Warehouse Cost Reduction: Immediate Results


A common thread to all warehouse operations is the quest to manage expenses. The most critical and the most manageable expense item on your P&L statement is labor, and managing labor efficiently will generate immediate results in your work to manage expenses.

READ: 38 Fulfillment Cost Reduction and Productivity Improvement Ideas

Managing labor begins with capturing daily man hours utilized by department or by activity in categories such as receiving, putaway, replenishment, pick/pack/ship, inventory management, supervision, etc. Capturing the man hours utilized can be done using sophisticated warehouse management system software or by a more manual approach, but no matter the method you use, you must know how many man hours are utilized each day in each activity.

Once you have successfully determined man hours utilized by activity, begin relating the man hours to a volume measurement (units, lines, orders, cases, pallets) for the activity by day. If you do not have a sophisticated system to do the calculation, create a spreadsheet for each activity with weeks down the side and days of the week across the top headings. Include subheadings for each day: volume, man hours, and volume per man hour. Total the horizontal subheadings for the week and calculate the total average week’s performance. Charting this data cumulatively by day and week not only creates a management tool to begin monitoring and controlling labor expense, but it also develops a historical planning tool for budgeting.

Now that you have captured the core data of man hours utilized and volume by activity, the next step is to establish metrics of performance for each activity. Again the level of sophistication for developing performance metrics varies from industrially engineered labor standards to simply establishing reasonable expectations by making three to six observations of employees performing a task, averaging units per time, and deriving an expected performance level of units per man hour. Acceptable performance levels might include work pace averaging, performance rating, fatigue and delay allowance, control start and stop time, assessing the skill level of the employee performing the task, a detailed description of the activity, and identifying order(s) and units. It is beneficial to draw upon benchmarking information as reference to your own performance measurement.

The next step is to begin monitoring actual individual performance by day by activity or at least by core activity (the point at which the employee spends the most time performing work). Utilize the same type of spreadsheet and begin posting actual performance man hours and units to standard or reasonable expectations. One to three weeks’ accumulation of data will clearly identify who is and who is not performing to expectation, and will also confirm if your standard is valid or if it requires review and adjustment. Your first obligation to underperforming employees is to assure that they are properly trained to perform the work effectively. Once assured they are trained you can effect management control within your company policies and guidelines either to improve their performance or replace them.

READ: Key Principles to Assessing Your Warehouse Operations

With performance measurement and planning tools in place you are ready to address the most immediate return to labor management—eliminate or reduce overtime or premium labor hours. Premium labor hours are a crutch for poor performance. We have found that the best method of reducing overtime operationally is to simply bite the bullet and advise your team that there will be no overtime unless you personally approve it, and you don’t plan to do so. Typically, within a week or two following this direction you will find that the same work is being done with fewer man hours, and you will realize immediate savings. The downside to prepare for is that during those two weeks customer service will slip until all realize that you are serious and pick up the pace. The key to success in managing overtime is not to waver during those two weeks by approving exceptions to your rule.