Executive Briefings

So How Do You Know Employees Are Productive?

In many cases, manufacturers, distributors and warehouse managers already have squeezed just about all the costs out of the supply chain. Now labor management strategy software can help measure the productivity of the work force itself.

Supply-chain managers traditionally have met nosy questions about unions, labor management and performance standards with a "no comment" or something equally evasive. Though many remain reluctant to come out of the proverbial closet on the labor front, companies in increasing numbers now demonstrate an active interest in embracing advanced labor management techniques to boost the efficiency of their warehouse operations.

"We're seeing new interest in labor management everywhere there is an opportunity to focus on direct labor, whether it's in a wholesale facility, a grocery environment, retail business or auto parts distribution," says Greg Utter, manager and application consultant for the retail industry at EXE Technologies. "We're seeing software implementations that are more geared to the productivity piece as warehouse managers already are squeezing out most of the other costs."

According to Utter, the supply chain as a whole "is getting smarter." For example, he sees more relevance in EDI transmissions, with advance shipping notices being electronic in nature and no longer involving human phone calls. "Technology - computers, software, warehouse equipment - is helping us take out a lot of the costs that didn't used to exist throughout the supply chain," he explains. "As a result, we see customers that in the past were happy just having a Tier I warehouse management system to make their operations flow better now coming back to us for solutions for increasing their bottom line through labor efficiencies."

Nevertheless, labor remains largely untapped as a source of supply-chain cost savings, according to research by Tompkins Associates, a leading logistics consultancy, and McHugh Software Inter- national. According to Tompkins, the potential exists for U.S. companies to snare more than $6.6bn in annual productivity gains through advanced labor management strategies, or LMS. Based on statistics from Torto Wheaton Research, Tompkins found that the 53 largest U.S. metro markets had 15,192 distribution facilities of 100,000 square feet or larger, with a total capacity of more than 3.3 billion square feet. The researchers determined that these facilities employed more than 1.1 million distribution workers at an annual cost of over $44bn. They reach the $6.6bn figure by applying an estimate of 15 percent average savings from increased labor productivity through the use of labor management solutions.

Add to that the findings by Herbert Davis and Company in its 2000 Logistics Cost Benchmarks and it's easy see the driver behind the labor focus. After collecting data from hundreds of companies in a wide range of vertical markets, the Davis study concludes that the total cost of logistics for those companies constituted 9.44 percent of sales, an increase of 9.6 percent from the year before.

These cost increases follow a decade of relative stability, according to Davis. The cost increase breaks down like this: transportation amounted to 3.54 percent of sales; warehousing, 2.39 percent; order entry/customer service, 0.76 percent; administration, 0.85 percent; and inventory carrying costs, 2.03 percent. As for the actual increases, transportation was up by 5.2 percent, largely attributable to shipment profiles and fuel; order entry/customer service by 9.0 percent due to order complexity and wage pressure; administration costs dropped by 5.3 percent; inventory carrying costs rose by 12.7 percent due to high SKU counts and higher customer service requirements; and warehousing showed a 9.2 percent jump in costs year to year, with warehouse complexity coupled with expanding requirements for value-added services behind the higher numbers.

Market Broadens
"Labor is a great untold story, not just for McHugh but really for the marketplace in general," says Dan Gillmore, vice president of marketing for McHugh. "Probably the biggest story in a sense is that less than 1 percent of the total customer base that could take advantage of these labor management strategies actually have done so. There's just tremendous value out there to be had, as our research with Tompkins Associates shows."

Once confined largely to the wholesale food vertical, labor management program vendors report that companies in a broadening range of verticals not only are putting out new feelers for labor management strategies but are actually coming on board. "Companies in non-grocery segments finally are starting to understand the value that can be created by labor management," Gillmore adds. "The market is finally waking up to those possibilities."

Exactly why the wholesale grocery business became the hot spot of labor management is a bit fuzzy. "The line is that margins are so low on the products grocery wholesalers sell that the actual productivity of the shipping operation is an extremely important element, and these companies want to provide tools to be able to reward those workers who are incredibly productive," says Ron Riggin, MARC Global systems vice president and general manager.

MARC Global Systems is predominantly a supply-chain execution suite wrapped around warehouse management system capabilities. "We historically have had an extraordinarily high-fidelity engineering standards model that basically provided projections of how much time various tasks in the warehouse should take to accomplish," says Riggin.

