In the cost per order, labor generally makes up more than 50% of the total costs (total costs being direct and indirect labor, total facility costs, shipping materials, etc.) excluding inbound and outbound shipping costs. As hourly wage rates continue to increase, overall warehouse productivity in many companies has remained flat. As a result, the cost per order and units of work produced (i.e., shipped orders, returns, picked lines, and units, etc.) has increased.
In the U.S., the average base pay for warehouse workers is $12.92 according to Indeed.com, the job employment website. In a number of our clients, it is much higher $15.50 to $17.50 per hour. When you factor in the cost of benefits, training, recruitment, and more, the fully loaded cost when applied to the labor cost escalates $12.92 to $22.22 per hour. Here are some costs we feel are typical in companies:
- Benefits and healthcare – 35% X $ payroll costs
- Workman’s comp and unemployment - 8% X $ payroll costs
- Training 4% X $ payroll costs
- Recruitment, hiring and HR - 25% X $ payroll costs
As the States and the Federal government increase the minimum wage to $15 per hour, the above costs push the fully loaded payroll cost to $25.80 per hour. This is an increase of 16.1% with no increase in productivity, efficiency, or accuracy.
In many warehouses, employee turnover is often 15–25% or more adding more to the overall labor costs. In many markets, businesses are not finding the quality, or the availability, of labor to staff or expand their businesses. The open jobs posted in America are at an all-time high - people can pick and choose where they wish to work.
Each company’s wage rates, overhead percentages, and the labor market will be different. And companies must ask themselves “What are we doing to manage our warehouse labor and reduce costs?” Here are 5 tactics companies should consider:
Identify Your Labor Trends, Costs, And Challenges
The first step is to objectively evaluate your labor issues in terms of cost and availability. What has been the trend in past few years? What do you see as the labor cost, benefit, and availability in your market in the next few years?
Find out what other warehouse employers are paying and their benefits. As a group of HR managers this can be done successfully without identifying specific companies. Conduct wage and salary surveys with other warehouse employers. be sure that you’re paying competitively without beginning at the top. Build a relationship with other warehouse operations, regardless of the industry. Identify for senior management what your situation is and the trends you see. We know nobody wants to hear the bad news but many company’s fulfillment is largely dependent on manual processing.
Here is an example of what one large warehouse client’s findings were. They were shipping $940 million in retail sales annually and they had major problems in hiring and retaining hourly employees. From a production perspective, there was a 34% variance in cases shipped daily. They had an annual employee turnover rate of 62%. A brief wage and benefit survey in their showed that they were paying $3 to $5 less than warehouses in their marketplace. They had very good benefits, but not enough to offset the wage differences. They were doing their best to hire employees within management’s guidelines, but they had become a temporary workplace.
Be careful to define the survey’s intended outcome and all data accurately so you get comparable data. Take for example “wage rates.” Are you interested in the starting hourly wage or average within a position? What does that position perform? What is included in benefits (i.e. dollarized costs for employee benefits such as vacation, sick time, profit-sharing, etc., a company-paid portion of FICA, profit sharing, etc.)? This will take time to define and get comparable data.
From a wage and salary data perspective, the Federal Bureau of Labor Statistics is a source available in all major markets. However, the “boots on the ground” data may show actual employers paying higher or lower than those averages. If you’re evaluating a new market for a future center, read this article.
Set Standards And Measure Productivity
Most companies are collecting and reporting top-line statistics and reporting them to management. These include shipped orders, lines, and units; receiving in pallets, cases, and mix cases in units and dollars; returns and exchanges processed.
What many have NOT done is to determine the productivity levels, and set goals by department and employee. Topline metrics are important. But, measuring detail department productivity at a lower level, such as receiving carton by pallets per hour or a number of returns and units processed per hour, is where you begin to improve productivity. Investing in a labor-management system in conjunction with your warehouse management system is critical to more efficient labor utilization.
When you start looking at productivity by department (e.g. picking), you find that a small number of people may excel in their high pick rates. Developing department productivity statistics and by person will definitely improve production and reduce costs per unit of work.
Incentive Pay For Higher Productivity
An increasing number of warehousing operations are implementing incentives to increase production. Incentive pay should be based on engineered standards to be fair to the employee and keep increasing department efficiency. If standards and production achieved aren’t continually evaluated, you may end up paying for an incentive that you have gained over time. To learn more about incentive pay read this article.
Developments in automation have positively impacted a company’s ability to provide faster order turnaround, higher degrees of inventory and order accuracy, and decreased labor costs. Whether its goods to person technology, robotics, or even conveyor and sortation solutions, this technology has strong ROIs for a fair amount of distribution companies.
Companies need to be clear on what they are trying to solve with technology, meaning reduce the FTE’s and labor cost, or increase inventory and order accuracy, or increase order throughput rates, etc. This then allows for a consistent comparison of technologies that satisfy these business requirements. Avoid going directly to a manufacturer as their attempt will be to try and fit your business into their specific offering. What may be best for your business might be a combination of different technologies and manufacturers.
Develop Action Plan
To offset these rising labor costs, companies must have an action plan to reduce expenses and not hurt company profits. FCBCO recommends six proven ways to drive down labor costs through efficiencies as well as the use of various technologies. Companies must constantly evaluate and adjust plans to coping with these challenges. Playing from behind is never a winning strategy and will often lead to higher employee turnover, including tenured employees and management, as the frustration can negatively impact this solid part of your workforce as well.
No two companies’ business environments are the same. Analyze the trends and what’s happening in your marketplace. Develop your own plan for reducing the increase in labor costs.