6 Ways to Combat Increasing Labor Costs

   

According to Indeed.com, the job employment website, the average base pay for warehouse workers is $12.92 in the U.S. However, when you factor in benefits such as healthcare, training and more – the fully loaded cost balloons to $22.22 per hour. Companies typically have the following costs over and above the base pay:

  • Benefits and healthcare 35% of payroll costs
  • Workers comp and unemployment 8% of payroll costs
  • Training 4% of payroll costs
  • Recruitment, hiring and HR 25% of payroll costs

When the minimum wage is increased to $15 per hour, these costs push the fully loaded payroll cost to $25.80 per hour. This is an increase of 16.1% with no increase in productivity, efficiency, or accuracy.

To offset these rising costs, companies must have an action plan to reduce expenses and not hurt company profits.  FCBCO recommends six proven ways to drive down costs through efficiencies as well as the use of various technologies.

1. Slotting

Slotting is one of the most critical and costly distribution fundamentals. Most companies struggle to maintain proper product slotting. It is not uncommon to see proper slotting disciplines decrease order cycle times by 20-30% over warehouses that are not slotted properly.

Companies should develop a heat-map to understand the density of picks by location and to understand the distance walked by pickers in a day’s time. A heat map visually shows through “hot” and “cold” colors, where picks are made throughout the facility.  It is not uncommon for pickers to spend 70% of their time walking.

The heat-map will easily highlight the problems within your facility. From here, the slotting should focus on having the right quantity of inventory in a location; using the right size location for product velocity; and where that location should be. It is also critical to think about what products should be picked from “golden zone” locations. These are the fastest and easiest picks to make where no bending or reaching is needed. Focus on the fastest moving (selling velocity) product first. This may be the 20% to 30% of SKUs that give you 80% or more of the units picked. Once the slotting is completed on “paper”, re-run the heatmap with the intended new locations to ensure that you have not created new points of congestion.

2. Evaluate Potential Changes to Picking

In addition to slotting, the most effective pick methodology can have a significant impact on pick efficiencies. If you are discreet order picking (i.e., one order at a time), there are ample opportunities to increase throughput. The same is true for some companies using cart bin picking. Even with proper slotting, your overall pick footprint may be quite large. In some of our clients, the primary picking zone is over 75,000 square feet.

One solution is to consider a zone batch pick. This keeps the pickers in a relatively small footprint - which may be just a few aisles - and they pick a portion of an overall batch. All the picks made from various zones are then sorted down to the order level either with a put wall or unit level sortation. This can dramatically increase the overall pick efficiency and throughput. Companies find it makes a significant difference when they may be struggling to process all the orders before the carrier cutoff time.

3. Invest in An Effective WMS System

Many companies believe that a WMS is just too expensive to consider, but this is not necessarily true anymore. There are great WMS options for whatever size company needing a WMS functions. To give you an idea, a company could invest $35,000 annually for a Software as A Service (SaaS) based 25 user WMS solution which can handle a wide range of multichannel businesses. A company still has to invest in handheld devices and the systems implementation cost. However, the range of features found in even tier 3 WMS solutions far exceeds those found in many order management and ERP systems.

These solutions will give you:

  • Functions to support more efficient picking,
  • Provides different picking methodologies (discussed above),
  • Task interleaving to use labor more efficiently while workers are doing putaway or replenishments,
  • Directed putaway to eliminate workers trying to locate open locations,
  • Suggested carton sizes so packers are not using excessively large boxes,
  • Productivity reporting to know exactly how each employee is performing,
  • Lot tracking and serialization capabilities,
  • Tighter inventory management controls such as FIFO, FEFO and LIFO, as well as robust cycle counting options and audit trails

For companies investing in their first WMS solution, these capabilities provide for a very strong return on investment and platform to grow.

4. Automation, Technology and Robotics

When Amazon originally purchased Kiva Systems for $775 million, people wondered about the ROI, and what the future of automation and robotics would be in distribution centers. Since the acquisition in 2012, Amazon has added over 200,000 robots to its distribution centers. Now, there are even more robotic options and providers to assist with automated picking. This is not to say robotics is the answer for everyone. The cost of technology has come down dramatically to levels where more and more companies can take advantage and get a favorable ROI.

FCBCO is consistently working with companies in the $30 - $50 million sales range that want to explore different ways to automate functions in their order fulfillment process. Often, these include “goods to person picking” technologies where workers are stationery and technology delivers the picking bins to the worker. Other automation includes conveyance and sortation as well as put walls to increase throughput.

Investing in automation and technologies can provide some of the greatest labor savings, by reducing labor costs by 25-50% in different operational functions. These investments are helping to cut the rising labor costs, as well as decrease the onboarding and training costs of new hires. For peak order days, this allows an operation to easily transition part time and temporary workers into a task, like picking, without significant systems training, and less loss of productivity in the couple weeks they are in your operations.  By reducing the amount of time needed to make a worker productive, we can decrease the overall labor costs and cost per order.

5. Lower Transportation Costs

In addition to the above, companies should also consider other ways of reducing inbound and outbound freight costs.  

From a freight perspective, everyone has seen the challenges with UPS, FedEx, USPS, and motor freight during COVID. We have all seen how various surcharges have become permanent and increase over time. Its critical to ensure that, based on package characteristics and volumes, that you have the best small parcel rates possible. Regarding inbound freight, routing guides and freight consolidation are keys. FCBCO and its partners can review your rates and contracts to help you understand potential savings.

6. Consider Third-Party Logistics (3PL)

With the threat of dramatic increases in labor costs, companies should consider how a 3PL could support a part or all your fulfillment and logistics processes. 3PLs can have the capability to handle a wide range of services from kitting and packaging to supporting order fulfillment. For some clients, they found using outsourcing in a region, on an opposite coast or may be more cost effective and manageable than opening a new internal facility.

Others have found 3PL provides total lower cost per order for handling 100% of their order fulfilment needs. Larger 3PLs have can scale to peaks and have more effective WMS systems. Some companies that need to invest in new systems or automation to deal with labor challenges, may find 3PLs to be a favorable alternative eliminating investments and implementation costs.

Summary

Hoping that minimum wages do not increase this year, is not a strategy. Minimum wages will go up, but so are existing base rates for those workers earning more than $15 an hour in your operations. Now is the time to explore all options for reducing costs increasing throughput and productivity.

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