How to hold the line on labor costs

By Maida Napolitano -- 8/1/2006

Labor costs account for more than 50 percent of a warehouse’s total operating costs. The recipe for a cost-effective operation is simple: Find ways to better manage labor costs and you’ll improve your bottom line. But for many managers, visions of cutting labor costs go hand-in-hand with visions of new equipment and fancy gadgets meant to reduce headcount and increase the productivity of the remaining workers. These managers may want to have their vision checked; their preoccupation with new equipment can be a little nearsighted. “Managers often forget that labor management is the best way to obtain savings and improve service.” says Don Cook, president of Cook and Associates, a N.J.-based consulting firm specializing in labor management for distribution centers and warehouses. Labor management taps “human resources” and converts them into “human capital” to drive process improvements. Today’s successful manager is armed with powerful information technology and systems support that help carry out the five steps to better workforce management: Improve, Measure, Allocate, Monitor, Communicate, and Motivate. The goal: Work smarter and faster while keeping a lid on costs. The following tips should help managers achieve this goal. 1. IMPROVE Focus on improving existing methods, not buying new equipment. In a 2005 “Census of Distribution” survey conducted by Material Handling Management, 80 percent of respondents reported process improvements as having the most positive impact on their distribution facilities—faring better than the implementation of new information technology (61 percent) and new capital equipment (49 percent). An example of the difference process improvements can make is the case of a small manufacturer that kept its slow-moving merchandise in mezzanine shelving. Supervisors were perplexed as to why pickers could only average 20 lines per hour, when theoretically they should be picking at 25 to 30 lines per hour. They observed that each picker was going up and down the mezzanine staircase many times a day to pick the same set of items. A quick fix involved reslotting products so that only true slow-moving items were kept in the mezzanine. A further increase in productivity occurred when mezzanine items were batch-picked by order and placed on a pallet, which was lowered by a lift truck to the main level for additional picks. No equipment was bought, yet more than a 25 percent increase in productivity was achieved. Consider adopting concepts such as Lean Six Sigma, which discourages pushing workers and focuses on devising better methods while enabling short supply cycles with zero start-up costs. Implement continuous-improvement programs to help you respond to business changes. The issues you deal with today may not be the issues you deal with tomorrow. John Gotthardt, president of Ridge Services, a 3PL that oversees 250 distribution-center workers in multiple facilities for Tommy Hilfiger U.S.A., Inc., concurs. “Our low-level managers tend to get stuck trying to get through the daily grind of running the operation. It’s up to our higher-level managers to step back and periodically question what we do and how we do it. It helps to look at it with a fresh eye and see how we can improve processes and make sure that they are still relevant to our current mission.” 2. MEASURE Set accurate work standards. Once process improvements are in place, the setting of accurate standards forms the basis for other labor management tasks, such as monitoring performance, scheduling work, and setting incentives. Many companies rely on total pieces shipped per man-hour to calculate the overall standard for the entire facility. “This information is not accurate enough to truly evaluate individual employees or provide equitable incentives,” counters Cook. Engineered time standards, on the other hand, break down each task into small elements that can be timed by a stopwatch. Adding in allowances for fatigue and personal needs determines an accurate, standardized measure of time for an operation. However, many feel that setting up time standards can get too expensive and time-consuming. An alternative is generating work standards based on historical data derived from individual task information supplied by Warehouse Management Systems (WMS). Figure 1 shows a sampling of work standards based on historical data for common tasks. Periodically update your work standards. Business conditions and requirements change, and so must productivity standards. For instance, value-added services such as ticketing and labeling that previously were accomplished in the warehouse may now be the responsibility of suppliers. Picking and packing standards must be updated to reflect this change and maintain accuracy. 3. ALLOCATE Use Labor Management Systems (LMS) to schedule and allocate work. A lift-truck driver drives back to the dock empty-handed. Workers stand idle as they wait for assignments. These scenarios are indicative of poor scheduling and allocation of work. Determining the appropriate staffing level for a given labor shift in response to seasonal requirements requires advanced planning and accurate standards. Many companies rely on spreadsheets to manually assign tasks in the warehouse. Today’s Labor Management Systems, either stand-alone or used in conjunction with a WMS, make it possible to allocate work by the day, by shift, or even by the hour—and in less time with more effective results. The software keeps a record of tasks that need to be accomplished and how long it takes to accomplish each one. The system determines the number of people required and via radio frequency assigns the tasks to individual employees. Other capabilities include task interleaving, which ensures that lift-truck drivers don’t leave storage areas or docks empty-handed by assigning them a retrieval or putaway task nearby. 4. MONITOR Monitor performance to instill productivity awareness. “In places where good workers don’t get recognized and no action is taken on poor workers, the prevailing attitude of 'Why should I bother?’ tends to dominate,” states Cook. Gotthardt adds that his managers judge workers’ performance against a bell curve. “We recognize that most people will fall under an average. We then concentrate on the people that are in the lowest 10 percent productivity level. First-level supervisors then talk to these employees on a weekly basis. If it doesn’t work, then second-level managers try to get to the root of the problem.” Use LMS to monitor worker performance in real time. Using LMS software also creates an added advantage for monitoring workers’ performance. With network connectivity, Web-based systems, and radio-frequency systems, data can now be captured in real time. LMS modules can track the actual progress of work versus its expected completion time, thus making it more effective for scheduling temporary workers, resolving current predicaments, and anticipating future bottlenecks. 5. MOTIVATE Initiate incentive programs. Acknowledging a job well done goes a long way, but the most dramatic results may result from monetary-incentive programs. “About 50 percent of our clients have some sort of incentive program,” says Cook. “They are far more productive than the other 50 percent who don’t have one. We also noticed that about 20 percent of employees will earn the most. Because they are earning more, these productive employees are satisfied and tend to want to stay with the company.” Figure 2 illustrates how incentives can be calculated. Share the savings gained by increased productivity with your employees. Gotthardt explains, “We calculate how much savings a productivity increase brings to the company, and we share that savings with the employees. For example, with a 5 percent increase in productivity, our company may save 40 cents per unit. Half of that, or 20 cents, goes to the employee as part of the incentive.” Generally, however, companies have learned to put a cap on incentive systems because some people will compromise their health and safety to earn bonuses based on performance. Improve employee morale by improving the working environment. Create a comfortable, clean, safe working environment with reasonable work requirements that employees can perform repetitively without straining themselves. Provide adequate lighting, a comfortable working temperature, proper rest breaks, and padded mats in areas where employees must stand for any length of time. 6. COMMUNICATE Recognize that communication is the link that binds all labor management functions. Training workers in the best way to accomplish their tasks, sharing engineered standards and incentive systems, and maintaining reporting systems that accurately track performance are important forms of communication in labor management. The value of maintaining open communication should be underscored. Gotthardt says: “There is a fine balance between getting people’s respect as a manager and being approachable enough to be able to listen to what your employee has to say.” Providing a suggestion box may uncover surprising results from those too timid to talk. Break down the language barrier. One of the biggest challenges for labor managers today is the increasingly diverse employee population, which has created a significant language barrier. Employees and supervisors alike may have to be trained in two languages. Complex information system menus should include bilingual capabilities. A FINE ART Labor management in the warehouse is a fine art. Not only must managers improve how they train, schedule, and motivate the workforce, they also must deal with external factors, such as health care and immigration issues. LMS modules can ease these burdens and provide comprehensive reports on productivity. With costs of over $100,000, however, not everyone can afford to take that plunge. A last word: Make sure you improve processes first before you urge your employees to go that extra mile. Figure 1:General Productivity Standards (color chart) Note: These rates are broad estimates based on experience in a wide variety of applications. There are additional variables that must be considered, such as: product slotting; travel distances; the use of paper, radio frequency, or voice-directed activities; and training, opportunity to dual cycle, carry multiple pallets in a move, etc. Fork-Truck Pallet Movement Lower Range Upper Range Units Counterbalanced 10 15 pallets/hour Narrow-aisle Reach 8 20 pallets/hour Man-up Turret 12 20 pallets/hour Man-down Turret 15 25 pallets/hour Narrow-aisle Articulating 8 15 pallets/hour Stacker Crane 24 30 pallets/hour Order Picking (Cases) Pick to cart 25 60 lines/hour Pick to powered pallet jack 30 80 lines/hour 50 120 cases/hour Case pick to conveyor 200 400 cases/hour Order Picking (Pieces) Pick to container/conveyor 60 150 lines/hour Pick to cart 30 100 lines/hour Carousel to container 200 400 lines/hour Flow rack to container 100 200 lines/hour Bin shelves to container 80 150 lines/hour Truck Load/Unload Unload floor to conveyor 350 400 cartons/hour Hand-stack into trailers 150 300 cartons/hour Palletizing from Conveyor 300 350 cartons/hour Source: Rules of Thumb, Gross & Associates, 2005 edition Figure 2: Productivity Index Calculations (color chart) By viewing this network screen, employees and managers see how well they are performing and how the Productivity Index (PI) is calculated. The current and previous week’s information is available by day, by worked-in department, and totaled for the week. The screen clearly shows how work in multiple tasks is summarized by using Engineered Time Standards. The resulting Total Standard Hours credited to the employee, divided by the employee’s Available Hours to perform the work, produces an accurate Productivity Index. Colored boxes indicate values used to calculate Incentive Payments. All employees are accounted for since the program is integrated with the Time & Attendance system. EMPLOYEE NAME: Jones, Tom 100-HOUR PI AVERAGE: 96.7% EMPLOYEE NUMBER: 39748 WORKDAY: Total Week PEP CENTER: 1890 – Picking DATE: 6/23/06 Summary Standard Hours Available Hours Current PI % 34.44 35.00 98.4% COMPLETED WORK No. Task Name Measure Time Standard Units Minutes % 01 Start picking cycle Cycle 2.00 50 100 5 02 Full cases picked Case 0.66 455 300 15 03 Broken cases picked Piece 0.25 2,265 566 27 04 Loose pieces picked Piece 0.10 3,995 400 19 05 Locations visited Location 0.17 4,120 700 34 Standard Minutes 2,066 Total Standard Hours (Standard Minutes/60) 34.44 Source: Cook & Associates www.cookpep.com HOURLY DETAILS Category Hours % Total Payroll Hours 40.00 Minus special projects 2.50 6.3 Minus paid relief 2.50 6.3 Minus hours loaned out 0.00 0.0 Plus hours borrowed in 0.00 0.0 Total Available Hours 35.00 87.5 Author Information Maida Napolitano is principal author of Making the Move to Cross Docking, Using Modeling to Solve Warehousing Problems, and The Time, Space, and Cost Guide to Better Warehouse Design. She is a senior engineer affiliated with Gross & Associates.