April, 2001

From the Editor

Facing Cutback

Opening the papers can be a frightening experience today as company after company announces rounds of layoffs, whether in the food industry – Supervalu has announced a cutback of 4,500 jobs – or somewhere else in the economy – Motorola, P & G, etc. These announcements are full of foreboding because they signify that the distress evident in the financial markets is now moving into the real economy.

It is more than cliché to say that when the going gets tough the tough get going, so one can count on the fact that many deli executives on both the retail and supplier side will be confronted with demands for economies.

It used to amaze me that large companies could announce layoffs of thousands of people without any indication that the company was going to restrict the scale of its operations. I didn’t understand how a company could possibly be so overstaffed as to cut so many people and still continue operating. It is easier to understand if a big retailer closes down a whole division, a distribution center and a large number of stores and thus cut payroll. But very often these cutbacks are no such thing. They just reduce head-count while continuing to do all the things they always did. At least that is the way it is played to the media.

More often, getting lean and mean requires that cuts be made in subtle ways. If one has ten stores and closes one, that is a dramatic cutback and evidence to everyone of how the company is retrenching. But if you keep all the stores open and lay off 10% of the employees, to the typical observer, it will be difficult to immediately see the impact of the cutbacks.

In business there are infinite tradeoffs in determining staffing, capital investment and maintenance levels. When an airline runs a call center, it can decide what is an acceptable standard: At peak hours, is it acceptable for our customers to wait three rings, ten rings, or five minutes? There is no one correct answer. In most cases, what massive layoffs imply is that the company is, intentionally or not, changing the standard that it finds acceptable. In other words, the airline that once kept 90% of callers on hold for two minutes or less will now keep 80% of callers on hold for three minutes or less.

In and of itself, this type of cutback is neither a good nor bad business decision. Since the initial level was not preordained but just selected, it is very possible that the new level is more appropriate than the old. The problem comes in when the company has not in fact made a decision to reduce some particular service, but just decides to cut and lets service standards fall where they may.

In other words a service deli might be able to function with fewer staff hours – it will probably mean long lines at certain hours. Now if a chain has carefully monitored its competitors, studied its customers’ behavior and found that an additional wait won’t hurt business – well, these types of determinations are what business is about.

But we do real damage to our business, in good times and bad, when instead of establishing what our standards are and staffing and equipping to meet them, we set financial goals and pare down to meet them.

When they learn about staff or budget cutbacks, many associates will point out the consequent service cutbacks will ruin the company. They are often dismissed as Cassandras, but they are not necessarily wrong. The fact is that there is a lot of ruin in a company and it can take years, even decades, before a great reputation is lost.

In the short term, staff cutbacks are tolerable because they benefit from management’s selection procedure – so if staff is reduced, presumably management terminates the least productive staff. This means that a staff that was pared by 10% is probably pared by only 5% in terms of getting the work done. This makes the cutback seem tolerable.

But this is a short-term phenomenon. Normal turnover will involve normal hiring and, as such, normal mistakes will be made. In time, the quality of the staff will be just what it once was.

But if the cutbacks create management expectations – the deli works fine with X hours of manpower – and those management expectations were based on an atypical staff, once that staff turns over, the result will be customers not being served properly.

So the solution has to be driven by operations, not by finance. Put another way, we are kidding ourselves if we just cut staff and assume the remaining employees will miraculously be able to service our customers just as well.

Instead we need to look at our systems and see if we can find ways to organize things differently – can we get more customers to buy pre-sliced meats and cheeses by merchandising or even pricing them differently? Can we let people write down orders on paper or via computer and go shopping while the order is prepared?

If we are going to change service levels, we need to look hard at the levels we are offering and see if we need to enhance or reduce them.

What we don’t want to do is just stage a massive cutback, then let the chips fall where they may. All too often, where they will fall is that reduced service levels, less well maintained stores, boring merchandising mixes, etc., will gradually eat into the reputation of our company. Then one day, after a decade of always making our return on our equity numbers, we’ll suddenly realize we have a dowdy, poor service image and competitors are eating our lunch. At that point, unfortunately, we are talking turnaround, and those are even more difficult to pull off than cutbacks.  DB