3 Critical Projects to Off-Set Rising Labor Costs


Four trends could make hiring for warehouse and distribution center employees difficult and expensive for the upcoming holiday season and in the longer term:

  1. The Bureau of Labor Statistics announced unemployment in April 2019 hit 3.6%, a 49-year low. Many labor markets are even lower than the national rate and are experiencing difficulty finding the warehouse workers they need. 

  2. A growing number of states passed legislation that automatically increases their state’s minimum wage annually. In many states, it’s edging towards $15.00 per hour in the next few years. The National Conference of State Legislatures (NCSL), which lobbies Congress on behalf of state legislatures, has a comprehensive table showing state by state increases already planned forward. 
  3. A lot of people are sitting on the sidelines - the Labor Force Participation Rate is only 62.8% in April 2019. 
  4. 31% of the workforce is employed in what’s labeled as the “gig” economy to supplement their incomes. “Gig” jobs include driving for Lyft or offering professional services as a freelancer. Many gig workers are working a full-time job with regular hours, pay raises, and good benefits. Other gig workers describe a very different experience: fewer hours than they want to work, only a few days’ notice on work schedules and little in benefits or pay increases. Often, gig workers are contractors who do not have any payroll taxes withheld and pay their own taxes. 

Growing Labor Demand 

In an article reporting April's unemployment, The Wall Street Journal reported that distribution centers are experiencing rapid job growth:

“Warehouse operators stepped up hiring in April as e-commerce demand drove up employment in distribution centers, even as job growth across the rest of the freight transportation sector slowed. Warehousing and storage companies added 5,400 jobs last month, according to preliminary figures the Labor Department reported Friday - the fourth straight month of growth in a sector that includes fulfillment centers that process and ship online orders. The sector added nearly 70,000 jobs over the past 12 months”. 

According to the article, industry leaders are seeing “huge growth” for logistics and e-commerce workers in key hubs like Southern California’s Inland Empire; areas of New Jersey near New York City; Atlanta; Indianapolis; and Memphis, Tenn.

“There are not enough workers in those markets,” Mr. Devine, SVP of logistics-staffing firm ProLogistix, said. “The unemployment rate is so low that it’s difficult for us to fill those positions.”

He said the average wage for ProLogistix workers jumped 6.8% in April from the same month a year ago, to $13.81 an hour.

The current labor climate may create the perfect storm – a tight labor market insufficient for growth during holiday hiring. Are your internal fulfillment operations becoming efficient at a faster pace to off-set these labor increases? For most companies, the answer is a resounding NO.

Manage Labor More Effectively

As fast as e-commerce and omnichannel is changing, is your company spending resources – time, money and talent – to continually become more efficient? Are you innovating in operations at a fast enough rate to lower costs while maintaining customer service? Is there enough time and budget set aside to reach specific breakthrough advances?

Here are three projects that would benefit many fulfillment centers:

1: Determine how to report productivity by department and employee

  • Benefits: Report actual versus planned cost for units, orders, and packages shipped in your operations weekly. Ultimately, compare goals versus actual costs to improve management of labor cost and budget.

    When you consider the total cost of fulfillment (e.g. direct and indirect labor, facility costs, depreciation and amortization of systems and MHE, packing material costs), labor expense is often more than 50% in most businesses.
  • Objectives: Report hours worked and labor costs by department - receiving, put away, replenishment to forward, picking, packing, shipping, returns, DC inventory control. Research phase should include collecting hours worked by function and employee; combined with units of work achieved in the same time period. If possible, record when employees change functions during the day (e.g. from receiving to returns processing). What are the ballpark costs for the systems and the data capture equipment?

Most employees want to do their best work for their employers. Yet, many times companies don’t provide employees feedback on key measures of productivity. Motivate employees and increase efficiency by setting and regularly reporting on specific department and individual employee productivity goals. 

Benchmarking is key to improving profitability and process improvement. This case study illustrates how one company started an internal benchmarking program.

2: Perform a feasibility study to determine the effect of a standalone WMS on your warehousing functions

  • Benefits: A standalone WMS often provides many benefits, such as the ability to track labor costs and inventory more closely through your operation. You may also gain the ability to add other modules, such as labor management and inbound and outbound transportation management systems (TMS).
  • Objectives: The present OMS would remain in place. What major functions could be enhanced or are new to the operations process and systems? Could there be labor savings?

Not sure if a WMS is right for your business? We recommend objectively evaluating the benefits of a replacement WMS for your fulfillment center. If you decide to bring on a standalone WMS, follow our 13 project management steps to select a new WMS. 

3: Improve line managers’ abilities to manage operations throughout the distribution center

  • Benefits: More than 50% of the total cost of fulfillment is labor. An empowered manager can reduce errors, reduce labor cost, reduce absenteeism, and provide better direction and nurturing employees under their control.
  • Objectives: Identify the individual needs of the line managers. Develop a plan for improvement with each manager. Identify educational programs through community colleges, university, consultants, or online programs that would be beneficial. Are there specialized topics that lend well to a one or two-day in-house seminar given by senior management? Estimate budget, timeframe, and potential results.
Challenge your managers to make more money for the company. Motivate them by showing them how they benefit and educating them on why investment is critical to the future. 
READ: 38 Fulfillment Cost Reduction and Productivity Improvement Ideas

In our experience, most fulfillment centers that complete these 3 projects find tremendous benefit and get a return on investment. Happy innovating!

Click to download: Reduce Cost and Increase Productivity