However, this module was applicable to a very finite market. "Basically, the module was used by grocery wholesalers and in hostile union environments where the company's objective is to incent employees who are doing exceptionally well and get rid of employees who weren't doing well at all," he adds.

Labor constitutes a significant drain on those thin grocery margins, and most of the grocery environments are unionized, he explains. As companies pushed for a standards environment to encourage greater accountability and implement productivity- based compensation in the warehouse, unions responded essentially by telling warehouse managers that if the managers wanted a standards environment, then they had to have a system that could accurately represent every possible task. In essence, they said, if employee A had to take one more step than employee B, that difference had to be represented in the labor standards model before the unions would accept it as a basis for incentive pay.

As a result, says Riggin, the labor standards business evolved to this "horribly complex mathe- matical model" of calculating how much time things should take. For example, the worker steps on the pallet jack, drives pallet jack from location A to location B, steps off, picks a case, places it on the pallet, and affixes a label. "Every one of those tasks has a standard associated with it that can be held up in court, and the level of activity is adjusted for early-day versus late-day energy levels." The standards are reached through time and motion studies.

Vendors now see the adoption of labor management in many other vertical industries, says Gillmore. "For example, last year a significant portion of our warehouse management sales were accompanied by labor management modules, but we also sold a lot of stand-alone labor management systems as well," he says. "That goes to show that in many other industry verticals - particularly food and beverage, consumer packaged goods, dotcom and e-fulfillment companies, and 3PLs - there are a lot of other companies starting to realize that labor management offers very low-hanging fruit in terms of the ease of implementation, the accelerated return on investment and considerable bottom line savings. Labor management really is one of the great hidden secrets right now of productivity gains in a market that is still looking desperately for the next round of productivity enhancements."

Opposition to Tools
Some of these verticals have many of the same characteristics as grocery retail does in terms of distribution operations, labor makeup and order profiles, says Gillmore. "The consumer packaged goods and food and beverage verticals continue to face significant competitive pressures in their respective marketplaces and are looking to squeeze every bit of operating improvement they can from their distribution operations."

Third-party logistics companies also have become an important segment, he adds, "some on their own initiative, such as EDS Logistics, and some driven by their customer requirements, like AmeriCold."

Two obstacles continue to hinder a broader call for advanced labor management tools in the warehouse. The first is simply a matter of education, says Gillmore. The second is what may be called the "Big Brother" aspect, or overly rigorous engineered standards.

"In many respects we're still in education mode, trying to explain to the marketplace the value and opportunity of labor management tools," he says. "Outside of some of the core markets, it's almost a bit of a missionary sale. You have to explain to customers what this is and how they can benefit."

Vendors simply don't see many requests for proposal where a company is actually looking for labor management, but they often find receptive ears once the talk shifts to value, the ease of implementation of the solutions and the fast payback. The cost recovery almost always occurs in less than nine months, Gillmore adds. "And it's almost instant ROI. From the time you turn the system on, you save money almost from day one."

Other than educating the marketplace, LMS vendors continue to meet some resistance to the notion of engineered standards. For many managers, that's a bit of a red flag in terms of how they want to operate their business. This creates the need for vendors to position their products in a less-hostile package as they expand their market reach.

For example, MARC early last month released a new version of its LMS that provides users with a more flexible approach to labor management. "That's sort of the impetus behind the direction we are taking as we move to expand our customer base," says Riggin. "We basically are saying we have a high-fidelity labor standards product with clients that use it and are happy with it. But we also can take this model and relax it a bit and let any client use it to build a labor standards solution without using it as a basis for incentive pay or to uphold court decisions, but just to get a better handle on how much work is going to be consumed with a specific amount of orders in the warehouse."

Consequently, MARC built a model where the actual calculation engines and travel models are all the high-fidelity travel models, but the actual tasks being performed are more generalized and not nearly as detailed. Warehouse managers can plug their own numbers into the system instead of using the engineered standards and can then manage their own people according to the company's own standards.

"MARC and most of our competitors always have been able to provide good counting mechanisms," says Riggin, using such examples as 15 seconds per order line, 1,000 order lines, and 15,000 seconds of pick time. "But we're trying to take it down another notch by saying, 'here's the 1,000 order lines, and here are the actual travel paths of the order lines, here are the actual vehicles being used, here are the general characteristics and tasks being performed.' Together, [we're] producing a higher fidelity model of how much time it is going to take to complete certain tasks."

