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Everlasting dilemma: labor a cost or people an asset

Ton, professor of the Practice, MIT Sloan School of Management and President, Good Jobs Institute explains that while cost minimization is very important, companies don't ultimately benefit when they view labor just as a cost.

Poor labor practices are often a result of attempts to minimize costs because of very low profit margins. Ton, professor of the Practice, MIT Sloan School of Management and President, Good Jobs Institute explains that while cost minimization is very important, companies don’t ultimately benefit when they view labor just as a cost.

My point of view

In the last two decades large corporations, institutions, government and healthcare organizations have shed their role as direct employers of the service people responsible for their products in favor of outsourcing work to (often small) companies, that compete fiercely with another. The result has been the fall of the middle class as a result of declining wages, eroding benefits, inadequate health and safety conditions and ever widening income equality. But there are some paradoxes. E.g. customer experience booms (probably as a result of technology) as a strategy, in operations and actually as perceived by customers.

The Good Jobs Practices

The companies that Ton looked all had several practices very similar to Toyota and other organizations that practice Lean, including:

  • Standardize and empower
    On the one hand, they standardized all the common processes that would benefit from efficiencies and consistencies, like cash register operation and merchandising. At the same time, they empowered their employees to continuously improve those standards, and to make decisions for their local customers, like product offerings.
  • Cross-train
    They trained employees to perform a wide-range of tasks. Not all employees are cross-trained to do every task, but are trained in enough areas to be able to react to customer demand changes.
  • Operate with slack
    Deliberately having more people on the selling floor than the expected workload ensures them that employees aren’t rushed to perform their tasks, which in turn results in fewer errors and gives employees time to help improve processes.
  • Offer less
    By understanding what the business is going to deliver to customers, and what they are not going to deliver to companies, these retailers offer fewer products, which not only helps keep prices low, but allows employees to be efficient and knowledgeable.
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From a 2017 podcast

“People don’t show up in the balance sheet [as an “asset”], they show up in the income statement in terms of cost. So that’s how they end up being managed. When the attitude is to see people as a cost, they under invest in their employees, both in terms of quality and quantity,” she explained. “It was frustrating to observe this as a researcher because it costs companies a lot of money, it gives customers bad service (and no one likes that), and it’s just downright brutal for employees. So, I saw a system that wasn’t working for anyone particularly, and the reaction was often that this is the only way to get the lowest prices. I thought, ‘That can’t be the only way.’ After that, I started looking for companies that, on the one hand, offered the lowest prices to their customers, but, on the other hand, excelled operationally to be able to deliver great service to their customers and good jobs to their employees.”

It wasn’t challenging to find retailers that were doing things differently, but there aren’t enough of them, Ton said. She found companies who were doing things differently (and better) through word of mouth, as well as research.

What was exciting to her was that it didn’t matter where the successful retailers were located, what industry they operated in, what products they sold, or who their target customers were. What was common among all of them was that they provided good jobs, charged low prices, and offered good customer service. These companies also all enjoyed higher labor productivity, higher sales per square foot, and lower inventory loss. Also common was strong financial performance, with per-store profits 89 percent higher than the top quartile in their industry, Ton said.

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Ton explained that when she examined how they achieved all of that, she found the answer to be operational excellence.


Retail Compared to Manufacturing

“If I were to make an analogy to auto manufacturing, especially to Toyota, it would be that most retailers run their operations like Henry Ford thought about running operations, which is using people as interchangeable parts and designing an operating system that does not require empowered, or even capable employees,” Ton said.


“And then Toyota came along and Toyota said, ‘If we design work differently, if we enroll our people in process improvement, have them identify problems when they happen, and solve those problems (we empower them to pull the ‘andon cord’), if we cross-train them so that they perform a variety of functions other than just one thing over and over, if we create a whole operating system, a human-centered system that really leverages capable, skilled, motivated employees, then we will do so much better.’ And they showed us that they do, do so much better in terms of quality, in terms of cost, in terms of lead time.”



The Good Jobs Strategy in Healthcare

Professor Ton and Mark Graban spoke a bit about how these principles are also helping healthcare providers. One of the cases she shares with her students is Shouldice Hospital, which only performs hernia repair.

Mark Graban: “add this should apply in healthcare, as well”

“They repeat it over and over, and that repetition, the standardization, the empowerment of people, that whole system works beautifully together,” Ton said. “Their patients are so satisfied they even have conferences — like to get preorders. In addition to highly satisfied patients, their costs are much lower, and their employees are very happy with what they do; they’re not rushed to do their tasks, like we see in other healthcare settings. They don’t suffer from understaffing, they have enough time to take care of their patients and deliver service, and of course their people are able to create good outcomes for their customers. They themselves are more engaged in their job, and they’re happier as a result.”



About professor Ton

Professor Ton is Professor of the Practice, MIT Sloan School of Management and President, Good Jobs Institute

Book: The Good Jobs Strategy

Almost one-fifth of American workers have bad jobs. They endure low wages, poor benefits, schedules that change with little—if any—notice, and few opportunities for advancement. The conventional wisdom is that..

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