10 Tips to Manage Labor More Effectively in Your Supply Chain Logistics
Most supply chain logistics processes are largely manual in nature; only the very largest companies can justify advanced automation. When you look at the total cost of back end order fulfillment—as we did by studying our proprietary data collected during our Benchmarking ShareGroups and supply chain consulting projects—you’ll find that out of costs that include direct and indirect labor, occupancy, and shipping supplies, total labor generally makes up 60%-65%. (We have excluded shipping costs, because it distorts comparisons.)
Typically, labor rates were in the $7.00/hour range five years ago. In many direct businesses today they have reached $12.00 to $13.00, plus a 20% benefit rate added on. But overall productivity in supply chain logistics has remained flat over a 5- to 10-year period. So, after factoring in the increasing labor rates, productivity has actually declined. Then consider employee turnover. Industry experience is that employee turnover in many supply chain logistics operations is 15%-25% or higher. Turnover costs range from $3,000 to $10,000 in people time, training, testing and the ramp-up to full production. This does not include expenses for agencies, ads, etc., which must be added on.
Given the current economic climate, most businesses are mandated to get more out of the resources they have. Here are 10 ways to improve productivity by managing your supply chain logistics’ labor more effectively.
1. Improve your odds with new employees
Hire right. How many times have you had new employees quit because they didn’t understand what the job entailed, or didn’t like it once they tried it? No matter how good the person comes across in an interview, you can’t tell how well you’ve hired until they start working.
•Some companies have had good results by giving prospective employees some limited instruction and then letting them try the work.
•Determine if there are tests you can give that assess whether people can do the work or have a good chance of fitting into your culture.
•Use a “buddy system” with a seasoned employee in the department to get the new employee off to the best start.
•Look at whether you have an effective training program by function. Will cross training improve production and give you flexibility in staff utilization?
2. Measure employee turnover and do something about it
Set up a system to track and calculate employee turnover monthly. Develop a turnover report showing the number of employees hired, employees who started training, employees who left while in training, and the number who leave once they graduate to the production staff. Establish an exit interview process to learn more about why people leave. Look at the turnover by months and years of service. Are you seeing turnover with long-term employees? New hires? Calculate the cost of recruiting, training and losing an employee and get management to understand the reasons and the costs. From there establish a supply chain strategy of action to achieve a positive change.
3. Set standards or expectations
There is an old industrial engineering axiom: “You can’t improve something you haven’t measured.” Set up production goals by department and individual. (Departments or functions include receiving, put away, replenishment, picking, packing, shipping, and returns.) There are two ways to do this: engineered standards and benchmark goals or expectations. Engineered standards are expensive for small to moderate sized supply chain logistics operations to establish and maintain. However, most companies can gain from setting expectations based on benchmarking with other companies. This will let you understand productivity, costs and best practices in other businesses. Study your suplly chain logistics operation and set up internal production standards that can be measured and are fair. Don’t just use someone else’s standards, as they probably will not fit your operation. The most important benchmark exercise is to measure your production against yourself, seasonally, by month and week. Increase the “height of the bar” over time and you’ll generally see overall productivity increase in your supply chain logistics. The most difficult part of all this is getting accurate production data.
4. Develop labor budgets by function
Many supply chain logistics operations have a planned dollar budget for the month. While dollars can be derived from this, a labor budget shows the number of hours needed by function based on the order and work flow. The budget should be planned by month, week and day if possible. For each of the various flows, identify the major activities: orders, receipts, returns, etc. The starting point for the orders is the projected order flow that marketing is expecting. For receipts this can come from purchase order files of expected receipts. Returns can be planned from the expected return rate. Production expectation for hours are derived based on the benchmarks that you set for your operation as described above.
The key here is to convert the transaction volumes expected to units of work. For example in the receiving area, it will mean estimating pallets and cases by the week and preferably by the day. In picking it means extending the number of orders by day into the units per order. Identify and plan variable and fixed labor required to meet these volumes.
Sum this all up to a weekly level. Over time as you get more experience and history you can experiment with taking it to a daily level. Challenge your supervisors to see this as standard for hiring and bringing in personnel. We all know that there is “play” in these volume estimates, but using this methodology will help you plan for improving customer service and keeping overtime to a minimum.
5. Give employees feedback
Most people want to feel they are part of the bigger company picture. They also deserve to have accurate feedback about their production. LifeWay Christian Resources, a religious nonprofit based in Nashville, TN that is the publishing, retail and direct commerce arm of the Southern Baptist Convention, is a great example. In their supply chain logistics offices they display monthly graphs for the past year of metrics such as total error rate, cost of a transaction, reported savings, etc. Actual against plan is shown. In their DC, current production is displayed on terminals and boards, and they not only acknowledge department records for various departmental functions, but individual record holders for such activities as packing. LifeWay also uses monitors in packing and other departments to show production versus plan for the day.
6. Provide incentives
More and more companies are using incentives to increase production. A large multi-brand catalog client we work with volunteered, “Incentives require engineered standards to be fair and to keep productivity increasing. If they are not continually evaluated, chances are that you’ll end up paying an incentive for production that you have gained over time.”
7. Deal with seasonal spikes
Each year the customer buys closer to the peak and counts on supply chain logistics operations to deliver on time—compressing the peaks dramatically. Stay in contact off-season with part timers who have worked the peaks for you. Consider using bonuses smartly: a) rehiring bonus; b) stay the season bonus; c) refer-a-friend bonus. Try temporary help agencies to meet the peak requirements.
8. Streamline functions
Three areas—picking, packing and returns processing—make up 60%-80% of the labor cost in most supply chain logistics. Look at each of these areas to determine how to reduce the work required. For example:
•In picking, 60% of the pickers’ time is in walking. Can you slot fast-moving product (which is 20%-30% of the product) in closer proximity (“hot pick” zones) to reduce pick time? Are there other picking methods like cart/bin, pick to light or voice pick which will increase production?
•In packing, can the pack station be engineered ergonomically to increase production? Can low tech solutions such as box builders or envelope inserters speed up production?
•In returns, can the steps be simplified? Can a team approach speed up processing?
9. Set up a continual improvement process
Streamlining labor functions is not a one-time activity. You will need to set up a continual improvement process—a set of activities designed to bring gradual, but steady improvement through constant review—to reduce and simplify the steps and number of times you “touch” product. Each time you touch product, you add cost.
10. Look at what more you can do as a manager
Look introspectively at our leadership and managerial capabilities in your supply chain logistics operations . Here are a few questions we need to answer:
•What motivates staff members to excel beyond normal expected performance?
•Have you delegated and empowered your staff to achieve success?
•Are your team members the most capable and talented people you can afford to hire?
•Are any of the staff too weak to enable you to achieve the success you were hired to achieve?
•How effectively and objectively do you evaluate the performance and development of your team members?
One of our large multichannel clients summed it up best: “Managing labor is a game of reducing a few pennies here and there on an organized basis to reduce the cost per order overall. At the same time, we need to take into account how we can motivate and increase productivity fairly to achieve our company’s goals.”
If you’re interested in more labor management information or other supply chain strategies, contact Jeff Barry at jbarry@fcbco.com, or call (804) 740-8743. F. Curtis Barry & Co. is a national consulting firm that works with eCommerce, catalog, retail, manufacturing and wholesale distributors on projects focusing on supply chain strategies, order management systems, warehouse management systems, inventory management, third party logistics, and to reduce freight costs.
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