Talent shortages, rising labor costs, and high turnover rates are rising challenges for distributors. Despite these issues, many companies still view their workforce as an expense rather than an asset. They should think more strategically about talent. On average, frontline labor accounts for more than 70 percent of a distributor’s direct investments. Top-performing distributors invest even more (Exhibit 1). Getting these investments right can enhance operational efficiency, accelerate growth, improve service levels, and generate a competitive edge over peers.
McKinsey recently took the stage at the National Association of Wholesaler-Distributors (NAW) CEO Roundtable to discuss the talent-related challenges organizations are facing and share proven strategies being used to address them. A live poll of participants confirmed that the industry is struggling with critical pain points such as turnover/retention, escalating costs, employee experience, labor productivity, and service quality (Exhibit 2).
Leaders across industries excel by investing in talent management to enable their frontline talent to create more value. They treat talent as a crucial investment, and one that can yield impressive returns. This mindset shift unlocks significant value and fosters sustainable growth. McKinsey analysis of companies that strategically invest in talent found that the top 1 percent of companies grow their total shareholder return (TSR) twice as fast as their peers, while improving labor productivity nearly three times as fast. The three distribution companies in this group perform even better (Exhibit 3).
What are the key barriers to investing in people?
Many companies focus on misguided priorities when it comes to talent. This misalignment can lead to frustration and high turnover. Employers tend to focus on competitive pay and job security, while employees value career development, caring and inspiring leaders, and work-life balance (Exhibit 4).
In a recent poll of around 50 leaders in distribution companies, more than half identified two main barriers to greater investment in talent: unclear return on investment in talent, and difficulty in determining the right KPIs and metrics for tracking progress. McKinsey research also shows that frontline talent stability and productivity issues persist despite pay increases, due to disconnects between employer and employee priorities.
What are the leaders doing differently?
There are four essential steps distributors can take to enhance talent effectiveness:
- Understand the current state of talent. Identify the root causes of instability and specific investment needs at the site level, such as compensation, working hours, seasonal production peaks, training, and supervisor availability. This comprehensive understanding is critical for informed workforce investment decisions.
- Set an aspirational talent investment strategy. Define your aspirations for talent stability and productivity. Articulate a holistic approach to building capabilities in talent planning, attraction and onboarding, talent development, talent management, culture and experience (including a compelling employee value proposition), and governance. Allocate a dedicated budget to ensure that financial commitments align with strategic goals.
- Deploy proven talent innovations. Implement a portfolio of relevant and proven talent innovations and technologies, such as flexible scheduling, supervisor copilot systems, and VR training. For example, one leading distributor implemented a phone app allowing employees to select and swap shifts, enabling a dynamic view of talent supply and a flexible staffing model. This innovative workforce planning helped the company achieve its ambitious goal of processing more than 25,000 units daily per warehouse.
- Build a holistic workforce operating model. Institutionalize cross-functional governance by involving operations, HR, and finance in overseeing talent investments. Activate new processes to identify, prioritize, fund, and monitor talent initiatives. This holistic approach ensures that talent management is integrated into the broader strategic framework of the organization.
How to unlock talent investment strategies
Distributors can enhance talent management using tools and processes designed to boost workforce engagement and productivity. This promotes better business outcomes and fosters a virtuous cycle of growth and success, ultimately leading to sustained competitive advantage. Examples include the following:
- Implementing flexible scheduling gives employees greater control over their work hours, improving their work-life balance.
- Incorporating tech-enabled onboarding processes can streamline and enrich the experience for new hires, making their integration into the company more efficient and engaging.
- AI coaching can provide personalized feedback and development opportunities tailored to individual performance data, fostering continuous growth and improvement.
These tools are already delivering results. Amazon, for example, has implemented flexible scheduling and AI-driven performance management tools to improve employee satisfaction and productivity. A global consumer packaged goods company used data analytics to identify high-potential employees and provide targeted development programs, resulting in a strategy for a 20 percent increase in retention rates. And other leaders have seen impressive results from strategic talent investments, boosting productivity growth while slashing attrition and absenteeism in the frontline workforce (Exhibit 5).
What can other distributors learn from these leaders? It starts with a shift in perspective. Instead of viewing talent as a cost center, see it as an engine for growth and innovation. By aligning talent strategies with business goals, investing in employee development, fostering a positive work environment, and leveraging technology, distributors can turn their workforce into a source of competitive advantage.
As executives, it is critical to consider the alignment between your talent management practices and your business goals. As immediate and initial next steps, determine the top factors impacting employee satisfaction and retention within your organization. Think about how you can use technology to enhance your talent management practices, and identify actions you can take to create a more positive, inclusive work environment.
The authors wish to thank Alex Benko, Dylan Lambert, Nick Lopez, Tyler Freeman, and Yashashree Watkar for their contributions to this blog post.