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The Balanced Labor Model
September 03, 2009
By Bob Gardner
A consensus is growing among organizations across a variety of industries that, in these trying economic times, effective management of labor will be the most important factor for measuring success.
Labor ranks among the highest costs of doing business. According to Forrester Research, retailers spend between 10 and 15 percent of total sales on labor. Health-care sector labor costs can account for more than 50 percent of total operating costs.
The labor cost crunch is transforming industries. North American manufacturers have helplessly watched work migrate to countries with lower labor standards and wages. In the automobile and financial services sectors, years of unfettered wage and benefit increases have proven unsustainable. A 2008 study by the American Health Association found more than half of all hospitals surveyed had already made, or were considering, significant staff reductions, hiring freezes, and an overall reduction in administrative costs.
But is cutting jobs really the best approach? Best-of-breed organizations learned in prior recessions that staff reductions alone do not translate into operational efficiencies. In fact, layoffs can actually impair long-term competitive advantages. Managing labor through an economic crisis is about doing things smarter, not cutting indiscriminately.
Unfortunately, labor management is a poorly understood discipline. This is especially odd given the fact that many sectors have excelled at implementing technology to manage other aspects of business.
Successful organizations are demonstrating the critical importance of understanding the fluid relationship between supply and demand. For decades, manufacturers have used complex financial models and software to forecast fluctuations in foreign exchange rates and raw materials prices. Retailers invest millions of dollars to build and implement sophisticated supply chain management systems.
Why not take the same approach with labor?
The workforce is an asset—no different than raw materials. As such, managing a workforce requires an organization to understand the laws of supply and demand in order to maximize return on investment (ROI).
It is not uncommon to see organizations with tens or even hundreds of thousands of employees that cannot predict the fluctuating demand for labor and, as a result, have no idea how to manage supply. These critical functions can be achieved through implementing workforce management (WFM) solutions. Unfortunately, many organizations view WFM solutions as tactical, not strategic, imperatives—largely due to how organizations view their employees.
Few organizations manage their workforces like they manage other mission-critical assets because, quite frankly, employees can respond negatively to excessive controls and over-management. Inventory, on the other hand, cannot go on strike or employ work-to-rule campaigns.
Regardless of industry, there are proven WFM tools and best practices that can eliminate the mystery and guesswork that often afflicts labor-cost management.
The relationship between labor supply and demand
As is the case with any supply-demand equation, the price and quantity of labor are determined by the intersection of the demand and supply curves, with the vertical access referring to the total cost of labor for a given time period and the horizontal axis representing the total number of hours of work required to match the specified level of demand. When supply and demand are balanced, the intersection of the two curves represents a state of equilibrium.
From a practical WFM perspective, a lack of equilibrium occurs when demand changes unexpectedly without a corresponding change in supply.
For most organizations, changes in demand are rarely met with any profound changes in labor supply. In these cases there are simply no WFM tools in place to assist with this task. When labor supply exceeds labor demand, unnecessary labor costs are incurred. When supply falls short of demand, production levels, customer service, and sales can suffer.
In an ideal world, organizations would have the ability to manipulate supply at the same rate as changes in demand, therefore maintaining equilibrium. For most organizations, especially those in retail and health-care, where demand can change on a daily or hourly basis, the ability to respond to fluctuations is just not possible within their current WFM infrastructures.
The balanced labor model
How can an organization deal with changes in labor supply and demand to achieve a more consistent state of equilibrium? From a WFM perspective, above-average labor management performance is produced by an analysis of what drives labor demand and how to respond proactively from a supply perspective. This can be achieved by implementing the Balanced Labor Model (BLM).
At a macro level, the concept of a BLM seems relatively straightforward. However, the BLM is built on the capacity of an organization to:
• Identify all variable and fixed drivers of labor costs.
• Forecast fluctuations in labor drivers that cause demand changes.
• Ensure labor supply is elastic enough to meet those fluctuations.
In industries such as manufacturing, total labor demand may not fluctuate significantly in the short term, thus requiring a full-time, inelastic workforce. This means the supply of labor is firm on a daily, weekly, or hourly basis. However, in industries such as retail and health-care, short-term labor demand fluctuations can be quite dramatic. Retailers must account for fluctuations in customer traffic, and the impact of sales, special events, promotions, and even the weather. Labor demand within health-care organizations is driven by acuity. The same numbers of patients can produce dramatically different demands for nursing levels depending on the acuity of those patients.
