Cost-Cutting Done Right

Problem: Seta Corp., a jewelry syndicator and the parent company of Palm Beach Jewelry catalog, continually looks to reduce labor fulfillment costs.

Solution: Instituted employee incentive programs, improved automation, realigned scheduling and staffing, and streamlined distribution center operations.

Result: Between 1999 and 2004, the cataloger reduced its labor fulfillment costs by 45 percent; at the same time, it increased employees’ average hourly wages.

* The following functions are included in Seta’s labor fulfillment costs: receiving; quality control; stock putaway; picking/packing; shipping; engraving; returns processing and putaway; production maintenance; and all hourly and salaried payroll costs, including payroll taxes.

If you’re of the mindset that says you can’t significantly reduce labor costs without also decreasing workers’ wages, Tim Holody, chief operating officer at Seta Corp., has a message for you: Think again.

By carefully implementing a strategic plan, Seta Corp., a Boca Raton, Fla.-based jewelry merchant, reduced its labor fulfillment costs by 45 percent and reduced its cost per package* from $1.64 in 1999 to $0.90 by 2004. Meanwhile, fulfillment employees’ average wages during that time period actually rose 25 percent.

Moreover, Holody and his team achieved these results despite a substantial sales reduction during the five-year period as a result of Spiegel’s bankruptcy. Seta Corp. sells jewelry through syndicated partnerships with other catalogers (e.g., J.C. Penney, Redcats USA titles), in addition to selling merchandise direct to consumers via its Palm Beach Jewelry catalog.

The following program enabled Seta to tighten its product fulfillment operations while also keeping its workforce motivated.

Instituted Individual Incentives

Holody instituted an ambitious and aggressive incentive program for all of the company’s distribution center (DC) employees and managers. For each employee, the company tracks how many hours worked and the number of transactions processed, and it measures the worker against a set standard of productivity. It then rewards the employee $3 for each hour he or she saved. (See chart “Individual Incentives,” for further explanation of this system.)

Employees who occasionally experience a week of lower productivity are given extra coaching, but money is not deducted from their pay. However, workers whose productivity measures chronically are below the set standard usually don’t complete the probationary, or training, period. Says Holody, “Great care is given to make sure we align the employees’ skills with the job itself, and employees are monitored very closely during the first few weeks of training.”

DC supervisors get the average incentive per hour for the employees they manage. Holody says rewarding managers for their workers’ performance reduces the chance of favoritism if the company has to cut back staff. “Because supervisors actually make money on the high-performers, they’re less likely to make staff-reduction decisions based on personal preferences,” he notes.

As a result of this incentive program, Seta’s DC employees increased their average production from 250 units per hour to more than 500, all in a manual batch-processing environment. And they increased their wages by $2.50 to $3 per hour over their average base pay of $10.

Takeaway Tips: Holody, who calls himself an “incentive advocate,” says staff motivation programs in general should be reserved only for jobs in which individual performance (e.g., productivity, accuracy) can be measured objectively. “Picking and packing operations are good examples,” he offers. And special projects, such as cleaning the warehouse or the parking lot, shouldn’t count toward incentives. “Such duties comprise non-productive time,” says Holody, “and as such, they’re beyond the employees’ control.”

Implemented Team Incentives

Certain positions, such as shipping processors, don’t lend themselves well to individual incentives, says Holody. At Seta, those jobs are converted to team incentives. Employees who aren’t part of the individual program (as described above) are given team-based incentives in which the calculation is the same as in the chart “Individual Incentives,” but are based on productivity standards determined for the team.

Holody admits it’s not a perfect solution, but it’s good for those functions that simply can’t be measured per individual. “What’s particularly effective about the team approach is that team members will coach one another if their weekly numbers aren’t up to par,” Holody says. The plan seems to work: About half of Seta’s fulfillment-cost reductions were as a result of the team-incentive program, Holody recounts.

Takeaway Tips: The incentive programs’ calculations should be easy for employees to determine on their own, but don’t base workers’ actual paychecks solely on their own counts, he says. Instead, use systems-based controls to calculate both the individual and team incentives. The programs should be transparent, and managers should be ready to explain to employees and teams how productivity calculations are determined.

Improved Quality and Accuracy

Seta also measures the quality and accuracy of its shipments to customers, and in 2004, the company registered a fulfillment accuracy rate of 99.63 percent. Holody calculates the fulfillment accuracy rate as follows: number of units that customers return because of fulfillment errors, divided by total units shipped.

Takeaway Tip: As long as you measure for it, “Quality and accuracy tend to improve with an employee incentive program,” says Holody, countering the often-heard argument that quality and accuracy standards decline when managers push for improved productivity. “Your top performers also will be the most accurate,” he says. And if those top performers feel generally well-compensated, their quality and accuracy measurements may improve along with their wages.

Let Automation Help

Seta’s automated and semi-automated processes do their share to keep fulfillment costs down. For example, its cold seal packaging equipment can process 400 to 500 packages per labor hour, and be operated by just one worker per shift. Its automated sort system can delineate up to 3,000 packages per hour for sorting to U.S. Postal Service Bulk Mail Centers or other carrier breakouts. The cataloger also makes extensive use of barcoding for all items and warehouse locations. Lastly, it makes broad use of radio-frequency applications.

Takeaway Tip: “Automation makes sense only if the equipment/capital investment can be amortized within a relatively short period of time, say, one to three years,” says Holody. “The exception would be if you have a [DC] capacity problem.”

