Warehouse Cost Reduction: How to Yield Immediate Results

A common thread to all warehouse operations is the quest to manage expenses. The most critical and manageable expense item on your P&L statement is labor. Managing labor efficiently will generate immediate results in your quest to manage expenses.

This begins with capturing daily man-hours used by department or activity in categories such as receiving, put-away, replenishment, pick/pack/ship, inventory management, supervision, etc. Capturing the man-hours used can be done with sophisticated warehouse-management system software or a more manual approach. But no matter the method used, you must know how many man-hours are used each day, in each activity.

Once you’ve successfully determined man-hours used by activity, begin relating them to a volume measurement (units, lines, orders, cases, pallets) for the activity by day. If you don’t have a sophisticated system to do the calculation, create a spreadsheet for each activity with weeks down the side margin and days of the week across the top heading. Include subheadings for each day:

* volume;

* man-hours; and

* volume per man-hour.

Total up the horizontal subheadings for the week and calculate the total week’s average performance. Charting this data cumulatively by day and week not only creates a management tool to begin monitoring and controlling labor expense, but it also develops a historical planning tool for budgeting.

Now that you’ve captured the core data of man-hours used and volume by activity, establish metrics of performance for each activity. Again, the level of sophistication for developing performance metrics varies from industrially engineered labor standards to simply establishing reasonable expectations by making three to six observations of employees performing a task, averaging units per time and deriving an expected performance level of units per man-hour.

Acceptable performance levels might include work-pace averaging, performance rating, fatigue and delay allowance, control start and stop time, assessing the skill level of the employee performing the task, a detailed description of the activity, and identifying order(s) and units. It’s beneficial to draw upon benchmarking information as a reference to your own performance measurement.

The next step is to begin monitoring actual individual performance of day by activity or at least by core activity — the point at which the employee spends the most time working. Use the same type of spreadsheet and begin posting actual performance man-hours and units to standard or reasonable expectations. One to three weeks accumulation of data clearly will identify who is and who’s not performing up to expectation, as well as confirming if your standard is valid or if it requires review and adjustment.

Your first obligation to underperforming employees is to determine if they’ve been properly trained to perform their job effectively. Once assured they are, you can assert management control within your company policies and guidelines to either improve their performance or replace them.

With performance measurement and planning tools in place, you’re ready to address the most immediate return to labor management — eliminate or reduce overtime or premium labor hours. Premium labor hours are a crutch for poor performance.

We’ve found the best method to reducing overtime operationally is to simply bite the bullet and advise your team there will be no overtime unless you personally approve it, and you don’t plan to do so. Typically within a week or two following this direction, you’ll find the same work is being done with fewer man-hours, and you’ll realize immediate savings. The downside to prepare for is that during those two weeks, customer service will slip until all realize you’re serious and pick up the pace. The key to success in managing overtime is not to waver during those two weeks by approving exceptions to your rule.

Gary Conrad is a vice president at F. Curtis Barry & Co., 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.