Riggin finds that increasing numbers of customers don't want to wrap their entire warehouse operation in a labor standards mode, but prefers to use the LMS to troubleshoot particular areas in the warehouse environment that tend to become bottlenecks. "We're about to embark on a project where the packing and gift-wrapping operation is the bottleneck in the warehouse, and the client wants to know with explicit detail how much time is going to be spent in the different gift wrap areas of the warehouse," he explains. Another client wants to focus on order picking, while another targets their consolidation and sortation area. But the comprehensive implementations continue; the first customer for MARC's new LMS is a large Kmart-type retailer based in Australia, which should come online this summer.

McHugh also now focuses on fighting the Big Brother reluctance. "Many prospective customers see labor management standards as being too strict a notion of how they want to operate," according to Gillmore. "So we say, 'fine, don't approach it from an engineered standards perspective, approach it from a perspective of goals or objectives and use the right terminology and construct the approach that is in tune with the way you want to run your operation.'"

Every warehouse operation has to have goals and objectives, and the LMS allows companies to establish those objectives at multiple levels of their distribution operation, whether by employee, work area, customer or task, he says. "And the system allows you to drive continuous improvement in your organization by continually measuring your performance against those goals and taking the proper management steps to ensure attainment of those goals."

Besides, says Gillmore, the Big Brother tag is a bit of a misnomer. "We have seen that employee satisfaction and retention actually go up, not down, after the LMS solution has been implemented. People want to understand how they are being evaluated, they want a fair evaluation system, and this system provides that," he says. "It also provides a tremendous platform for implementing truly effective incentive management systems that enable both the employee and the company to benefit from above-average performance."

Despite the challenges, the future looks good for labor management, says Gillmore. For starters, he says, there's no question that the warehouse or distribution center compared to manufacturing has been a comparative black hole of costs. "In the warehouse or distribution center, costs are allocated on very gross measures and without the visibility into detailed activity or customer costs as you get in a manufacturing environment," he says. As a result, much of this information is relatively new to companies, which "appeals to chief financial types as well as the logistics people because it allows them to understand their costs and customer profitability much more precisely than they ever have in the past."

As a result, he says, a company considering the addition of some kind of logistics-oriented value-added service can determine the cost of that proposed service, its impact on profitability, whether it should it have a pricing impact, and if the move is good for the company.

Supply-chain managers traditionally have met nosy questions about unions, labor management and performance standards with a "no comment" or something equally evasive. Though many remain reluctant to come out of the proverbial closet on the labor front, companies in increasing numbers now demonstrate an active interest in embracing advanced labor management techniques to boost the efficiency of their warehouse operations.

"We're seeing new interest in labor management everywhere there is an opportunity to focus on direct labor, whether it's in a wholesale facility, a grocery environment, retail business or auto parts distribution," says Greg Utter, manager and application consultant for the retail industry at EXE Technologies. "We're seeing software implementations that are more geared to the productivity piece as warehouse managers already are squeezing out most of the other costs."

According to Utter, the supply chain as a whole "is getting smarter." For example, he sees more relevance in EDI transmissions, with advance shipping notices being electronic in nature and no longer involving human phone calls. "Technology - computers, software, warehouse equipment - is helping us take out a lot of the costs that didn't used to exist throughout the supply chain," he explains. "As a result, we see customers that in the past were happy just having a Tier I warehouse management system to make their operations flow better now coming back to us for solutions for increasing their bottom line through labor efficiencies."

Nevertheless, labor remains largely untapped as a source of supply-chain cost savings, according to research by Tompkins Associates, a leading logistics consultancy, and McHugh Software Inter- national. According to Tompkins, the potential exists for U.S. companies to snare more than $6.6bn in annual productivity gains through advanced labor management strategies, or LMS. Based on statistics from Torto Wheaton Research, Tompkins found that the 53 largest U.S. metro markets had 15,192 distribution facilities of 100,000 square feet or larger, with a total capacity of more than 3.3 billion square feet. The researchers determined that these facilities employed more than 1.1 million distribution workers at an annual cost of over $44bn. They reach the $6.6bn figure by applying an estimate of 15 percent average savings from increased labor productivity through the use of labor management solutions.

Add to that the findings by Herbert Davis and Company in its 2000 Logistics Cost Benchmarks and it's easy see the driver behind the labor focus. After collecting data from hundreds of companies in a wide range of vertical markets, the Davis study concludes that the total cost of logistics for those companies constituted 9.44 percent of sales, an increase of 9.6 percent from the year before.