Carefully Examined Staff Scheduling

“If we kept two people on a job that we know should take just one person, the work for the two of them inevitably would stretch to fill the entire day. In other words, work expands to the time allotted,” reasons Holody.

Takeaway Tip: Staff and schedule your operation according to the expected productivity, by both job and employee, says Holody.

For example, if Seta has 4,000 units to pick in one day, and its top producer can pick 500 units per hour, managers schedule that employee to do all the picking for that day’s orders. Other pickers are assigned to other duties that day, says Holody. Similarly, if the company had 3,000 units to get picked one day, managers would assign the top performer to work six hours on picking and the remaining hours on other duties.

Provided Motivation; Fostered Teamwork

After nearly 30 years in merchandise fulfillment, including stints at the Home Shopping Network and Orvis, Holody concludes that most employees are motivated by the following four things:

- a good working environment — Seta’s South Florida-based DC is air conditioned, and employees can wear jeans to work;

- fair pay for the job — “Your local labor market should dictate your base salary,” Holody advises;

- opportunity to improve income — the incentive programs help here; and

- fair treatment and respect.

Moreover, Holody says, “Success in any environment comes from people working together as a team. We accomplished the 45 percent reduction in labor costs by working as a team. We focus on individual success within the team environment, while working toward team goals.”

Streamlined DC Operations

When Holody began working at Seta in 1998, the company had a location inventory accuracy rate of just 78 percent. Since 1999, however, that rate has improved to 99.3 percent or better — no small feat for a DC with 40,000-plus picking locations, 22,000 of which are small bins just big enough for rings, one of Seta’s best-selling product categories.

Holody says the following action steps helped boost inventory accuracy:

* Reduce the amount of times a product is handled. For example, Holody and his team eliminated reserve stock locations. Instead, they take all items directly from quality control and put them in a forward picking location. “This results in a small increase in walk time,” says Holody, “but we offset that by entirely eliminating the replenishment function.”

* Perform daily, random cycle counts. “Inventory accuracy is enhanced by regular cycle counts, which assure that the correct items are in the right locations,” he notes. “This helps reduce fulfillment costs, because an accurate inventory virtually eliminates the number of ‘exceptions’ a picker has to face. Picking productivity goes up with fewer exceptions, which helps to reduce our overall fulfillment costs.”

* Assign one location per SKU and one SKU per location. This helped reduce fulfillment costs by eliminating double- and triple-handling of items. “Once an item is put in a location, that location becomes the home for that SKU,” he explains. “Eliminating multiple handling of items helped reduce our fulfillment costs.”

* Reduce the number of people who can make inventory location adjustments. Seta reduced it from 23 to two, which forced all adjustment transactions to be more closely scrutinized, says Holody, and it created “a much-needed accountability for adjustment accuracies.” For example, if an inventory control manager makes an adjustment, he or she is then held accountable for it, and must justify and reconcile all adjustments on a weekly basis to Holody and Seta’s chief financial officer.

* Create a quick and easy returns process. All customer service paperwork is handled in the DC’s returns area, rather than being routed to other departments. “The returns department is equipped with a system that lets the operator scan the barcode of the returned item and designate a reason code for the return. The customer’s complete transaction, including refund, credit or exchange, also is completed. The operator then decides to refurbish or restock the item, and then hits ‘enter.’ It’s a very simply process,” says Holody, who notes that Seta’s returns rate is about 10 percent.

“The more steps to a process and the more complicated we make it, the greater the chance for errors, delays and increased costs. As the saying goes: Keep it simple,” he notes.

Implemented an Operations Management Incentive Plan (OMIP)

This initiative, begun in January 2000, was the final piece of the overall incentive strategy. It’s meant to motivate DC managers to continually look for process improvements and cost reductions. It promises to extend Seta’s fulfillment cost cuts into the future.

Here’s how OMIP works: The company tracks its total payroll costs on a monthly basis and determines its actual cost per package. The cost then is compared against a standard, and any resulting cost savings is split with the managers on a 65/35 (company/managers) basis, says Holody (see the above chart “Operations Management Incentive Plan”). “You can’t successfully incentivize your line workers without doing the same for managers,” he explains.

Conclusion

Holody offers some parting advice to other catalog fulfillment managers who want to reduce costs: “The most important thing to remember is that we’re in the business of managing people. By carefully aligning the goals of each employee in a DC with the goals of your company, you can achieve great success and reduce costs far beyond what you may think is possible.”

Palm Beach Jewelry’s List
12-month housefile: 65,000
Rental cost: $90/M
Contact: Tom Bacino or Kathleen Wallish, TPB Media Services, (847) 587-3111

About Seta Corp.
Headquarters: Boca Raton, Fla.
Company founded: 1955
Direct to consumer catalog title: Palm Beach Jewelry
Products: Jewelry and fragrances sold directly to consumers and through syndication partnerships with other merchants
Channels: 66% of business is from syndication partnerships; 33% is consumer direct
# of employees: 75
# of SKUs: 40,000
Packages shipped annually: About 1 million
Printer: Quebecor World
URLs: www.setacorporation.com, www.palmbeachjewelry.com

Some of Seta’s Syndication Partners
Redcats USA, including: BrylaneHome, Chadwick’s, Jessica London, Lerner Catalog and Roaman’s
Spiegel and Newport News
Blair Corp.
Lillian Vernon Corp.
IMS (Swiss Colony)
Sears