Operations Management, Higher Wages and Profitability

“Untrained or poorly trained employees are less productive and make more errors.”

-Zeynep Ton, Professor in the operations management at MIT’s Sloan School of Management.

Many organisations today use contract labour for doing routine and lower level jobs. This is done to lower the labour cost, as they are generally paid minimum statutory wages and benefits. Had same employees been on rolls of organisation i.e. full time employees, the cost would have been much higher due to unions and wage settlements.

But does having large contract labour and paying minimum wages lead to higher profitability?

Zeynep Ton is professor of operations management, who based on her research feels that while such strategy helps in short term; in long term it lowers profits of organisation.

ton

She takes example of retail industry, where retailers see labour as a cost driver rather than a sales driver and therefore focus on minimizing its costs.

The financial benefits of cutting employees are direct, immediate, and easy to measure, whereas the less-desirable effects are indirect, long term, and difficult to measure. For example, when Robert Nardelli became CEO of Home Depot, at the end of 2000, he cut staffing levels and increased the percentage of part-timers to reduce costs and boost profits. Those moves achieved both goals immediately, but they eventually caused Home Depot’s excellent customer service to suffer and customer satisfaction to plunge.

retail supply

On the other hand retails chains that keep their entire staff on company rolls, pay and train them well have done better than retailers like Wal Mart.

“Highly successful retail chains—such as Quik­Trip convenience stores, Mercadona and Trader Joe’s supermarkets, and Costco wholesale clubs—not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors.”

-Zeynep Ton

Employees of these retailers have higher pay, fuller training, better benefits, and more-convenient schedules than their counterparts at the competition.

customer retail

Well trained employees manage operations better which leads to lower supply chain costs and higher customer satisfaction, this compensates for higher wages, leading to higher profitability.

“As a result of this cross-training, employees have more-predictable schedules and are always busy (that is, more productive), and customers get faster service from more-knowledgeable employees.”

-Zeynep Ton

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