8 Ways to Combat Shrinking Labor Availability

The benefits of a booming economy are obvious to top line sales but a robust economy causes problems with labor availability in many markets. Later customer buying patterns in the fourth quarter are also straining many companies as they staff to the peak order volumes expected.

What’s more, over a 10-year period direct labor rates have gone from $6.50 to almost $14.00 per hour in some companies. Recently, in benchmarking 15 direct companies of varying sizes, the average hourly base pay rate varied from $6.82 to $13.33 for back-end fulfillment operations. Keep in mind these businesses are all direct with roughly the same processes. The surprising trend is that benefit costs are increasing – five companies were over 29%, whereas normally we see 15%-20%.

Direct labor is typically 45% to 55% of the cost per order. Considering the total warehouse cost per order, the cost is generally between $3.00 and $6.00. Total warehouse cost per order includes direct and indirect labor, occupancy, and packing supplies. We have eliminated shipping costs as this tends to distort the cost comparison between companies.

Some low cost producers can operate below $3.00 per order either through automation (e.g. tilt tray sortation) or low labor rates in their market. The affect of labor rates in some companies may not be as pronounced because the merchants and marketers may have had to increase average order.

But for the most part, since many fulfillment operations are largely labor intensive, the problem of increasing labor rates and availability of productive workers isn’t going to go away and it will continue to affect profits. These 8 steps can help multichannel companies deal with this trend.

1. Build shifts around people availability. Instead of establishing a traditional work schedule and then trying to find people, some companies are doing research around when people are available and then scheduling around that availability. This could result in shorter shifts or flexible work schedules, they may also establish additional shifts to attract other part time workers. For some types of work, it may also result in home workers. West, one of America’s leading outsource call centers, uses thousands of home based workers (see www.west.com/customer_contact/westathome.asp). West’s use of advanced technology and home based agents has allowed them to operate at lower costs.

2. Change the skill set requirements. Redefine the jobs and skills set around the skill sets available in the labor pool. This may mean simplifying complex jobs that require less experience for part timers; and in other cases, it may mean adding tasks to workers that can handle more. An example: a merchant may use combined functions for picking and packing in one job function. To scale the tasks done, a company can separate and simplify the job into two positions so that new seasonal workers can handle the simpler of two jobs and the more experienced full time worker can handle the more complex.

3. Look for ways to automate and reduce dependency on labor and head count. Most multichannel businesses are highly labor intensive and use a minimal amount of automation. There is a wide range of automation opportunities to reduce labor. Simple automatic carton taping machines, inbound and outbound conveyances that eliminate travel time, pick to light, bar code RF scanning (paperless, real time no data entry), voice picking, to the more complicated RFID and tilt tray sortation systems. The key is to find the appropriate level of automation that is cost justified to reduce labor.

4. Try gain sharing or incentives to reduce head count required. To offset the shrinking labor pool, you must make your existing labor more productive. Many companies are considering gain sharing or incentives to increase output per labor hour, reducing the overall head count in operations.

5. Encourage seasonal workers to come back. Instead of having to rehire a new labor force merchants are offer incentives or perks to encourage seasonal workers with experience to return year after year. Some of the perks include partial benefits, sign on bonuses, bonuses to stay through the season, referrals for a friend joining the company, etc.

6. Relocate where the labor pool is more available. If you move your DC, the number one factor should be labor availability in the market. Doing your homework upfront will eliminate the surprise of not being able to staff the center in a couple of years. Memphis, TN, and Roanoke, VA, are communities where many direct and distribution industries migrated because they saw others prosper in fulfillment thanks to the available labor.

7. Use temp agencies for seasonal workers. To maximize the effectiveness of temporary agencies you need to establish a year round relationship with them. You can’t just call them in the peak and expect to get help. The relationship includes providing the temporary agencies having a clear understanding of your company, the jobs involved, and the type of employee that will be successful in your environment.

8. Look into predictive pre-employment testing. Develop a model of characteristics and behavior that can help predict whether an employee will be successful or not. A model can be developed for each job function, as well as screening test that can be used to predict success. During the hiring process, make sure the worker gets an opportunity to preview the work to be sure that they understand the job requirements and the working conditions.

Curt Barry is president of Richmond, VA-based operations consultancy F. Curtis Barry and Co.