Wages, or employee salaries, typically form the largest operational cost (source) for retailers, a point mirrored by my experience of building and running a sizeable retail operation. However, should we frame employee salaries as a cost, or alternatively view them through the lens of human capital management and strategic human resource management?
If viewed as a cost, employee salaries will fall under the remit of finance and respective controls, which can quickly lead to cost stripping and destroy long term value. Alternatively, if considered as the biggest on-going investment that a business continually makes year after year, it opens up an interesting discourse on how to generate maximum return from it? The latter also ties in neatly with my previously blog on operational efficiency, which returns to a point made within an article that noted (source):
‘Irrespective of the sector, the underlying issues remain pretty much the same and revolve around human capital, its behaviour and the complex interactions that it has with information technology’.
Let’s break the above statement down into its component parts, namely human capital, behaviour (heuristics) and interactions with IT to see where it takes us.
What I find intriguing, particularly when reviewing the literature on human capital management and strategic human resource management, is that no account whatsoever is taken of Behavioural Economic factors (source), nor how they impact upon decision making. Particularly, when the latter is subject to an incredible number of them, for example bounded rationality, limited self-control, and social preferences, which deliver less rational and stable outputs than traditional normative theory suggests (source).
Pure logic dictates that if you decide to build a complex entity with any ambition of longevity a sound understanding of the foundations or blocks upon which it is built will not go amiss. The importance of the atomic core of any organisation, more specifically the human functionality upon which it is built, therefore immediately springs to the fore. However, and as noted above, research has shown this to be somewhat contrary to the model of rational man taught across numerous domains within world leading business schools. So, what are the potential implications of respective factors for human capital management and improving retail operations?
Let’s consider an example wherein a store assistant is under pressure from their superior to restock a supermarket gondola. This is a highly important task as it impacts immediately upon revenue; customers simply cannot buy items that are unavailable for purchase, i.e. not on the shelf. Whilst carrying out this task, a customer drops a carton of milk from a refrigeration unit directly opposite to the gondola that the store assistant is attending to, the carton splits and starts to leak milk onto the floor. This is a common event and falls under the remit of facilities management, a different department. The store assistant decides to quickly finish their task, which will only take a few minutes, before giving facilities a heads-up so that they can deal with the spillage. The shop assistant has done this before, nothing bad happened and facilities management were even quite thankful for being given the notification.
Now rate the response of the store assistant: Good, helpful, reasonable or bad?
This is where things start to get very messy. Heuristics are mental shortcuts hardwired into cognition that facilitate efficient decision making (source), as for the messy part they ignore information, some of which can be critical in arriving at a correct decision. Consider the impact of just one heuristic on the above example, confirmation bias, which is the tendency to process information by looking for, or interpreting, information that is consistent with one's existing beliefs (source).
This particular store assistant has done this before. Namely, completed their own tasks before reporting a spillage to another, and potentially an unrelated, department. Nothing bad happened, but does this mean it is a good or correct decision? Richard Feynman described this practice as ‘playing Russian roulette’, during the Presidential inquiry into the Challenger Disaster (source), describing that ‘the fact that the first shot got off safely is little comfort for the next’.
In short, confirmation bias facilitates decision making based upon previous experiences of operating in similar situations, which did not produce bad outcomes. However, as in the above example and the Challenger Disaster, probabilistically the odds of achieving a successful outcome diminish with every subsequent event. As noted during the inquiry into the latter, there’s a natural human tendency to rationalize shortcuts under pressure, especially when nothing bad happens. Furthermore, the lack of bad outcomes can reinforce the ‘rightness’ of trusting past success instead of objectively assessing risk (source). These were the key takeaways and recommendations published by NASA following research into the cost of silence, normalisation of deviance and groupthink. So, irrespective of the level of education, and whether a rocket scientist or store assistant, all humans are subject to these biases and the costly decisions that they can produce. We can now also see why research from the Health & Safety Executive showed that 71% of slip, trip and fall incidents are avoidable and result from human behavioural factors (source).
Let’s reflect upon the same example through providing an economic assessment of it. The average shopping basket value in the US is $41.29 (source), which may be missing 2 or 3 items as a result of poor on shelf stock availability at a gross margin of around 5%, if the store assistant immediately stopped what they were doing and attended to the spillage event. Compare and contrast this potential loss to the average cost of personal injury claims, which result from slip, trip and fall cases, namely $50,000 (source). When noting that the average profit per basket is c$2.06, you need an additional 24,219 baskets, or transactions, to cover the cost of a single slip, trip and fall claim, which in itself starts to impinge upon the frequency of reoccurrence (1 in every 100,000 to 300,000 transactions), producing somewhat of a never ending circle. It therefore appears that our store assistant made a bad decision.
These factors may be offset to a large degree by exploring new technology and innovative machine learning software solutions. For example, computers are good at things that human are not, in particular repetitive tasks, parallel processing, data manipulation and following strict rules, as noted within a recent whitepaper, which explored Loss Prevention Software. What the latter also illuminated was that quite interestingly humans excel in areas that technology struggles, for example critical thinking and strategy formulation.
It may also provide an opportunity for organisations to start developing a source of sustainable competitive advantage, by correctly blending human capital and IT to deliver an entity that is greater than the sum of its parts, which may prove to be overwhelming for its competition through achieving unrivalled levels of efficiency and proficiency within. Furthermore, these types of structures evolve over time and can become a core competence of the firm, as a result they cannot be easily imitated. It also initiates a process that by its very nature starts to develop asymmetric information from within, a source of effectuation, which skews markets, generates economic rents and creates corporate value.
Consider for a moment why organisations use humans for a wide range of operational functions, one key reason is their ability to ‘observe’ their operational environment, but they do not necessarily ‘see everything’ as a result of another powerful heuristics; bounded awareness (source). A factor, particularly when combined with confirmation bias, that can leave humans ‘blind’ to numerous risks and delivers flawed reporting.
There is a simple answer; take humans out of the reporting loop through releasing latent value of existing CCTV networks by using AI software to correctly guide or manage human capital in a prioritised manner, so that they can incorporate this data within areas that they excel – namely critical thinking and strategy formulation. This level of human capital management software is already available and capable of delivering a low cost, state-of-the-art solution for dealing with a wide range of operational issues, from on shelf stock availability to slip, trip and fall hazards.
Contact us for more information on how we may improve your bottom line through raising your overall operational efficiency and proficiency.