The Effect of Labor on Profitability: The Role of Quality
Determining staffing levels is an important decision in retail operations. While the costs of increasing labor are obvious and easy to measure, the benefits are often indirect and not immediately felt. One benefit of increased labor is improved quality. The objective of this paper is to examine the effect of labor on profitability through its impact on quality. I examine both conformance quality and service quality. Using longitudinal data from stores of a large retailer, I find that increasing the amount of labor at a store is associated with an increase in profitability through its impact on conformance quality but not its impact on service quality. While increasing labor is associated with an increase in service quality, in this setting there is no significant relationship between service quality and profitability. My findings highlight the importance of attending to process discipline in certain service settings. They also show that too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability.
|Date of creation:||Sep 2008|
|Date of revision:||Jul 2009|
|Contact details of provider:|| Postal: |
Web page: http://www.hbs.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sunil Gupta & Valarie Zeithaml, 2006. "Customer Metrics and Their Impact on Financial Performance," Marketing Science, INFORMS, vol. 25(6), pages 718-739, 11-12.
- Andreas Soteriou & Stavros A. Zenios, 1999. "Operations, Quality, and Profitability in the Provision of Banking Services," Management Science, INFORMS, vol. 45(9), pages 1221-1238, September.
- Beach, Charles M & MacKinnon, James G, 1978. "A Maximum Likelihood Procedure for Regression with Autocorrelated Errors," Econometrica, Econometric Society, vol. 46(1), pages 51-58, January.
- Eugene W. Anderson & Claes Fornell & Roland T. Rust, 1997. "Customer Satisfaction, Productivity, and Profitability: Differences Between Goods and Services," Marketing Science, INFORMS, vol. 16(2), pages 129-145.
- Kevin B. Hendricks & Vinod R. Singhal, 1997. "Does Implementing an Effective TQM Program Actually Improve Operating Performance? Empirical Evidence from Firms That Have Won Quality Awards," Management Science, INFORMS, vol. 43(9), pages 1258-1274, September.
- Christopher D. Ittner & David F. Larcker, 1997. "The Performance Effects of Process Management Techniques," Management Science, INFORMS, vol. 43(4), pages 522-534, April.
- Andrew King & Michael Lenox, 2002. "Exploring the Locus of Profitable Pollution Reduction," Management Science, INFORMS, vol. 48(2), pages 289-299, February.
- Charles H. Fine, 1986. "Quality Improvement and Learning in Productive Systems," Management Science, INFORMS, vol. 32(10), pages 1301-1315, October.
- Frances X. Frei & Ravi Kalakota & Andrew J. Leone & Leslie M. Marx, 1999. "Process Variation as a Determinant of Bank Performance: Evidence from the Retail Banking Study," Management Science, INFORMS, vol. 45(9), pages 1210-1220, September.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Nikos Tsikriktsis, 2007. "The Effect of Operational Performance and Focus on Profitability: A Longitudinal Study of the U.S. Airline Industry," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 506-517, April.
- Banker, Rajiv D. & Lee, Seok-Young & Potter, Gordon, 1996. "A field study of the impact of a performance-based incentive plan," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 195-226, April.
- Wallace J. Hopp & Seyed M. R. Iravani & Gigi Y. Yuen, 2007. "Operations Systems with Discretionary Task Completion," Management Science, INFORMS, vol. 53(1), pages 61-77, January.
- Joanne M. Sulek & Mary R. Lind & Ann S. Marucheck, 1995. "The Impact of a Customer Service Intervention and Facility Design on Firm Performance," Management Science, INFORMS, vol. 41(11), pages 1763-1773, November.
- Rogelio Oliva & John D. Sterman, 2001. "Cutting Corners and Working Overtime: Quality Erosion in the Service Industry," Management Science, INFORMS, vol. 47(7), pages 894-914, July.
- Aleda V. Roth & William E. Jackson, III, 1995. "Strategic Determinants of Service Quality and Performance: Evidence from the Banking Industry," Management Science, INFORMS, vol. 41(11), pages 1720-1733, November.
- George Li & S. Rajagopalan, 1998. "Process Improvement, Quality, and Learning Effects," Management Science, INFORMS, vol. 44(11-Part-1), pages 1517-1532, November.
- Charles J. Corbett & María J. Montes-Sancho & David A. Kirsch, 2005. "The Financial Impact of ISO 9000 Certification in the United States: An Empirical Analysis," Management Science, INFORMS, vol. 51(7), pages 1046-1059, July.
- William S. Lovejoy & Kannan Sethuraman, 2000. "Congestion and Complexity Costs in a Plant with Fixed Resources that Strives to Make Schedule," Manufacturing & Service Operations Management, INFORMS, vol. 2(3), pages 221-239, February.
When requesting a correction, please mention this item's handle: RePEc:hbs:wpaper:09-040. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Soebagio Notosoehardjo)
If references are entirely missing, you can add them using this form.