Improving Ecommerce Fulfillment Productivity, Decreasing Labor Costs

ecommerce fulfillment AEO workers

In calculating ecommerce fulfillment cost per order, labor generally makes up more than 50% of the total costs. For comparison between companies, we exclude inbound and outbound shipping as costs vary so widely. As hourly wages continue to increase, overall fulfillment center productivity in many companies has remained flat. This increases the per order costs, including shipped orders, returns, picked lines and units.

In the U.S., the average hourly base pay for warehouse workers is $12.92, according to Competition for hourly workers at a number of our client firms has pushed rates to $15.50-$17.50. When you factor in benefits, training, recruitment and more, the fully loaded cost escalates to $22.22 per hour. Here are some costs we feel are typical in ecommerce fulfillment centers, as a percentage of payroll:

  • Benefits, FICA match and healthcare: 35% — what do benefits, taxes, vacation and personal time cost you?
  • Recruitment, hiring and HR: 25% — what does management time for interviews, ads, employment agency fees cost you?
  • Workman’s comp and unemployment: 8%
  • Training: 4% — how much time is spent training new people? This does not even count what’s lost in bringing people up to full productivity.

Thirty-one states have minimum wages above the current federal minimum wage of $7.25 per hour, 21 of them doing so in 2021. California, Maryland, Minnesota, New Jersey and New York have set two tiers of minimum wages for “small and large” companies. But these tiers are so low that they will in affect make most ecommerce operations and make them subject to the higher minimum wage rates.

State and federal pushes to increase the minimum wage to $15 per hour would escalate the fully loaded wage rate 16.1% to $25.80 per hour, with no increase in productivity, efficiency or accuracy. The federal infrastructure bill will increase competition even more.

In many ecommerce fulfillment centers employee turnover is often 15%–25% or more, adding to overall labor costs. In many markets, businesses are not finding the quality or even availability of labor to staff or expand their businesses.

Each company’s wage rates, overhead percentages and the labor market will be different. What are you doing to manage your ecommerce fulfillment labor and reduce costs? Here are 5 tactics companies should consider:

Identify 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 is your projection for future labor costs, benefits and availability for the next few years?

It’s imperative to find out what other fulfillment centers and employers are paying and their benefits. Conduct wage and salary surveys with other employers. Be sure that you’re paying competitively without beginning at the top. Build a relationship with them, regardless of the industry or warehouse function. Identify for senior management what your analysis is and the trends you see.

Here’s an example of what one large client’s findings were after doing their first survey. They were shipping $940 million in retail sales annually and had major problems in hiring and retaining hourly employees. From a production perspective, there was a 34% variance in shipped orders daily and an annual employee turnover rate of 62%. The brief wage and benefit survey showed that they were paying $3 to $5 per hour less than operations in their market. They had very good benefits, but not enough to offset the lower wages. They were doing their best to hire employees within management’s guidelines, but had become a temporary workplace.

Work with HR and management, defining the data you want to collect and analyze. Take for example wage rates. Are you interested in the starting hourly wage or average within a position? What does that position perform? What benefits are offered and what is the cost?

Set Standards and Measure Productivity

Most companies are collecting and reporting topline statistics and reporting them to management, including shipped orders, lines, and units; receiving in pallets, cases and mixed cases in units and dollars; returns and exchanges processed.

What many have NOT done is determine productivity at a lower level and then set goals by department and employee. By implementing detailed measurement systems, you will identify the processes to improve employee productivity objectively. Investing in a labor management system (LMS) in conjunction with your WMS is critical to more efficient labor utilization. Here is a detailed workbook.

Incentive Pay for Higher Productivity

An increasing number of ecommerce fulfillment centers are implementing incentives to increase productivity. Incentive pay should be based on engineered labor standards to be fair to the employee and increase departmental goals and efficiency. If standards and production achieved aren’t continually evaluated, you may end up paying for an incentive you’ve gained over time.

You can learn more about incentive pay from this prior post.

Human And Robotic Collaboration

Currently, most automation and robotics are deployed in picking and fulfillment processes such as goods-to-person and collaborative robotics (co-bots). The major benefit is the reduction in travel time and distance pickers walk throughout the day. Studies show that pickers in medium-to-large fulfillment centers often walk as much as 5-8 miles per day. About 75% of their time is lost in travel time.

Robots do the traveling between facility zones, while associates stay in place or within a short distance within a pick zone. With goods-to-person technologies, the worker stays in a single location with either conveyors or robotics transporting picked items to the next zone or to packing.

In the most productive environments, picking rates can easily double those of manual operations, to as high as 400 picks per hour per picker.

Develop an Action Plan

The above four points have shown to reduce costs in many ecommerce fulfillment centers. However, they each are a project requiring detailed analysis, planning and decision making. It goes without saying, you can’t do all of them at once. Investigate each tactic in sufficient detail to know what savings each can bring, the required investment and ongoing costs. Then define a plan for your business and get management approval.

Brian Barry is President of F. Curtis Barry & Company