DDBA 8580 Week 6 Turnover Cost Analysis Example

Which Departures Cost Money? A Turnover Cost Analysis for a Specialty Pharmacy Distribution Center That Classifies a Year of Separations Before Pricing Any of Them and Prices Only the Departures the Organization Would Have Prevented

Student Name

Walden University

DDBA 8580: The New HR: The Savvy Strategic Partner

Instructor Name

Month Day, Year

Which Departures Cost Money? A Turnover Cost Analysis for a Specialty Pharmacy Distribution Center That Classifies a Year of Separations Before Pricing Any of Them and Prices Only the Departures the Organization Would Have Prevented

Why Classify First

A composite specialty pharmacy distribution center in Tennessee, with 480 employees who pick, pack and ship refrigerated medications, recorded 132 separations last year, a turnover rate of 27.5 percent. Its leadership asks what turnover costs. The usual answer multiplies separations by a fraction of salary, which at half of a $50,000 average would put the cost near $3.3 million. That answer assumes every departure is a loss. Dalton et al. (1982) argued that turnover is overstated as a problem when all departures are treated alike, and proposed distinguishing dysfunctional turnover, the departure of employees the organization would want to keep, from functional turnover, the departure of those it would not.

Classification Criteria

The criteria were set before any separation was classified. A departure is dysfunctional if the employee's last performance rating was meets or exceeds expectations, the role requires more than eight weeks to reach full productivity, and the supervisor states the organization would rehire the person. A departure is functional if the last rating was below expectations or the supervisor would not rehire. Departures that meet neither definition, such as retirements and relocations, are counted separately as unavoidable.

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Table 1

Separations by Class, Last Year

Pricing the Dysfunctional Share

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Fifty-two dysfunctional departures at $12,486 each cost about $649,000 a year, about a fifth of the salary-multiple estimate.

Table 2

Cost per Dysfunctional Departure

Two Findings That Seem to Disagree

Park and Shaw (2013) conducted a meta-analysis and found that higher turnover rates were, on average, associated with lower organizational performance. Glebbeek and Bax (2004), studying offices of a Dutch employment agency, found an inverted U: performance was highest at moderate turnover and lower at both very low and very high turnover. These findings can both be true. The meta-analysis averages across settings where most turnover is dysfunctional, so the average relationship is negative. Where some turnover is functional, removing poor performers and bringing in new skills, moderate turnover can help, producing the curve Glebbeek and Bax observed. Hom et al. (2017), reviewing a century of turnover research, noted this growing attention to the quality of who leaves, not only the quantity.

What This Means for the Center

The center should aim to reduce dysfunctional turnover, not turnover in general. Exit interview themes among the 52 dysfunctional departures, pay compression for experienced technicians and mandatory weekend rotations, point to targets. Efforts that also retained the 41 functional leavers would add cost without benefit.

Why Not Use a Salary Multiple

Salary multiples are popular because they are easy and produce large numbers that attract attention. They are also impossible to check: no one can trace a figure of half a salary to any invoice or payroll line. When finance asks where the figure came from, the answer undermines HR's credibility on every later number. The sourced estimate here can be traced line by line, and a finance reviewer can challenge any element and see what changes. It is smaller, but it will survive the challenge.

What a Reduction Would Be Worth

If targeted changes cut dysfunctional departures by a quarter, from 52 to 39 a year, the center would save about $162,000 a year on the costs counted here. That figure, not the salary-multiple total, is what retention programs should be measured against.

The Unavoidable Third

The 39 unavoidable departures, mostly retirements and relocations with spouses, carry real replacement costs, but no retention program would prevent them. Planning for them belongs in workforce forecasting, not in the turnover cost case.

Limits

Classification depends on supervisors' rehire judgments, which may be biased. Costs exclude harder-to-measure effects such as errors by new hires and lost team knowledge, so the estimate is a floor.

References

Dalton, D. R., Todor, W. D., & Krackhardt, D. M. (1982). Turnover overstated: The functional taxonomy. Academy of Management Review, 7(1), 117-123. https://doi.org/10.5465/amr.1982.4285499

Glebbeek, A. C., & Bax, E. H. (2004). Is high employee turnover really harmful? An empirical test using company records. Academy of Management Journal, 47(2), 277-286. https://doi.org/10.2307/20159578

Hom, P. W., Lee, T. W., Shaw, J. D., & Hausknecht, J. P. (2017). One hundred years of employee turnover theory and research. Journal of Applied Psychology, 102(3), 530-545. https://doi.org/10.1037/apl0000103

Park, T.-Y., & Shaw, J. D. (2013). Turnover rates and organizational performance: A meta-analysis. Journal of Applied Psychology, 98(2), 268-309. https://doi.org/10.1037/a0030723