Overtime%: The low-hanging fruit in increasing cost performance in your distribution operation

Every operation wants to increase cost performance. I think that’s a fair generalization to make.

Within the 4 walls of a distribution operation, there are many different costs that need to be accounted for, but none of them are more influential to the bottom line than labor. Direct and indirect labor not only represents one of the biggest overall costs to the average operation, it’s also one of the most variable.

Not all operations were created equal and certainly not all payrolls.

This is why, when it comes to reducing costs, most operations turn to increasing labor efficiency. Ultimately, to increase efficiency means to reduce labor activities on the floor without reducing order throughput. When it boils down to the basics, that’s what the goal is.

Related: 16 root-causes of low (or decreasing) labor productivity

Unfortunately, from the perspective of most operators – especially those in charge of shift planning – it’s not so easy to reduce direct labor unless efficiency gains are so substantial that it warrants the reduction of at least one full-time employee. It’s a fair point. Most operators will prefer to keep a larger roster to cover for no-shows, turnover and typical seasonal fluctuations in volume, and reducing someone’s hours – especially if they’re full time – will only likely lead to them being unhappy and eventually leaving.

This sentiment is especially true if there is no plan in place to ensure the improvements are sustainable year-round.

Let’s use slotting optimization as a quick example. The big mistake that a lot of executives and operators make when considering optimizing their slotting for the purpose of enhancing labor efficiency – usually done by way of mass-re-slot with or without a tactical adjustment of profiles or layout – is they don’t have a maintenance plan in place to ensure the slotting remains optimized year-round. After all, if a re-slot is needed in the first place, it’s likely because the operation does not have an effective process in place to optimize and maintain slotting on a consistent basis.

In most modern distribution centers, item seasonality and consistent proliferation can wreak havoc on handling requirements week in and week out. This is why, savings estimates – usually annualized – from mass re-slots rarely live up to expectations, and why some operators may be a little apprehensive to lessen roster size.

While I would always argue that if you are going to do something, you may as well do it right, you don’t always have to reduce your labor roster to achieve savings.

The first thing you should be looking at cutting is your overtime %. In a perfect world, your shifts would be appropriately staffed each and every day and your productivity levels would be high and predictable. In the real world, operations usually see an overtime rate that is between 5-10%. If it’s any less than 5%, it’s likely most of your shifts are overstaffed. If it’s over the 10% mark, you’re either understaffed or your efficiency is low or dropping beyond acceptable levels.

A high overtime rate is not only bad for morale but it’s high-priced labor and it also means your shifts are going longer than expected, potentially impacting service level. When you increase efficiency, and maintain that increase long-term, savings from a decreased overtime rate should be the first thing you notice on your financial reports.

If you want to learn more about how the best-in-class are using fulfillment optimization systems to increase labor efficiency and lower labor costs, check out this case study.

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