How Inflation Can Fool Your Labor Model

by | Feb 9, 2022

2022 has only just begun but already it feels like being on a rollercoaster. The labor shortage continues to be a thorn in the side of many employers, and already we’re faced with another concern: rampant inflation. For most retailers, this means rising prices for nearly everything you sell.

Inflation is complicated. The Consumer Price Index is a good measure used by many experts. That said, boiling the impacts of inflation down to one single number doesn’t give you the full picture. And as you’ll soon understand, inflation can derail your approach to workforce management and labor planning.

How Inflation Affects Sales

There are many ways to determine your labor budget. Two of the most common methods are to use a percentage of sales, or to staff based on sales per labor hour. Determining labor as a percentage of sales is exactly what it sounds like. You identify the expected sales figure (in dollars, pounds, or euros) per hour for a store and use a percentage or divisor of that to create your labor budget.

These approaches to budgeting labor create a usable baseline for many organizations, but high inflation can throw them into disarray.

The first thing you’ll notice happening during inflation is an increase in your sales. Sounds great, right?  But here’s the thing—if you determine your labor budget as a percentage of sales, inflation can trick your WFM system into thinking you need a lot more labor than you do.

Remember, it’s not that you’re selling more product, it’s that your products are selling for more. For example, the retail price of 200 articles of clothing could have totaled $10,000 last year, while those same goods could sell for $12,000 today.

Does that 20% increase indicate that you’re selling more goods, meaning you need more labor for customer service, inventory management, and checkout? Absolutely not. It took you exactly the same amount of labor to sell that $12,000 worth of product this year as it would have to sell $10,000 worth of product last year.

If you use a sales-driven model to set labor budgets, the chances are your WFM system isn’t aware of that difference. So you’re likely scheduling more labor than you need.

Inflation and your labor model

What Can You Do to Counter the Effects of Inflation?

That’s the inflation problem. I imagine you’re thinking “but what do I do about it?” There are some great things you can get started on right away. First, you’ll need to identify what the inflation rate is in your specific sector.

Inflation isn’t a big monolithic number that affects the entire economy equally. Even sector-specific inflation numbers are an average of the different rates individual products are experiencing. But as they average fewer product-based rates, your sector’s inflation rate is a better reflection of the reality you’re facing.

There’s a simple way to unpack this a little more. Right now, we’re seeing an inflation rate of around 7% in the US. The Consumer Price Index (CPI) shows that products are increasing in price across the board.

But let’s break down those numbers a little more. Food costs have risen by 6.3% while energy has spiked a dramatic 29.3%. Experts call food and energy costs core CPI inflation. And when you strip those increases out of the inflation rate, the overall numbers start to look a little better. But remember, short-term price increases due to shortages and supply chain issues can dramatically exceed the 7% benchmark.

So, do some research into the inflation rate your specific sector is experiencing. And remember, if you can break that rate down even further to make it more specific to your business, that can only help. For example, while food prices have gone up 6.3% overall, meat and poultry have jumped 12.5%. At the same time, cereals and baked goods have risen just 4.8%. This granular insight will help you start the process of updating your business model to save your labor budget.

Activity-Based Labor

Or, if you would like to take a significantly more reliable approach, stop allocating labor based on sales and start allocating labor based on activity. This approach completely eliminates the need to monitor the ebbs and flows in inflation and sector-specific price changes. And it can provide significant cost-saving opportunities to boot.

Axsium’s experts have helped some of the world’s most recognizable brands to review and update their labor models. Studia, our mobile data collection work sampling tool, is a great way to record the details of what’s happening in your stores. And Opus gives you the freedom to adapt your labor model to respond to changing circumstances.

The Axsium Difference

Inflation may not be the #1 most important thing you’re worried about right now, but it’s likely having a damaging impact on your bottom line all the same.

With Axsium’s help, you can assess the impact inflation is having on your labor model. More than that, our experts can help you move away from sales as a labor driver while making sure your executives will buy in to an activity-based approach.

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