Get a Grip on Your D.C.

Most fulfillment processes are largely manual in nature, as only the very largest companies can justify advanced automation. Looking at the total cost of back-end order fulfillment — including direct and indirect labor, occupancy, and shipping supplies — total labor generally makes up 60 percent to 65 percent. That excludes any shipping costs because they distort the comparisons.

Benchmarking ShareGroups, a proprietary program in which participants share benchmarking data, reveals that labor rates were typically around $7 an hour five years ago. Today, they’ve reached $12 to $13 an hour for many direct marketing businesses, plus a 20 percent benefit rate. But overall productivity in distribution centers has remained flat over a five- to 10-year period. If you factor in increasing labor rates, you can conclude that productivity has actually declined.

Consider employee turnover of 15 percent to 25 percent, or even more in many centers.

Turnover costs $3,000 to $10,000 in people time, training, testing and the ramp up to full production; that doesn’t include the expenses for agencies, ads or other details.

Given the current economic climate, businesses must do all they can to get more out of the resources they have.

With that in mind, here are 10 ways to improve productivity by managing distribution-center labor more effectively.

1. Improve Hiring Practices
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 people come across in interviews, you can’t tell how well you’ve hired until they start working. Consider these ideas.

• Give prospective employees some limited instruction, then let them try the work up front.
• 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 company's culture.
• Use a “buddy system” with seasoned employees in the department to get the new employees 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 the use of your staff?

2. Measure & Act on Turnover
Set up a system to track and calculate monthly employee turnover. Develop a turnover report that shows the following employee counts for you:

• the number of employees that were hired;
• staffers who began training;
• those who left while in training; and
• those employees who left once they graduated to production staff.

If you don’t already have one, establish an exit interview process to learn more about why people leave. Look at the turnover by months and years of service. Determine whether you’re seeing turnover with long-term employees or new hires — or a combination of both.

Then calculate the cost of recruiting, training and losing employees, and get management to understand the reasons and the costs. From there, establish a well-designed plan of action to change these trends.

3. Set Standards, Expectations
There’s an old industrial engineering axiom: You can’t improve something you haven’t measured. With that in mind, establish production goals by department and individual and measure against them. 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/expectations. Engineered standards are expensive for small and midsize companies to establish and maintain. However, most companies can gain from setting expectations based on benchmarking with other companies. This lets you understand productivity, costs and best practices in other businesses.

Study your operation and set up internal production standards that can be measured while being fair. Don’t just use someone else’s standards, as they probably won’t fit your operation.

The important benchmarking exercise is to measure your production against yourself by season, month and week. Increase the “height of the bar” over time; you’ll generally see overall productivity increase. The most difficult part of all of this is getting accurate production data.

4. Budget by Labor Function
Many operations have planned dollar budgets for each month. While dollars can be derived from this, a labor budget shows the number of hours needed for each function based on orders and work flow. Your budget should be planned by month, week and day.

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 your expected return rates. Derive production expectations by labor hours from the benchmarks you set for your operation as described above.

Convert the expected transaction volumes into units of work. In the receiving area, for example, that will mean estimating pallets and cases by the week and, preferably, by the day. In picking, extend the number of orders by day into the units per order. Identify variables, and plan for the fixed labor required to meet these volumes.

Sum this all up on a weekly level. Over time, as you get more experience and history, you can experiment by taking it to a daily level. Challenge your supervisors to see this as a standard for bringing in quality personnel. We all know that there is “play” in these volume estimates, but using this methodology will help you improve customer service and keep overtime to a minimum.

5. Give Employees Feedback
Most people want to feel they’re part of the bigger company picture. They also deserve to have accurate feedback about their production. LifeWay Christian Resources — a religious nonprofit organization based in Nashville, Tenn., that is the publishing, retail and direct commerce arm of the Southern Baptist Convention — displays the 12 most recent monthly graphs of metrics it uses. These include, among others:

• total error rate;
• cost of a transaction; and
• reported savings.

LifeWay shows actual vs. plan. It displays current production in its distribution center on terminals and boards. LifeWay not only acknowledges department records for various departmental functions, but also individual record holders for such activities as packing. The organization also uses monitors in packing and other departments to show production vs. plan for the day.

6. Provide Incentives
More companies are using incentives to increase production. “Incentives require engineered standards to be fair and to keep productivity increasing,” says one large, multititle cataloger my firm works with. “If they’re not continually evaluated, chances are you’ll end up paying an incentive for production that you have gained over time.”

7. Deal With Seasonal Spikes
Each year customers buy closer to peak dates (e.g., Christmas) and count on operations to deliver on time, thereby compressing the peaks dramatically. Stay in contact in the off-season with part-timers who’ve worked the peaks for you. Consider offering bonuses accordingly:

• a rehiring bonus;
• a stay-the-season bonus; and
• a refer-a-friend bonus.

Also, try temporary help agencies to meet the peak requirements.

8. Streamline Functions
Three areas — picking, packing and returns processing — comprise 60 percent to 80 percent of the labor cost in most distribution centers. Look at each of these areas to determine how to reduce the work required. Take time to ponder the following.

• In picking, 60 percent of the pickers’ time is spent walking. Can you slot fast-moving product (20 percent to 30 percent of the product) in closer “hot-pick” zones to reduce pick time? Are there other picking methods, such as cart/bin, pick-to-light or voice pick, that will increase productivity?

• 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 the production?

• In returns, can the steps be simplified? Can a team approach speed up processing?

9. Streamline Processes
Streamlining labor functions isn’t a one-time activity. Set up a continual improvement process to reduce and simplify the steps and number of times you “touch” product. This is a set of activities designed to bring gradual but steady improvement through constant review. Every time you touch product, you add cost.

10. Answer Key Questions
Look at your leadership and managerial capabilities, and answer these questions:
1. What motivates staff members to excel beyond simply the expected performance?
2. Have you delegated and empowered your staff to succeed?
3. Are your team members the most capable and talented people you can afford to hire?
4. Are any staffers too weak to enable you to achieve the success you were hired to achieve?
5. How effectively and objectively do you evaluate the performance and development of your team members?

“Managing labor is a game of reducing a few pennies here and there on an organized basis to reduce the cost per order overall,” says another large, multichannel marketer my firm works with. “We need to consider how to motivate and increase productivity fairly so we can successfully achieve our company’s goals.”

Curt Barry is president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory and benchmarking. For information, go to www.fcbco.com.