UK: Best Practice - Open all hours.

UK: Best Practice - Open all hours. - With demand less predictable but often immediate, firms are looking for new ways of managing labour supply.

by Malcolm Wheatley.
Last Updated: 31 Aug 2010

With demand less predictable but often immediate, firms are looking for new ways of managing labour supply.

Despite the thickness of the hand-out packs, the conference is full of people busily taking notes. The question sessions after each presentation see earnest delegates probe for yet more detail and advice. Capacity flexibility - the ability to gear up or down quickly and cheaply in response to demand - is, for all types of business, suddenly a hot topic.

In manufacturing industry, for example, lower inventory holdings and lean supply chains mean that peaks in demand can no longer be buffered by inventory, and must trigger manufacture almost immediately. Industries as diverse as grocery retailing and the automotive sector have embraced slick ordering systems that require factories to respond speedily to variations in their customers' demand and product mix.

The high street is also affected. Legal restrictions on retailers' opening hours have been relaxed. During Christmas 1996, several of the large supermarket chains opened on a 24-hours-a-day basis - a familiar occurrence in the US. This summer Somerfield decided to open its stores until 10pm for the duration of the eight-week school-holiday period; others now open for 24 hours on Fridays.

For businesses the challenge is twofold. Not only are they faced with an unprecedented transformation in their customers' expectations, but the failings of traditional solutions are becoming apparent. Overtime, for instance, drives up unit costs, affects both quality and safety, and, due to its voluntary nature, cannot give cast-iron assurance that extra capacity will be available when required.

Worse still, as overtime becomes institutionalised, inefficiencies and restrictive practices develop as the workforce seeks to boost its pay packet. At Britvic Soft Drinks' Widford site near Chelmsford, overtime payments had escalated to 40% of the total wage bill - prompting it, this May, to switch to an alternative.

Nor is another classic solution to short-term capacity peaks - the use of temporary or casual labour - without problems. Temporary employees' morale and skill sets are often lower than those of permanent employees, and it can prove difficult to integrate them within tightly-knit production teams and Japanese-style continuous improvement activities. Many factories are now moving back to higher levels of permanent employees.

Hence the attraction of alternatives such as zero hours contracts, where there is no set number of hours, or annualised hours contracts, where the number of hours is set but the employer decides how they are spread over the year. The once traditional swing shift is also seeing something of a comeback at the moment, especially among retailers, who find that housewives and other people whose family commitments prevent them working a nine-to-five day make ideal evening or weekend workers.

At NCR's cash dispenser factory in Dundee, for instance, short-to medium-term fluctuations in demand can see output double or halve within weeks, explains Dan O'Brien, the vice president in charge of the plant. A core labour force is supplemented by fixed-contract temporary employees, around 40% of whom form a part-time swing shift. Employees work 16-or 20-hour weeks, splitting the hours in one of three ways.

An interesting variation of the swing shift is operated at Leicester-based Walkers Bradgate Bakery, a manufacturer of pre-packed sandwiches for supermarkets such as Tesco. Manned by three shifts on a 24-hour basis on Sunday to Thursday when demand is at its highest, the factory is principally staffed by people working on a start-until-finish basis on Friday and Saturday, when demand is both lower and less predictable. Employees report for work at 6am and leave when the last sandwich has been packed and despatched.

It is this work-when-work-is-available principle that lies at the heart of zero hours contracts. The employer commits to employing people - but only when there is work for them to do. Increasingly popular in sectors such as education, catering and healthcare, zero hours contracts typically run for fixed terms. People live on standby, waiting at home until they are called in to work. An extreme example of this came from one branch of a fast food outlet which asked its employees to clock off but remain at work during quiet periods.

For all their apparent flexibility, zero hours contracts suffer from two drawbacks. First, recent case law has highlighted the fact that zero hours employees have more employment rights than has previously been recognised.

Second, despite the contractual (and possibly semi-permanent) nature of the relationship, zero hours employees are essentially casual workers.

People with the ability to achieve a higher level of earnings - and also greater earnings stability - will always wish to do so, leading to a higher-than-normal labour turnover.

Hence the attraction of annualised hours. Under an annualised system, employers guarantee a certain number of hours work, be it 37.5, 39 or 40 per week, but this is averaged and rostered over the course of the year. At times when forecasts indicate that work will be scarce, employees spend more time at home or work shorter weeks. When demand rises, either more employees are called in, or employees work longer hours - or both.

The overriding advantage for employers is that this avoids the need to pay overtime and, depending on the scale of the demand fluctuations that are involved, the need for temporary labour is either substantially reduced or eliminated altogether.

Annualised contracts are most commonly associated with process industries, where a high reliance on continuity of labour can lead to particularly high levels of overtime payments - often up to 40% or more. Predictable demand fluctuations help make the system more workable - the more predictable the fluctuations, the simpler it is to roster employees' hours. Any additional unpredictable demand fluctuation is dealt with through the use of banked or committed hours: employee capacity paid for in advance, but usually only used if actually required.

In exchange for giving up overtime, employees benefit from long blocks of quality leisure time, and (generally) an increase in their basic pay - which, unlike overtime pay, is also pensionable. Once implemented, annualised hours schemes usually prove highly popular with employees. And the unions these days have few reservations about properly-negotiated schemes: Lynn Williams, a national officer with the Amalgamated Engineering and Electrical Union, recently chaired one conference promoting the schemes.

