– Supply Chain Insight –
Wednesday Wisdom: Are your direct labor requirements inflated?
Enjoy the first edition of Wednesday Wisdom last week? Well, we have another edition for you. Now, if you’re a leader in warehousing and distribution, your labor roster, requirements, productivity levels and throughput capacity are always top of mind. Over the last couple of years, however, every operator’s ability to not only plan their labor requirements effectively, but also retain their most productive personnel was tested in the face of a global pandemic. Don’t worry, that’s the last we’ll mention it. Onward and upwards, as they say.
This brings us to the burning question, though, that you are probably asking yourself more and more: are my direct labor requirements inflated?
The reality is, the labor market is not getting any easier in many areas of North America. If you’re facility is located in a small suburb, you’re probably dealing with a reduced population from which to recruit. If you’re located close to metropolitan area, you’re without a doubt competing with many other organizations looking for a similar profile of employee. Recruiting the right personnel has never been as easy task and, unfortunately, it’s not going to become any easier.
Some organizations have the resources to implement automated modules, or go fully automated.
But, what if you don’t have those resources, or automation is not right for your operation?
What are your options?
Well, the first thing you need to do is understand your requirements. What’s the delta between what you need and what you think you need? If you think your requirements are greater than they are (or even if you’re underestimating them) you’re creating bigger problems for yourself; problems that will shave valuable profit off your bottom line, either through increased overtime or through excess labor expenditure through an inflated shift roster.
So, before you do anything, figure out your actual direct labor requirements.
There are a few ways to do this but a very simple way is using what’s called the Golden Ratio.
The Golden Ratio (shown above) can be completed by dividing your weekly unit output (i.e. cases shipped, pallets shipped, etc.) by your total direct payroll hours.
For example, if your operation shipped 250,000 units over the last 7 days, and your payroll hours (all direct functions) totaled 1750, your equation would look like this:
This would mean that for every direct labor hour you pay for, you have a throughput of 142 units. This is known as your paid productivity labor rate, and it’ll typically be between 15-25% lower than the “worked” productivity rate generated by your labor management system.
You can also do this calculation for each direct labor category. Here are a couple of examples.
Moving Stock (Forklift Pallet Putaway)
Take this equation for a spin and see what you get for each one of your direct labor functions. Just remember to match your units to your labor category and only use the relevant number of hours.
Ok, so once you’ve determined your own baseline and the golden ratios for each direct labor category, you need to see where you stack up vs. your peers, ideally in the same industry but, more importantly, in the same distribution environment. This isn’t overly critical, but it may point out some things you’re missing and where you may be falling behind, or even what you’re doing right. It’s always nice to know where you stand and what opportunity is realistic and achievable for your environment, experience and level of resources.
This data is not always readily available but here are three tips for getting some helpful comparisons.
Leverage your peer group by reaching out to other leaders in your industry or attend popular industry events, conferences, and webinars.
Join an industry warehouse productivity benchmarking survey. These surveys are sometimes done in conjunction with a conference hosted by an industry association. For example, in 2016 and 2017, Syncontext partnered with the Food Industry Association and ROFDA on a ground-breaking warehouse productivity research partnership with participation from some of the largest grocery wholesalers and retailers in North America. The results were presented at their annual supply chain conference in 2016 and 2017, and the industry report is still available on their website here.
These larger studies don’t come around often so, when they do, make sure to take advantage of them. If you want to be notified the next time Syncontext partners with an industry association for another one of these studies, be sure to follow our LinkedIn page or sign up for our newsletter on our main blog page.
Don’t go it alone. Syncontext can help you find some industry comparisons, either from our previous studies or from our years of experience. If we have an appropriate benchmark to offer you, we’ll give it to you. And we’ll also let you know if we have any upcoming studies. We are starting to talk to a few of the larger industry associations now that conferences and events are back in person, so it might be sooner rather than later.
As for your final step, now that you have your baseline and an estimate of your achievable opportunity, the only thing left to do is execute. The bottom line is that every overstaffed or understaffed shift is costing you money.
Unfortunately, it’s not enough to just know your opportunity. You have to do something about it.
You may be among the lucky few who know exactly what to do but, if you’re not, we have an option for you. It’s called a strategic opportunity assessment (SOA). If you’ve followed us for a while, you’ve no doubt heard us explain what an SOA is and why it’s important. In a nutshell, it’s a no-obligation assessment, leveraging your operational data and our fulfillment optimization system, SKUStream, of existing optimization opportunity within your operation. It doesn’t just tell you where you’re wasting money. It tells you how to stop it.
Whether you’re looking for an edge on the competition, assurance that you’ll hit your quarterly distribution budget, or you have a specific area of concern, such as your labor expenditure, an SOA is a perfect place to start.