Tracking 100% of your Labor Costs

Posted on: December 19, 2017

Peter Drucker is quoted as saying “You can’t manage what you can’t measure!” The world is now awash in data and measurements. The challenge is to understand which ones are important and drive the success in your business.

Traditionally, when companies implement labor management, they focus on productivity and labor standards. Yes, productivity is very important, but if you just focus on that, you will lose site of the forest from the trees. Direct labor, as a percentage of total labor, is generally anywhere from 50% to 70% of your total production labor spend. This means that if your total labor spend per year is $4 million (100 employees) you have a blind spot in your business for $1.2 – $2 million of your labor spend. We have consistently seen companies that focus purely on direct labor processes often do not benefit from the increased productivity savings because an efficiencies gained in direct labor end up leaking over into untracked processes.

We have personally experienced this. In one of our previous businesses, we ran large cross docking operations for a very big national retailer. We initially focused on the direct labor cost per container and the employees quickly improved their productivity and the direct labor cost per container dropped measurably. However, our indirect labor cost per container exploded from $25 per container to over $55 per container, a cost that if continued, would render the operation very unprofitable. We responded by tracking all indirect labor and then holding the supervisors accountable for the indirect labor spend. As Peter Diamandis of the X-Prize says “You get what you incentivize.” Indirect labor per container dropped rapidly, eventually getting down to $12 per container making the operation very profitable.

There are several ways to track all of your labor. Most modern warehouse operations us RF scan and WMS system that do an effective job tracking the majority of direct labor processes. Some processes like receiving and cross docking are usually not tracked unless they customize the WMS. But, as stated previously, the WMS will only capture 50-70% of the direct labor. In order to capture the remaining labor, you will need to deploy a job coding system. Most time clock system have this functionality and allow employees to switch between job assignments, although the process can be a bit cumbersome. Some of the newer WMS systems also enable job coding. Easy Metrics also has a job coding application, Job Trak, that is a user friendly job coding system.

To put the importance of tracking 100% of your labor into perspective, assuming that direct labor is 60% of your total labor spend, a 10% increase in productivity equates to about 6% in labor savings.  If your missing and unaccounted time is 25%, reducing that down to below 5% is very achievable in the first 30-60 days and gives you an ROI greater than the 6% savings from increased productivity.

The end result is that you will have full visibility into where every minute of the day is spent by your employees and accurate cost center allocation of their efforts.

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