Employee turnover costs more than you think

A new study from Wharton’s Ken Moon reveals the hidden cost of employee turnover by drawing a direct link between higher quit rates and product failure for a smartphone manufacturer.

A recent Wharton study measuring the effect of worker turnover on the quality of smartphones made in China illustrates that a stable workforce is valuable, even in a factory setting where so much of the labor is deskilled.

Smartphone factory assembly line.

Ken Moon, a Wharton professor of operations, information and decisions and other researchers partnered with a major Chinese manufacturer to track the failure rates for 50 million cellphones over four years of consumer use. When a device failed, they were able to trace the unit back to the exact date and location where it was assembled, the factory conditions, and the staffing level at the time.

With such precise data, the researchers uncovered some significant correlations: Each percentage-point increase in the weekly turnover rate for workers increased product failure by 0.74% to 0.79%. Failure was 10.2% more common for devices produced in the high-turnover weeks following payday, which was once a month, than for devices produced during the lowest-turnover weeks immediately before payday. In other weeks, the assembly lines experiencing higher turnover produced an estimated 2% to 3% more field failures on average. The associated costs amounted to hundreds of millions of dollars.

The authors say their study is the first to link worker turnover directly to product reliability in the manufacturing sector, and the results emphasize that there is a lot more for managers to consider about worker turnover than just the budget-line costs of recruiting and training replacements.

“That’s the wrong way to think about it,” Moon says. “When you have a lot of turnover, you may be able to replace people easily and quickly, but a team is still more than the sum of its parts. Workers on an assembly line aren’t necessarily collaborating in a deep way, but their work does affect other stations. Their ability to coordinate is more important than we think.”

Read more at Knowledge at Wharton.