Cutting Labor Costs

Sep 01, 2005 9:30 PM  By

No matter how efficiently you manage your distribution center, there’s one part of it that’s almost impossible to control: the high cost of labor. Unless you’re operating a fully automated facility, what you pay for labor is typically the biggest component of your total operating costs, and it is a challenge for even the most competent warehouse manager to rein in labor costs without damaging customer service.

Labor costs consist of two main elements, direct and indirect. Direct labor costs relate to the people actually doing the activities most recognized within the warehouse, such as material handling and order picking and packing; in fact, in most DCs, order picking accounts for more than 40% of the tab for labor. Indirect labor costs relate to the people affected by the warehouse work. It includes functions such as customer service, accounting, and sales.

To achieve the best balance between expenses and output, your goal should be either to manage the workload with the same number of employees working fewer hours or to operate the same number of hours with fewer employees. To reach either goal, you have several options that vary widely in cost. The labor cost savings realized with each of these alternatives depends on your specific operation.

HIGH-INVESTMENT OPTIONS

Advanced System Technologies

Applying advanced system technologies throughout the warehouse is one method of increasing throughput and reducing annual labor costs. High-tech applications reduce the time needed to perform activities, thereby decreasing the number of employees required overall.

The three most common technologies that replace paper-based systems are radio frequency terminals (RFT), pick/put-to-light (PTL), and the emerging voice recognition systems.

RFT systems can be implemented throughout the warehouse. These use handheld, wrist-mounted, and truck-mounted terminals; information is displayed on the terminal screens to provide instructions to the operator. In an operation that does piece picking from carton flow racks, RFT can achieve 200 lines an hour.

PTL systems are typically used in open-case/each-pick operations. Location lights are illuminated to guide the operator during picking. In piece picking from carton flow racks, PTL can achieve 400 lines per hour.

The use of voice systems is steadily on the rise in the picking area and in basic warehouse functions. This technology offers efficient, hands-free operation. Electronic text is converted into voice commands that inform the operator of each task. A headset receives information via a radio frequency unit secured around the operator’s waist. In full-case picking from pallet flow racks, voice systems can achieve 250 lines per hour.

Each of these technologies increases the productivity of picking operations and reduces the time required to perform tasks. In terms of labor costs, certain technologies will affect an already efficient process differently. The table “Impact of technology on labor costs” on page 80 shows the basic warehouse functions and identifies technologies useful in those areas, highlighting the ones likely to provide the best labor savings.

Warehouse Management Systems

A warehouse management system (WMS) controls the movement and storage of materials within a warehouse and saves many costs within the distribution center. Labor savings are often the driver for justifying the system, but the amount of savings depends on the level of your current WMS. The typical range is from 25% to 40% (see “Typical WMS savings,” below).

The most common WMS functions that drive down labor costs are automated programs such as direction of operators, location mapping and management, inventory counts, workload organization, radio frequency scanning and data transfer, and use of advanced shipping notices (ASN). An example of potential labor savings is shown in the chart “Labor reductions from WMS implementation” on page 80.

Material Handling Automation

Automation can replace certain labor-intensive tasks — for example, by using a conveyor to transport products rather than having an operator drive an industrial vehicle. Another example is the use of any part-to-operator system, such as carousels, that brings products to operators instead of requiring the operator to travel to the part. Note, however, that the technologies require not only large investments but also cost justification based on labor and space savings (see “When to use material handling automation,” page 80).

LOW-INVESTMENT OPTIONS

Although the more expensive options described above are highly effective and efficient, their cost puts them out of the reach of many smaller operations. But there are numerous alternatives that require less investment but result in substantial labor savings. A good place to start is by making changes to the following aspects of your operation:

Layout/Material Flow

The material flow and floor layout of your facility should result in minimal travel time during the day. For example, in the picking area, the typical walk time is 38% of the total pick time during a shift. If your pickers habitually take more time than this, there may be opportunities to modify the layout of storage equipment. In a large storage area, tunnels and cross aisles reduce travel time and minimize backtracking. A U-shape layout flow is the most common, and most retail operations use it. A straight-through layout flow is best for manufacturers and freight-forwarders. While modifying warehouse layouts can occasionally require capital investments, the cost is minimal when compared with that of new equipment.

Procedures

A review of your day-to-day procedures and methods can uncover many opportunities for productivity enhancements and labor cost savings. The best way to do this is to map your facility’s current process, using Visio or another software package to visually examine the process flow. Once you identify inefficient procedures such as backtracking, delays, and repetitive tasks, you can develop processes that streamline warehouse functions and reduce labor costs.

For example, if you perform quality control in the packing area and run into extensive delays when correcting errors, you might move the QC process into the picking function. Another example is to pack during picking instead of using packing stations downstream. While this is a larger change, it might reduce labor costs for pickers and packers.

