Operating with slack creates the opportunity for continuous improvement

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Here's a sneak peek at what's inside today's edition:

🔥 Listening to Employees: Learn from Zara's epic success story and discover why tapping into your team's potential can lead to unstoppable growth.

🤝 Trust-Building in the Workplace: Uncover the secret sauce behind fostering employee involvement and creating a win-win situation for everyone involved.

⏰ The Art of Operating with Slack: Find out how striking the right balance in workload can boost customer satisfaction, employee happiness, and overall efficiency.

🎯 Hiring the A-Team: See how thoughtful hiring practices can elevate your business and pave the way for long-term success.

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Next, week are going to try a twist on the newsletter. Instead of shipping daily we will send out a weekly letter.

Understaffing: A Universal Problem?

The prevalence of understaffing in retail stores is not a random occurrence. There are specific reasons behind this persistent issue. For one, many companies lack an accurate idea of the workload distribution in their stores, often using sales as a proxy for workload. This approach can be misleading since the selling price of a product doesn't necessarily correlate with the amount of labor required to manage it.

Moreover, determining overstaffing and understaffing costs is not a straightforward task. Understaffing costs, such as unhappy customers, messy shelves, and wasted inventory, are difficult to quantify and often have long-term and indirect consequences. On the other hand, overstaffing costs are immediate, direct, and easier to quantify, usually amounting to an employee's hourly wage.

Our human nature tends to emphasize short-term consequences over long-term effects. This tendency leads retail managers to focus more on the costs of labor rather than the benefits of having more labor, often resulting in understaffing. This mindset is reinforced when store managers are constantly measured and pressured to reduce labor costs, even when doing so doesn't maximize profits.

This phenomenon, dubbed by Marshall Fisher as "business-school thinking gone wrong," prioritizes measurable costs over the harder-to-measure impacts that staff have on revenue. Consequently, understaffing becomes a form of cost-cutting, leading to a plethora of issues and dissatisfied customers.

And the problem doesn't stop with retail. Executives from various industries, including manufacturing, admit to suffering from understaffing. It affects not only hourly workers but also salaried employees who often find themselves with too little time to complete their tasks effectively. This widespread issue highlights the need for a more balanced approach to staffing that considers both short-term costs and long-term benefits.

Why Model Retailers Prefer Too Many Employees to Too Few

You might be wondering why companies like QuikTrip are cool with having extra employees on hand. I mean, wouldn't that just jack up their costs? But these companies have a different perspective: they believe that understaffing costs are higher than overstaffing costs. They're able to make better workload forecasts because they offer less, empower their employees, and have a standardized yet flexible approach.

Forecasting Workload

Take Mercadona, for example. They're really good at understanding how much work needs to be done in their stores. They look at tasks that are operational and those that involve customer interaction. Because they cross-train their employees, they don't need to forecast workload in tiny increments. This makes their forecasts more accurate.

Mercadona also has less variability in customer demand and supply. Offering less variety and using their own distribution network helps them predict their workload pretty well. They're also great at figuring out how many hours are needed for specific tasks at each store, taking into account the unique characteristics of the location.

Determining Staffing Levels

The managers at Mercadona always plan for a bit more than the expected workload. They'd rather have too many employees than too few, because they believe that understaffing costs are higher. Plus, their overstaffing costs are much lower than others, because their cross-trained employees can always find something useful to do, like interacting with customers or working on inventory tasks.

Time + Empowerment = Opportunity for Continuous Improvement

The opportunity cost of not having some slack in the system is huge. Employees who have extra time and are empowered can use that time to identify problems, come up with solutions, and communicate them to the company. This culture of continuous improvement can lead to big savings and operational excellence.

Take Arrow Electronics, for example. They achieve high inventory accuracy by involving their warehouse operators in finding and solving problems. This hands-on approach not only boosts employee morale but also ensures that problems are addressed quickly and efficiently.

So, in a nutshell, model retailers prefer having too many employees to too few because they know that the cost of understaffing is higher than the cost of overstaffing. Plus, having some slack in the system allows employees to be more involved in continuous improvement, which ultimately benefits the company.

Listening to Employees: The Zara Example

Operational excellence in companies like Arrow and Costco is heavily reliant on involving employees in continuous improvement. However, implementing this practice is not always easy, especially in large chains with numerous locations. Ensuring that there is time for improvement and empowering employees are essential, but even these steps may not be enough. It is crucial for companies to establish processes for employees to communicate their findings and for the company to institutionalize improvements.

Zara, a leading fast-fashion retailer, is a prime example of a company that understands the importance of listening to employees. Its business model is centered around quickly understanding customer preferences and rapidly delivering the desired products. To achieve this, Zara encourages frequent communication among its stores, headquarters, and field employees.

Zara's employees are trained to observe customer behavior and engage in conversations to understand their needs better. This valuable information is then communicated to section managers, who relay it to headquarters-based product managers responsible for multiple stores within a region. If similar requests are made across various stores, product managers communicate these changes to the designers. Consequently, Zara can rapidly design, produce, and deliver new products to its stores, sometimes in as little as 48 hours.

In addition to listening to employees for product recommendations, Zara also pays attention to their suggestions for displaying merchandise and improving operational processes. The company invests in field employees, such as regional directors and merchandisers, who work closely with multiple stores to gather ideas, implement them, and monitor conformance.

While Zara's fast-paced business model may not allow for extensive testing of new ideas, other retailers with more stable product selections can adopt a more scientific approach. Companies like Mercadona and Costco have established mechanisms to test and communicate new ideas from store employees to headquarters.

Trust is a critical component of employee involvement in any organization. Employees need to trust that their suggestions will not lead to job losses for themselves or their peers. Model retailers like QuikTrip and Toyota have made it clear that they will not eliminate employees as their processes become more efficient, thereby fostering a culture of trust and enthusiasm for continuous improvement.

Operating with slack offers benefits to employees, customers, and investors alike. It allows employees to take pride in their work, enjoy a better work-life balance, and feel more secure in their jobs. This, in turn, leads to better customer service and improved operational efficiency, ultimately benefiting investors. Furthermore, having a more relaxed hiring process enables companies to find better-suited employees, which positively impacts all stakeholders.

In conclusion, the story of Zara demonstrates the power of listening to employees as a crucial component of a company's success. Empowering employees, fostering a culture of trust, and providing time for improvement are all essential factors in driving continuous improvement, better serving customers, and ultimately benefiting all stakeholders involved.