Executive Briefings

Availability, Cost of Labor Drive New Ways of Thinking about DC Strategy

The availability of labor (or lack thereof) is requiring us to think differently about network strategy and site selection. Distribution network strategy is no longer just about optimizing traditional costs (transportation, operating expense, fixed costs and capital). Today, when evaluating different network strategies, total supply chain cost, including availability, cost and quality of labor, real estate occupancy costs, inventory working capital and possible economic incentives must be considered alongside service level improvements that drive revenue growth. -Chirag Modi, Director, Global Strategy, Fortna Inc., and Tray Anderson, Vice President, Strategy, Fortna Inc.

Availability, Cost of Labor Drive New Ways of Thinking about DC Strategy

Disruptive change, driven in large part by e-commerce growth, has morphed order profiles to smaller, more frequent orders that require more each-picking. Customer expectations for faster, free shipping continue to rise and the number of returns increase over time, creating greater demand for more distribution centers and more warehouse labor.

Availability, cost and quality of labor play a bigger role in network strategy than ever. In certain markets, competition is so fierce that for as little as an additional 50 cents per hour, competitors poach the best talent and an arms race ensues, driving wages up for everyone in the market. When unemployment declines to around 3 to 4 percent, labor markets are virtually tapped out. Primary markets (Inland Empire, Chicago, New Jersey, Atlanta, Harrisburg, Dallas, and others) are approaching crisis-level labor shortages, and secondary markets (Nashville/Memphis, Indianapolis, Cincinnati) are seeing a boom in labor and real estate demand that could create problems in the near future.

Population demographics and unemployment trends indicate labor has reached a tipping point in the U.S., U.K. and Western Europe. There are simply not enough workers to fill all the available positions. The challenges of recruiting and retaining workers are exacerbated during peak when hiring swells to unprecedented numbers to meet demand created by holiday or seasonal shopping. And the problem just grows larger as we look 3 to 5 years into the future.

To attract top workers, companies need to pay higher wages and/or provide additional benefits to be the employer of choice. Well-lit facilities that include HVAC, upgraded locker rooms and gym facilities, and perks like free or catered meals, transportation and on-site childcare must be factored into the cost of competing for limited labor resources.

Companies looking to position new or relocate distribution nodes to meet new service requirements around speed are forced to consider the competitive forces that might price them out of certain markets over time. What happens if Amazon opens a DC in the same market and hires a large number of available workers? Are there ways to tap into regions with higher unemployment and adequate public transportation to ensure workers can get to the available jobs?

No matter how you look at it, turnover rates are increasing and turnover is costly. The cost of recruiting, hiring and training a workforce prone to leave for greener pastures must be weighed against costs of retention bonuses and competitive wage increases. In the end those strategies focused on recruiting and retaining workers may not be comprehensive enough. There’s still the risk that no matter how much a company is willing to pay, there will simply not be enough workers available. The answer to the problem may have to come in the form of higher levels of automation to reduce dependence on labor over time.

Companies experiencing the dual challenges of labor cost and availability during holiday peak will agree that labor is a critical element of distribution network strategy.

The Outlook

An accelerated pace of change and disruptive changes in the workforce are forcing companies to think differently about distribution network strategy. While every component of a strategy has ripple effects on other decision points, for the foreseeable future labor will remain one of the biggest impact points for distribution operations. More frequent review of network decisions will be needed to ensure flexibility to adapt as the workforce and the business change over time.

Disruptive change, driven in large part by e-commerce growth, has morphed order profiles to smaller, more frequent orders that require more each-picking. Customer expectations for faster, free shipping continue to rise and the number of returns increase over time, creating greater demand for more distribution centers and more warehouse labor.

Availability, cost and quality of labor play a bigger role in network strategy than ever. In certain markets, competition is so fierce that for as little as an additional 50 cents per hour, competitors poach the best talent and an arms race ensues, driving wages up for everyone in the market. When unemployment declines to around 3 to 4 percent, labor markets are virtually tapped out. Primary markets (Inland Empire, Chicago, New Jersey, Atlanta, Harrisburg, Dallas, and others) are approaching crisis-level labor shortages, and secondary markets (Nashville/Memphis, Indianapolis, Cincinnati) are seeing a boom in labor and real estate demand that could create problems in the near future.

Population demographics and unemployment trends indicate labor has reached a tipping point in the U.S., U.K. and Western Europe. There are simply not enough workers to fill all the available positions. The challenges of recruiting and retaining workers are exacerbated during peak when hiring swells to unprecedented numbers to meet demand created by holiday or seasonal shopping. And the problem just grows larger as we look 3 to 5 years into the future.

To attract top workers, companies need to pay higher wages and/or provide additional benefits to be the employer of choice. Well-lit facilities that include HVAC, upgraded locker rooms and gym facilities, and perks like free or catered meals, transportation and on-site childcare must be factored into the cost of competing for limited labor resources.

Companies looking to position new or relocate distribution nodes to meet new service requirements around speed are forced to consider the competitive forces that might price them out of certain markets over time. What happens if Amazon opens a DC in the same market and hires a large number of available workers? Are there ways to tap into regions with higher unemployment and adequate public transportation to ensure workers can get to the available jobs?

No matter how you look at it, turnover rates are increasing and turnover is costly. The cost of recruiting, hiring and training a workforce prone to leave for greener pastures must be weighed against costs of retention bonuses and competitive wage increases. In the end those strategies focused on recruiting and retaining workers may not be comprehensive enough. There’s still the risk that no matter how much a company is willing to pay, there will simply not be enough workers available. The answer to the problem may have to come in the form of higher levels of automation to reduce dependence on labor over time.

Companies experiencing the dual challenges of labor cost and availability during holiday peak will agree that labor is a critical element of distribution network strategy.

The Outlook

An accelerated pace of change and disruptive changes in the workforce are forcing companies to think differently about distribution network strategy. While every component of a strategy has ripple effects on other decision points, for the foreseeable future labor will remain one of the biggest impact points for distribution operations. More frequent review of network decisions will be needed to ensure flexibility to adapt as the workforce and the business change over time.

Availability, Cost of Labor Drive New Ways of Thinking about DC Strategy