How to Reduce Costs by Paying Your Labor More
By Jim Laverty
Eliminate overtime while increasing productivity by 20%
You can dramatically reduce your long-term operating costs by simply paying your existing labor more based on their level of performance. Incentivizing higher performance in the form of hourly wage increases will motivate your warehouse staff to continually work at a higher level, eliminating the need to hire additional workers.
When you incentivize labor like this, your staff will strive to meet the incentive metric. This creates an atmosphere of peer pressure that encourages everyone on staff to hit that high metric. The incentivized level becomes the new norm, thereby raising the level of performance throughout your entire operation.
Here’s an example of this labor management principle in action:
We’ll assume there are 15 existing workers in your warehouse and that each makes $15/hr for hitting their minimum of 20 picks in an hour. At their current productivity, your labor is making 300 picks an hour at a cost of $225 to you. Your business has grown though and you need them to be making 360 picks an hour.
You have three options here:
- Hire 3 workers and pay them $15 an hour PLUS benefits
- Pay for overtime at 1.5 times the hourly rate
- Motivate your current employees to increase their current output
If you hire 3 additional workers, you’ll get those extra 60 picks per hour, but it will cost $45. If you allow each employee to work overtime, it’ll be an extra 1.6 hours for each employee per day, resulting in a total added cost to you of $56.25 per hour. If you incentivize labor output so that each worker makes an extra dollar an hour by getting 24 picks, you’ll reach your 360 picks goal at an added cost of only $15. When you extend those cost savings out over entire operation over the course of a year, you’ve just reduced operating costs by enough to be the first line in your company’s annual report.
Important: All incentive rates must account for error. Quality must remain at the same high level regardless of production. Metrics should be displayed in real-time across the facility so everyone always knows exactly where they stand, and those that fail to meet minimum standards consistently should be dealt with. Without consequences for failure, your incentives are useless.
It is important to understand your facilities matrix in setting the baseline. It’s not just as simple as providing an incentive for your worker, you need that incentive to be driven by actual performance data. You need to identify your KPIs and standards so you can define the program, and make sure you understand how to track and compare metrics. Picking cases versus picking bulk would be different metrics per hour so you can’t penalize someone for performing less if it’s a different type of metric that’s not comparable. It is vital to analyze normal average days over the course of days, weeks, months, and even years to observe normal and spike behavior. You have to find out the median production and determine where your incentive and minimums are located.
“Improving the mechanisms used in tracking labor helps you implement a “carrot and stick approach” in your warehouse, rewarding your top performing talent and holding your lowest performers accountable for their lack of production.” - Joe Matthews, Chief Operating Officer, Independent Publishers Group
The ultimate goal of labor management within a warehouse is to reduce costs while continually raising the standard of performance. Closely tracking performance data and incentivizing your staff with a wage increase based on superior productivity will increase individual performance, reduce the need to hire additional labor, and create a positive competitive environment where staff challenges each other to continually do better.
Measuring productivity is difficult and often misleading. Our approach to labor management is all about controlling costs. Our WMS tracks critical performance metrics for every worker (number of units picked, number of orders completed, time elapsed to pick an order, etc.), and compares it to established standards. These real-time statistics can be displayed throughout your warehouse and emailed to managers so your staff always knows their current level of performance.
These labor analytics can provide visibility into your warehouse operations that have will have a significant impact on costs, inventory, and availability and cycle times. With this direction, you’ll have statistical data to easily improve order promising and profitability decisions.
Get the tools you need to monitor labor performance without getting your IT department involved. Schedule a demo of the irms|360 Enterprise Warehouse Management System today.