What Goes Into a Per-Order Labor Cost Calculation?

One of our readers recently sent in the following question regarding per-order labor costs and how to calculate them: “Do the labor costs relate only to pickers and packers of the orders? What about management? How many levels of management, if there is more than one level in the facility? And janitorial labor, especially if that consists of in-house employees? The possible combinations of what constitutes per-order labor are phenomenal in number, and vary dramatically from one facility to the next.”

Distribution expert Stephen Harris, principal of Harris & Harris Consulting in Lincoln, VT, has kindly provided this answer:

The per-order labor cost is a simple calculation that divides all of your direct warehouse labor (salaries, benefits, bonuses, vacation compensation, and any other incentive programs) of all of the employees in the warehouse, from management and supervisors down through temps, and divides that figure by the number of orders fulfilled per year. You can shorten the time frame to monthly or weekly to examine what happens to this cost during busy periods. This includes janitorial expenses, kitting labor, labor associated with multiple touches of your product, labor to move items between warehouses, and so forth.

What it does not include are rent, common area maintenance charges (grass cutting, snow removal, exterior building maintenance), mortgage payments, utilities, taxes, or the labor costs of anybody in the “front of house,” such as marketing, merchandising, and contact center staff and sales, administration, and executive management. These employees are treated by this calculation as “indirect labor costs,” which can be another useful measurement.

Like all statistics in fulfillment, such a number as per-order labor cost has real meaning only when compiled by the same organization over time, as a means of verifying the impact of cost-cutting initiatives or as a long-term method to evaluate productivity. Comparing this calculation before and after installing a conveying or sortation system, or before and after a warehouse relocation, can be very instructive. It can also be useful to get your warehouse staff sensitized to this measurement and its impact on profitability. As a way of comparing one company to another, the statistic must take into account the level of automation; storage and retrieval technologies; size, weight, and complexity of product; and the volume of orders.