Training/Exception Handling

By mapping your procedures, you may discover that operators do not have a clear understanding of the steps to follow, a situation that leads to time-consuming mistakes. For instance, if replenishment is not timely or correct, pickers may run out of stock during order fulfillment, causing reduced productivity. Exceptions may also cause confusion, so it is advisable to map them separately to ensure their effective handling.

Thorough training can help you realize labor savings from your existing employees. Some tactics that work well are to simplify all processes; reduce the number of manual procedures; employ a variety of training formats; ensure that your operators know and understand the products; implement team incentive programs; and pay attention to ergonomics and safety.

Product Slotting

Product slotting is often the biggest hidden opportunity to reduce labor costs. Slotting refers to placing products in the optimal equipment and location to maximize the use of space and labor. The issue of slotting affects the two largest labor pools: picking and replenishment. General slotting practices don’t require any investment. Ongoing slotting is more efficient when done with a slotting program, and the return on this investment is typically less than a year.

By simply observing the picking process for one shift, you can identify labor congestion and ergonomic problems; the latter occur when operators continuously bend and stretch to pick products. To alleviate pickers’ discomfort on the job, place the fastest-moving items in the “golden zone,” which is the area that is easiest for pickers to reach. Typically, just 20% of the total active products account for 80% of all picking activity. These top-moving products should be located in the most ergonomic locations and in storage equipment sized appropriately to reduce stock-outs and minimize replenishment labor. These products should then be balanced across picking zones to decrease congestion and further boost picker productivity.

Staff Management

The methods for motivating operators are unique for each individual, but there is certainly a mix of motivational tactics that can work in your operation. Monetary rewards are one of the most popular methods for motivating people, but several other tactics are equally effective.

Recognizing good performance during team meetings is a great way to motivate individuals as well as the team. In addition, establishing an employee-of-the month parking space near the entrance of the warehouse is a nice perk for exceptional performance; this is not a monetary reward, but one that is sure to please if the parking situation is poor at your facility. Combining employees into teams is another method of motivating individuals in a group to perform at higher levels. This staff rearrangement can backfire if relationships within the team are not solid, but identifying and correcting these strained relationships can enhance the productivity of the facility.

Evaluate productivity incentive plans to see their bottom-line impact on costs and savings. The results of such an analysis might be positively surprising. Considering the happiness and comfort of your employees can lead to a more productive workforce and lower annual labor costs.

CALCULATING LABOR RATES

Of course, only statistical analysis will reveal just how much any of these techniques will yield by way of labor cost savings. The first step is to estimate the labor rates for each alternative you’re considering. You can determine labor rates by using traditional time studies or predetermined time standards (such as the Maynards Operating Sequence Technique, or MOST).

If you find that the lower-cost options do not offer enough improvement in productivity, then make sure to go through the justification process for the more-expensive solutions. Your justification should compare the investment with the incremental labor, space, and other annual operating savings. Next, perform a net present value (NPV) analysis to select the solution that provides the highest positive NPV. Although labor costs are a large component of most facilities’ operating expenses, conducting financial analyses will enable you to both manage and reduce those costs.


Norman Saenz Jr. manages the Logistics Group at Carter & Burgess, a distribution center planning and consulting firm based in Fort Worth, TX.

Typical DC labor cost allocation
Shipping 3.3%
Indirect labor 11.1%
Receiving 3.1%
Put away/stocking 22.9%
Replenishment 10.3%
Order picking 42.7%
Packing 6.6%
Typical WMS savings
Picking, shipping, receiving labor 38%
Cost of capital in reduced inventory 27%
Inventory write-off 14%
Data entry labor 8%
Gross profit increase 3%
Management time 3%
Elimination of shipping errors 2%
Customer service labor 2%
Productivity gain for first-year emplyee 2%
Inventory counting hours 1%
Impact of technology on labor costs
FUNCTION PARER RFT VOICE PTL
Receive dock operations best n/a
Putaway into pallet rack best n/a
Replenish carton flow best
Each pick from carton flow best
Case pick from pallet flow best
Pallet pick from drive-in best n/a
Ship dock operations best n/a
Labor reductions from WMS implementation
OPERATION CURRENT FUTURE DESCRIPTION
Entry clerks 2 0 Typical savings are on jobs that require key entry
Receiving 3 2 Advanced shipping notice reduces receiving time
Put away 2 1 Directed putaway increases productivity rates
Picking 13 10 Improved inventory accuracy saves time
Shipping 2 2 Not all areas will have savings
Total 22 15 A savings of 7 people at a loaded cost of $32,000 per person equals an annual savings of $224,000
When to use material handling automation
EQUIPMENT DESCRIPTION
Conveyer/sorters High throughput and number of SKUs
High material handling labor costs
Material moved between specific points
Material moved over fixed path
Pick to conveyor for full-case picks
Carousels Low-cube/day movement
Medium lines/day movement
Handles various item dimensions/weight
Automated storage/automated retrieval High pallet in/out volumes
Space constraints (use vertical heights)
A-frame Very high piece-pick volumes
Security issues