These cost increases follow a decade of relative stability, according to Davis. The cost increase breaks down like this: transportation amounted to 3.54 percent of sales; warehousing, 2.39 percent; order entry/customer service, 0.76 percent; administration, 0.85 percent; and inventory carrying costs, 2.03 percent. As for the actual increases, transportation was up by 5.2 percent, largely attributable to shipment profiles and fuel; order entry/customer service by 9.0 percent due to order complexity and wage pressure; administration costs dropped by 5.3 percent; inventory carrying costs rose by 12.7 percent due to high SKU counts and higher customer service requirements; and warehousing showed a 9.2 percent jump in costs year to year, with warehouse complexity coupled with expanding requirements for value-added services behind the higher numbers.

Market Broadens
"Labor is a great untold story, not just for McHugh but really for the marketplace in general," says Dan Gillmore, vice president of marketing for McHugh. "Probably the biggest story in a sense is that less than 1 percent of the total customer base that could take advantage of these labor management strategies actually have done so. There's just tremendous value out there to be had, as our research with Tompkins Associates shows."

Once confined largely to the wholesale food vertical, labor management program vendors report that companies in a broadening range of verticals not only are putting out new feelers for labor management strategies but are actually coming on board. "Companies in non-grocery segments finally are starting to understand the value that can be created by labor management," Gillmore adds. "The market is finally waking up to those possibilities."

Exactly why the wholesale grocery business became the hot spot of labor management is a bit fuzzy. "The line is that margins are so low on the products grocery wholesalers sell that the actual productivity of the shipping operation is an extremely important element, and these companies want to provide tools to be able to reward those workers who are incredibly productive," says Ron Riggin, MARC Global systems vice president and general manager.

MARC Global Systems is predominantly a supply-chain execution suite wrapped around warehouse management system capabilities. "We historically have had an extraordinarily high-fidelity engineering standards model that basically provided projections of how much time various tasks in the warehouse should take to accomplish," says Riggin.

However, this module was applicable to a very finite market. "Basically, the module was used by grocery wholesalers and in hostile union environments where the company's objective is to incent employees who are doing exceptionally well and get rid of employees who weren't doing well at all," he adds.

Labor constitutes a significant drain on those thin grocery margins, and most of the grocery environments are unionized, he explains. As companies pushed for a standards environment to encourage greater accountability and implement productivity- based compensation in the warehouse, unions responded essentially by telling warehouse managers that if the managers wanted a standards environment, then they had to have a system that could accurately represent every possible task. In essence, they said, if employee A had to take one more step than employee B, that difference had to be represented in the labor standards model before the unions would accept it as a basis for incentive pay.

As a result, says Riggin, the labor standards business evolved to this "horribly complex mathe- matical model" of calculating how much time things should take. For example, the worker steps on the pallet jack, drives pallet jack from location A to location B, steps off, picks a case, places it on the pallet, and affixes a label. "Every one of those tasks has a standard associated with it that can be held up in court, and the level of activity is adjusted for early-day versus late-day energy levels." The standards are reached through time and motion studies.

Vendors now see the adoption of labor management in many other vertical industries, says Gillmore. "For example, last year a significant portion of our warehouse management sales were accompanied by labor management modules, but we also sold a lot of stand-alone labor management systems as well," he says. "That goes to show that in many other industry verticals - particularly food and beverage, consumer packaged goods, dotcom and e-fulfillment companies, and 3PLs - there are a lot of other companies starting to realize that labor management offers very low-hanging fruit in terms of the ease of implementation, the accelerated return on investment and considerable bottom line savings. Labor management really is one of the great hidden secrets right now of productivity gains in a market that is still looking desperately for the next round of productivity enhancements."

Opposition to Tools
Some of these verticals have many of the same characteristics as grocery retail does in terms of distribution operations, labor makeup and order profiles, says Gillmore. "The consumer packaged goods and food and beverage verticals continue to face significant competitive pressures in their respective marketplaces and are looking to squeeze every bit of operating improvement they can from their distribution operations."

Third-party logistics companies also have become an important segment, he adds, "some on their own initiative, such as EDS Logistics, and some driven by their customer requirements, like AmeriCold."

Two obstacles continue to hinder a broader call for advanced labor management tools in the warehouse. The first is simply a matter of education, says Gillmore. The second is what may be called the "Big Brother" aspect, or overly rigorous engineered standards.

