Why 'retail' isn’t a dirty word

With announcements of CEO turnover, bankruptcies and poor holiday sales numbers, the retail industry is no stranger to disparaging headlines. Moving into the New Year, the winners and losers -- those that come out of the downturn positioned for growth -- will be identified by the ability to generate profitable revenue. It will be critical for companies to keep selling, general and administrative expenses costs low so that the organization is as efficient and lean as possible. To many people, it may surprise them that some retailers do this better than most other companies. NexGen Advisors recently conducted a Global Organizational Efficiency Survey (GOES) to benchmark spans of control and management layers to determine a company’s organization efficiency. Our research, which included some of the biggest names in retail, was quite interesting. First and foremost, we found that over the past 18 months, most companies (76%) had already performed, or were in the process of performing headcount reductions to increase efficiency.

Yet, our data analysis of spans of control, the number of direct reports a manager has, and reporting layers, the number of layers as defined by the solid-line reporting structure from front line to CEO, indicates that 52% of the participating organizations are highly inefficient or “unhealthy.” Interesting enough, companies in the retail sector, were the best performing in the survey, ranking 1, 2 and 3 out of the 31 in total.

The importance of having a properly structured organization is paramount to a company’s success, especially in retail, as it can be a competitive advantage. We use an organizational efficiency (OE) index to determine the health of an organization. The OE Index is a metric that measures the efficiency of your organization structure based on rules, weightings and data. The following inputs are required to calculate the OE index:

1. Number of reporting layers;
2. Distribution of employees across reporting layers; and
3. Average span of control by reporting layer.

We found that 52% of the survey participants had an OE index below 55%, which is considered “fair” to “average.” However, retail, was in the 80% range, or “above average.”

The retail sector only had 10 layers, while the aggregated survey average was 15. Why did the retail sector bode better than the rest? There could be several reasons:

1. Retail’s business model is simple in nature, and not as global as B2B companies;
2. Their core business is selling product through D2C channels (stores, online, etc.) requiring less functional support;
3. The “store templates” are standard and create an easy way to flex the work force; and
4. They are able to project their “busy” times of the year and hire as needed to keep the number of layers low.

If we look at the retail sector, it is easy to see why their spans and layers are better than the group. First, their business model is fairly straightforward. Some key functional processes, such as r&d, manufacturing, and operations are not as large as other industries. One key indicator we observed was that other functions that typically add to layers in the corporate environment, such as IT, finance and human resources, were small groups at headquarters, with a limited amount of employees in the stores. This allows for fewer layers in their organization.

Companies in the survey that had a broad global footprint, had more layers and smaller spans than the retail sector. The companies in the retail sector were not global, rather, domestic in nature, with thousands of locations across the country. Our data shows that the more global a company is, the more management layers are typically found.

Another positive the retail sector has is its type of operations, which are mostly stores, with a standard layout, and a standard number of people required. The stores usually have one or two managers, with a large group of store sales help reporting into them. This helps drive the spans of control higher. The work force can also be “flexed” at any time given the type of workers retailers hire. They do have full-time equivalents (FTEs), but also a majority are part time, and can be “temporary” if needed during the high season. Having non-permanent employees does not show in the data and is not counted in the span and layer analysis.

The ability for the retail sector to keep their spans large and layers small, gives them a competitive advantage that is required in their business. Operating as efficiently as possible provides dollars to be freed up for investment in product and merchandising, which enables them to grow their revenue.

When interviewing the retail companies, we found they benefited from healthy spans and layers. Primary benefits are tangible and can be measured in dollars and metrics. The most prevalent primary benefits were:

1. Decreased SG&A costs and increased profit;
2. Re-investment of savings for growth; and
3. Increased productivity.

However, there are many secondary benefits that also play a significant role for an efficient organization structure, but are more difficult to measure. These are represented in a company’s culture, and can either help or hinder a company from achieving its business strategy. They include:

1. Fluid communication flow;
2. Quicker decision-making; and
3. Faster go-to-market with products & services.

Among the retail participants, almost 85% agree that communication throughout their organization is good, a positive that was not seen in the other sectors.

GOES also found that the retail companies all reviewed spans and layers annually, with dedicated resources that linked this activity to process improvement activities. They set targets by function to achieve year-over-year improvements versus performing a one-time headcount reduction with blanket benchmark goals. To achieve an optimal organization structure, a company requires the right benchmarks, analysis and data. With this, they can create an organization that is efficient and agile, and will be a key factor to reducing cost and growing profit. This holiday season, the winners definitely include companies with the most efficient organization, and luckily, our survey shows retail is a winner.

Carla Zilka is the founder and principal advisor of NexGen Advisors, an operational restructuring firm. She has extensive experience in organizational efficiency, talent management and engagement, and sales. Zilka can be reached at carlazilka@nexgenadvisors.com.