While the variables that impact labor supply and demand vary from industry to industry, the BLM can be applied to any industry. BLM envisions the ideal WFM infrastructure, where demand for labor is in perfect balance with the supply across any measurement of time—monthly, weekly, daily, or even hourly.
The benefits of a balanced labor model
There are a myriad of additional benefits that can accrue from a properly implemented BLM:
Advantages:
• Improve levels of customer service
• Improve sales execution
• Enhance productivity
• Minimize overtime and premium pay
• Improve communications and field-head office alignment
• Improve employee engagement and job satisfaction
Benefits:
• Increased sales conversion rates (retail)
• Improved patient care (health-care)
• Increased sales per labor hour
• Reduced costs of sales
• Reduced sales cycle time
• Reduced labor cost per unit output (manufacturing)
• Increased sales per labor hour (retail)
• Increased patient throughput (health-care)
• Reduced communication and administrative costs
• Eliminated friction or conflict between head office and the field
• Improved customer experience
• Reduced voluntary turnover
• Reduced unplanned absenteeism
• Increased retention rates
Implementing the balanced labor model through enterprise workforce management
To successfully implement a Balanced Labor Model, the WFM infrastructure must be comprised of enterprise software and hardware that automates and optimizes:
• Time and attendance
• Labor forecasting and scheduling
• Leave/absence management
• Task (execution) management
• Employee/manager self-service
However, the model's not complete without effective WFM practices that govern the deployment, tracking, and compensation of employees so they align with the BLM concept.
There must be equal emphasis placed on both technology and operational best practices to achieve a BLM capable of delivering long-term, sustainable benefits. Additionally, organizations must pay attention to the distinct components necessary to understand labor demand and supply:
Predicting labor demand
The individual components required to forecast labor demand include:
1. Standardized organizational structure: Facility or location profiles must be completed to account for store format and size within the retail industry, and product and raw materials for manufacturing.
2. Detailed understanding of labor drivers: The factors affecting labor requirements are either customer-driven variable labor drivers that can include factors such as sales, orders, and patient acuity levels; or non-customer driven non-variable fixed labor drivers that can include production lines and patient beds.
3. Productivity measures and labor standards: General estimates of the time required to perform specific tasks are used to translate labor drivers into labor demand and to develop and support a BLM.
4. Enterprise WFM software: Translates labor-driven data into forecasts of labor demand that can then be used to generate schedules and ensure budgets are met.
Understanding labor supply
Identifying the available supply of labor, and matching it to demand across different time spans requires a technical and operational infrastructure:
1. Proper mix of full and part-time personnel: Achieving adequate elasticity in labor supply is one of the most critical components of achieving a BLM.
2. Centrally-managed inventory of skills: Matching employees with tasks based on skills ensures the right person is in place to get the job done.
3. Automated leave and absence management: Automated processes are critical for the effective management of paid and non-paid time. Failure to proactively manage time-off requests and tracking of absences can significantly increase the overall cost of labor.
4. Automated tracking of employee availability: In businesses where a large percentage of employees are part-timhttp://cms.vnuemedia.net/iw-cc/command/iw.group.formspub.save_valid_formers, this is especially important.
5. Standardization of roles and job descriptions: Large organizations with multiple locations and facilities must have standardized roles and job descriptions.
6. Enterprise time and attendance software: An automated and centralized time and attendance solution houses the data needed to understand the behavior of labor across the enterprise.
Building a balanced labor model is an evolutionary process
Organizations not currently supported by an enterprise WFM solution will find achieving a state of balance or equilibrium between labor supply and demand cannot be achieved with a single software implementation. The components needed to build the BLM are like blocks in a wall; each must be laid in its proper place to ensure stability and sustainability. The goal is to produce a system that generates sufficient benefit to become self-funding—and that is the beauty of the BLM. As a fully integrated, methodically constructed whole, the balanced labor model generates significantly more benefits than the sum of its parts.
Bob Gardner is managing director of Axsium Group.
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