Labor cost is among the many key metrics tracked within distribution centers – and to CFO’s, labor is one of the most important categories to control within their P&L’s. Those CFOs would likely be astonished to learn that their organizations are likely optimizing only 65% of their total labor cost, as most do not have visibility into “indirect labor”.
Most distribution centers are still using older, legacy Labor Management systems, which are directly tied to the WMS. As a result, these older LM systems only optimize direct labor: activity directly related to moving a case of product. Direct labor is typically 65% of total labor costs within a warehouse, so the remaining 35% of indirect labor is left unoptimized and potentially wasted.
This begs the question: Where is the other 35% of labor cost going?
The Cost of Indirect Labor
For a sense of the financial implications of indirect labor: In a 100-person warehouse, 35 employees are likely indirect labor and are not captured by the LM tool. At a cost of $30,000 per year, these employees cost over $1 million annually. As you can see, indirect labor is a huge chunk of the cost structure and a significant expense category left “invisible” to legacy Labor Management tools. The impact is compounded over longer periods of time, creating a multi-million dollar opportunity for the average distribution center.
The Savings Through Visibility of Indirect Labor
One of our clients at Easy Metrics was seeing 38% of its labor costs attributable to indirect and missing time. By capturing both indirect labor costs, Easy Metrics was able to optimize their full labor profile. This effort decreased the client’s indirect labor to 27% of total labor (from the original 38%), saving the client an astounding $330,000 for the year. Employees were no longer “hiding” in the indirect bucket, but instead were visible to the Labor Management system and providing consistently value-add work.
3PLs Major Indirect Impact
In 3PL Public Warehouses with multiple customers, indirect labor is often an even bigger concern as it impacts not only the cost side, but also the revenue side of the business. A customer may be billed hourly for their required support, but the 3PL should ensure that all of the labor that is spent supporting that customer is accurately captured and tracked. If the facility does not have detailed visibility on these indirect hours then they run the risk of not billing for all of the support that was provided.
How to Capture Indirect Labor
Companies are beginning to gain visibility into all of their indirect hours using different approaches. Some WMS systems allow employees to log into indirect job functions such as “box making” or “housekeeping” using the RF guns. This information is then used by the LMS to allocate costs appropriately. A second approach is to use job codes in the time clock system. When an employee moves from a direct job to an indirect job (ie – switching from picking orders (direct) to housekeeping (indirect)), that employee will punch into the time clock to indicate they are changing job codes. Once the employee returns to a direct job, they are automatically put back into the direct job code with their first scan gun activity. Clocking in-and-out a few times a day may sound labor-intensive, but the potential cost savings is well worth it.
New Data, New Era
Today, there are modern tools and strategies available so warehouses do not have to negate 35% of their labor cost. Capturing both direct and indirect labor can bring substantial savings to a warehouse – leaving management and CFOs with better P&Ls and more restful nights.