Article by: Jon Harvill CPC
Article appeared in the Summer 2008 Dunhill Consultant newsletter

Dr. John Sullivan, when heading the Human Resources Management Program at San Francisco State University, used the example, "If an airline bought a new 747, and then let it sit for two months on the runway because they didn't have a pilot, what would the cost be to the airline?"

What if a new business venture, which was targeted to make millions of dollars in profits, cannot begin until the key personnel is recruited,---and the understaffed Human Resources department takes six months to hire the key executives?

What is lost if a critical Time To Market (TTM) is slightly delayed by staffing issues and results in a new product having a weak #2 position in the marketplace, rather than a strong #1 position?

If we expect cost reductions and cost avoidance from our purchasing and our production staffs, what happens when they fail to accomplish the lower costs because, they are spread too thinly due to having unfilled positions; yet their competitor continues to reduce its costs?

Many firms calculate the cost-per-hire, but few have taken the time to calculate the cost of a vacant position. Don Schwerzler, Managing Director of Family Business Institute, feels that unfilled positions cost the U.S. economy billions of dollars.

"Most organizations fail to make a direct connection between the time it takes to fill a vacancy, and the dollars they end up losing from the bottom line," he said recently. "As a rule-of-thumb, the average manager should make for their company at least five times his or her salary -- i.e. a $50,000 supervisor should move $250,000 to the bottom line; a $100,000 executive should personally be responsible for $500,000 profits."

CASE STUDY 1:

In a real life case study, a client company balked when told that a retained search should be used to work out conflicting expectations held by their plant management and their corporate staff, regarding a newly created Materials Manager position.  The retained search was quoted to be the same rate as the contingency search that was chosen, so expected cost was not a factor in the decision.

Over the course of a full year numerous candidates received thorough vetting, including travel, interviewing, psychological testing and more interviewing. Midway through the one-year process, one hire was made and he lasted only six weeks.

Implementation of a critical scheduling system was delayed a year and urgently needed cost reductions, process improvements and the supply chain staff’s training and developments were missed, and all due to the inability to agree on a viable candidate.

The position was eventually filled with an $80,000 Materials Manager, probably no better than dozens who had been considered and rejected before.

Using Don Schwerzler's formula, an $80,000 position should earn the company five times their salary, or $400,000 per year. That is $33,333 per month that did NOT go to the bottom line.  Given the strategic nature of Supply Chain function, I'll bet many of you can make the argument that the cost was actually a great deal more than $400,000.

Possibly with no direct connection to this course of events, the company has since been sold.

Ending on a happier thought, another case study comes to mind:

CASE STUDY 2:

Management for a Fortune 500 company called from Minneapolis on a Monday asking for help filling a Warehouse Manager position in St. Louis. The company had been increasing inventory levels trying to improve flagging service levels but the extra inventory just made it more difficult to find and pull the correct product.  Service levels continued to decline, causing a flood of customer complaints.

We had the new Warehouse Manager onboard within fourteen days.  During the post-assignment debrief process the company gave an unsolicited testimonial recapping how we had saved them money.  They had budgeted $20,000 for relocation and no relocation was required.  We had found a Warehouse Manager for $10,000 less than they were prepared to pay. They gave us credit for $15,000, identified as lost-opportunity savings, for finding someone in two weeks while they had expected the search to take six weeks.

However, the real savings were accomplished over the next year. The new Warehouse Manager had committed to reach the targeted service level and also remove $1,000,000 from their inventory. He actually reduced their inventory by $2,000,000 and improved service 2% above their targeted level. In addition to saving the $2,000,000 in reduced inventories and the $360,000 annual carrying cost on that inventory, our client's customers were happy and buying product once again.