"In many respects we're still in education mode, trying to explain to the marketplace the value and opportunity of labor management tools," he says. "Outside of some of the core markets, it's almost a bit of a missionary sale. You have to explain to customers what this is and how they can benefit."

Vendors simply don't see many requests for proposal where a company is actually looking for labor management, but they often find receptive ears once the talk shifts to value, the ease of implementation of the solutions and the fast payback. The cost recovery almost always occurs in less than nine months, Gillmore adds. "And it's almost instant ROI. From the time you turn the system on, you save money almost from day one."

Other than educating the marketplace, LMS vendors continue to meet some resistance to the notion of engineered standards. For many managers, that's a bit of a red flag in terms of how they want to operate their business. This creates the need for vendors to position their products in a less-hostile package as they expand their market reach.

For example, MARC early last month released a new version of its LMS that provides users with a more flexible approach to labor management. "That's sort of the impetus behind the direction we are taking as we move to expand our customer base," says Riggin. "We basically are saying we have a high-fidelity labor standards product with clients that use it and are happy with it. But we also can take this model and relax it a bit and let any client use it to build a labor standards solution without using it as a basis for incentive pay or to uphold court decisions, but just to get a better handle on how much work is going to be consumed with a specific amount of orders in the warehouse."

Consequently, MARC built a model where the actual calculation engines and travel models are all the high-fidelity travel models, but the actual tasks being performed are more generalized and not nearly as detailed. Warehouse managers can plug their own numbers into the system instead of using the engineered standards and can then manage their own people according to the company's own standards.

"MARC and most of our competitors always have been able to provide good counting mechanisms," says Riggin, using such examples as 15 seconds per order line, 1,000 order lines, and 15,000 seconds of pick time. "But we're trying to take it down another notch by saying, 'here's the 1,000 order lines, and here are the actual travel paths of the order lines, here are the actual vehicles being used, here are the general characteristics and tasks being performed.' Together, [we're] producing a higher fidelity model of how much time it is going to take to complete certain tasks."

Riggin finds that increasing numbers of customers don't want to wrap their entire warehouse operation in a labor standards mode, but prefers to use the LMS to troubleshoot particular areas in the warehouse environment that tend to become bottlenecks. "We're about to embark on a project where the packing and gift-wrapping operation is the bottleneck in the warehouse, and the client wants to know with explicit detail how much time is going to be spent in the different gift wrap areas of the warehouse," he explains. Another client wants to focus on order picking, while another targets their consolidation and sortation area. But the comprehensive implementations continue; the first customer for MARC's new LMS is a large Kmart-type retailer based in Australia, which should come online this summer.

McHugh also now focuses on fighting the Big Brother reluctance. "Many prospective customers see labor management standards as being too strict a notion of how they want to operate," according to Gillmore. "So we say, 'fine, don't approach it from an engineered standards perspective, approach it from a perspective of goals or objectives and use the right terminology and construct the approach that is in tune with the way you want to run your operation.'"

Every warehouse operation has to have goals and objectives, and the LMS allows companies to establish those objectives at multiple levels of their distribution operation, whether by employee, work area, customer or task, he says. "And the system allows you to drive continuous improvement in your organization by continually measuring your performance against those goals and taking the proper management steps to ensure attainment of those goals."

Besides, says Gillmore, the Big Brother tag is a bit of a misnomer. "We have seen that employee satisfaction and retention actually go up, not down, after the LMS solution has been implemented. People want to understand how they are being evaluated, they want a fair evaluation system, and this system provides that," he says. "It also provides a tremendous platform for implementing truly effective incentive management systems that enable both the employee and the company to benefit from above-average performance."

Despite the challenges, the future looks good for labor management, says Gillmore. For starters, he says, there's no question that the warehouse or distribution center compared to manufacturing has been a comparative black hole of costs. "In the warehouse or distribution center, costs are allocated on very gross measures and without the visibility into detailed activity or customer costs as you get in a manufacturing environment," he says. As a result, much of this information is relatively new to companies, which "appeals to chief financial types as well as the logistics people because it allows them to understand their costs and customer profitability much more precisely than they ever have in the past."

As a result, he says, a company considering the addition of some kind of logistics-oriented value-added service can determine the cost of that proposed service, its impact on profitability, whether it should it have a pricing impact, and if the move is good for the company.