The annualised hours system in place at Van den Bergh Foods' Purfleet margarine factory, Management Today's 1996 Factory of the Year, typifies the workings of such a scheme. Employees contract to work 1,779 annual hours but their rostered work shifts usually account for 1,700. Any shortfall is used for training, planned extra production or meetings - activities that were formerly either not carried out or carried out in overtime.

Critically, employees' contracts also call for them to be available to work a further 282 committed hours per year, which are paid for in each month's salary whether they are worked or not - with the intention being, according to factory manager Neil Hufton, that they should not be worked.

'We use them if we've failed in some respect, or if there's a high level of sickness.' Actual usage, he explains, averages around 30 hours per employee per year. As with most implementations of annualised hours, managers are obliged to go to some trouble to ensure that the usage of banked hours is as equitable as possible, and that people with more skills do not see themselves penalised by having to work more hours.

Popular though annualised hours schemes are, there are dangers in simply blindly following fashion. So believes Peter Curran, senior partner of Philip Lynch Associates, theYork-based specialist consulting firm, which has implemented many such schemes for a list of blue-chip clients which includes companies such as Frigoscandia, Albright & Wilson, Nestle and Guinness. The starting point, says Curran, should be a consideration of the business's demand patterns and the level of order book volatility. 'There's a huge distinction between seeking to enhance a business's capacity flexibility and adopting annualised hours.

The latter may not always be the best way to achieve the former,' he warns.

A good example of improved flexibility is Telecom Sciences, an Airdrie-based business that was formerly a part of the Philips empire. Some 50 or so of

the factory's 190 direct employees are paired on joint job sharing employment contracts that commit them to working, at management's request, either a 19.5-or 39-hour week. This means the capacity of the factory can be flexed between 165 and 190 full-time-equivalent employees.

'We try to give people a week's notice that their hours are moving up from 19.5 hours a week to 39 hours a week - or, conversely, downwards from 39 to 19.5 - but in effect we can switch almost immediately,' explains Alan Kennedy, managing director of operations. Overtime premiums are thus avoided in periods of peak demand, and lay-offs or under-utilisation are avoided in periods of lower demand. Over-staffing to cover for holidays or absences is also avoided as each paired individual is responsible for arranging for their opposite number to cover for them in the event of their absence. Once again, employees appear to like the scheme - although many of those in it are women, living in an area where high unemployment makes it hard for male partners to land full-time jobs as the family breadwinner.

But, as research by consultants Sanders & Sydney revealed last year, by no means all employees respond enthusiastically to such working arrangements, not least because the resulting unpredictability of earnings impacts on their ability to undertake long-term financial commitments such as mortgages, a criticism that at least cannot be levelled against annualised hours.

With the end of Conservative rule, we may see the pendulum begin to swing back in favour of employees - perhaps, in time, capacity flexibility will be viewed as positively Dickensian. That said, for the next few years at least, expect to see more employers embracing it, not fewer.

Total Capacity Flexibility: The New Competitive Frontier will be published by Management Today, price £450. For more information, call Morice Snell-Mendoza on 0171 413 4412 or fax him on 0171 413 4138.

TESCO - A BEHIND-THE-SCENES SUCCESS STORY

Retail giant Tesco has to cope with huge fluctuations in demand.

Fridays and Saturdays see levels of demand in its stores roughly double those of Tuesdays and Wednesdays. As the distribution operation that supplies the stores works a day ahead, its peak comes on Thursdays when it requires twice as many people as on the previous two days.

Other predictable peaks in demand occur at Christmas and bank holidays, with Easter 'busier even than Christmas', according to Paul Bateman, managing director of the company's distribution arm. Further demand variation is seasonal - summer fresh vegetables use more cubic capacity than winter ones, and so require more pallets, trucks and drivers.

The distribution operation's annualised hours scheme began in 1989 - after a ballot of the 98% unionised workforce. In sharp contrast to companies where the introduction of annualised contracts has been facilitated by an uplift in basic pay rates, Tesco's negotiations were clouded by a requirement to negotiate a reduction in wages of around 20%. 'I wouldn't recommend combining the two,' says Roger Roberts, HR operations director.

Tesco offers a number of annual contracts: a standard contract, with 1,971 hours per year (42.5 hours for 46.4 weeks); a shorter contract of 1,693 hours(36.5 hours for 46.4 weeks); and a rather longer one for 2,110 hours (45.5 hours for 46.4 weeks). 'With hindsight, we wouldn't offer the longer contracts again,' says Roberts. 'An important objective was to provide people with meaningful blocks of leisure time - it's one of the trade-offs for providing management with the required levels of flexibility - but longer contracts tend not to do this.'

Despite the acknowledged success of annualised hours in the distribution arm, the scheme has not been extended to the stores. In these the required degree of flexibility can be achieved by a combination of flexible working patterns and the ability to offer part-time workers extra hours - 'rather than overtime hours,' says Roberts, keen to stress that it won't be the cost of dealing with capacity flexibility that pushes up the chain's prices.

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