different items. By 1971, that number had more than doubled to around eight thousand, and in 2012, it was close to forty thousand. Retail checkout operators must learn ever more new processes—how to handle loyalty cards, age restrictions, returns, coupons, and so on. One U.K. retailer found that its checkout operators had to know a lot more processes than bank clerks did, yet received much less than bank clerks' pay.

If I had to choose one phrase to describe how retailers tend to manage this complex operating environment, I would quote one of the employees I interviewed: “mismanaged chaos.”

Some retailers are simply operating without good systems or standard operating procedures for store processes. I have seen retail chains rely on their employees to use their common sense, to remember how things are done and when to do them. I have seen retail chains where access to storage areas was blocked and the employees had a hard time just getting in. I have seen retail chains where the storage areas were so disorganized and clogged with boxes that no one could find anything. I have seen retail chains where the planogram—a map of the store showing where products are supposed to be—doesn't even match the store's actual layout.

But even retailers with standard operating procedures, good systems, and good store design end up operating in “mismanaged chaos” because of their lack of investment in employees. Employees deviate from the procedures because they do not have the skills or the motivation to follow a particular procedure or because they don't have the time to follow it or because it conflicts with something else they are supposed to do.

While complexity has increased, retailers have been investing less and less in their employees. This is evident not only in retail workers' wages but in how their wages compare with those of an average worker. In 1948, an average U.S. retail worker earned 91 percent of what an average U.S. worker earned; by 2011, that figure had fallen to 65 percent. In 2011, while the average wage for all occupations in the United States was $21.74/hour and the median was $16.57, the average for the 4.3 million retail salespersons was only $12.08/hour; the median was $10.10. For the 3.3 million retail cashiers, the average was $9.73/hour; the median was $9.05.

The investment deficit goes beyond salary. Training is abysmal—most retailers provide only a few hours of orientation, usually consisting of watching videos, before new hires are thrown onto the selling floor.

Companies are investing less not only in the quality of labor—that is, how well workers are paid, trained, and motivated—but also in the quantity of workers. Surveys of store managers indicate that payroll budgets have not kept pace with rising workload at their stores. Increasingly, stores are trying to do more with fewer people. As one employee I interviewed recalled: “You [used to have] sales-floor associates that help[ed] do the freight. Now you have very few sales-floor associates, and department managers are not only responsible for more than one department, but they're responsible for all the department-manager work plus the freight. . . . They're doing the job of four to six people and no increase in their pay.”

When I teach executive education classes, executives and managers from a wide range of industries are keenly aware that complexity in their operating environment has been increasing while their labor investment is staying flat or even declining. You may have noticed it in your own business. But complexity outrunning investment in people remains an underappreciated problem in many settings, including retail. Even those who know it is happening often don't realize how much it is undermining their businesses.

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