Two fun articles in today’s Wall Street Journal. The first deals with how the recession has led firms to manage their cash more aggressively (Big Firms Are Quick to Collect, Slow to Pay). Specifically, many firms are trying to stretch out the time they take to pay their suppliers while simultaneously collecting from their buyers sooner. Float is always a good thing but tight credit puts working capital at a premium and “borrowing” for free from suppliers become particularly attractive. As the article’s title suggests, not all firms are created equal on this front; it pays to be big and have some bargaining leverage over your smaller supply chain partners. The graph below shows that large firms have been the big winners here while smaller firms have gotten the short end of the stick.
The second article relates to human resource policies and employee turnover (Burger Chain’s Health-Care Recipe). It is about a quick-service (ie fast-food) burger chain in the Pacific Northwest called Burgerville that has over the last four years greatly expanded its healthcare benefits for hourly employees. From a service operations perspective there are two really cool things happening here. First, the article claims that this greatly reduced turn over – from 128% per year to 54%. Given a cost of $1,700 to train an employee, this saves some a decent chuck of change (the chain has 39 outlets some the money could really add up).
There is a recurring theme in service management that long-term employees are more productive and that the key to profitability is making sure that you hang on to good frontline workers. Sure enough Burgerville has seen an increase in productivity but there is an added kicker here, which is the second cool thing. Here is how the CEO Jeff Harvey explains it:
Mr. Harvey believes part-time hourly employees work harder to qualify for more hours, which are assigned on a priority system based on performance. Employees must work 20 hours a week to qualify for the health plan. “As soon as employees realized the value of the health-care benefit, they started to work to win the 20 hours,” Mr. Harvey said.
In effect, competition for hours creates a tournament between employees – a clever way to induce greater effort without explicitly paying more.
A final point, these two articles are not as disparate as they seem. The link is Little’s Law. Little’s Law ties key operating measures together. Specifically, Little’s Law says that the average inventory in the system equals the average throughput times the average flow time. With Little’s Law one can figure out how, say, a reduction in accounts receivable translate to more cash on hand. Alternatively, one can translate a reduction in employee turnover into longer employee tenures. I read these articles and I start thinking about midterm questions.