3 Strategies for Improving Workforce Productivity

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1 3 Strategies for Improving Workforce Productivity The Ins and Outs of Distribution Center Staffing TZA Workforce Series

2 Strategies for Improving Workforce Productivity The demand for additional distribution labor is increasing as companies react to increased activity levels resulting from the recovering economy, which is likely to increase exponentially in the next five years, The short supply of semi-skilled labor and a steady growth in US labor rates has caused significant concern for senior executives in the logistics industry. The recent recession forced companies to scale back and now that the economy is improving, the decision to add labor back into the distribution center is a tricky one. In an effort to control labor costs and react to fluctuating market conditions, many firms are employing staffing agencies or temporary labor as a means to increase their workforce. Other companies have followed the advice of management consultant Peter Drucker, Do what you do best, outsource the rest. Assessing Your Workforce Staffing Strategy So what alternative is best for your company? Should you do your own recruiting, use a staffing firm, or outsource all or part of your distribution business to a third party logistics firm? Should you invest in workforce optimization programs as a way to improve productivity and utilization? Is there a way to get a tangible return from that investment and can it be measured? The short supply of semi-skilled labor and a steady growth in US labor rates has caused significant concern for senior executives in the logistics industry. To answer these questions, you must first assess your own workforce staffing strategy. Over the past 27 years of implementing performance solutions, TZA has observed and worked with hundreds of companies that face this staffing dilemma. The table in Figure 1 summarizes various strategies or levels of maturity with regard to staffing and workforce productivity strategies. 1

3 Workforce Productivity Maturity Matrix No defined process for managing labor You must first assess your workforce productivity maturity level to decide the best staffing strategy. Basic Managed Engineered No labor planning Few, if any, metrics or performance reporting Generally rely upon short-term staffing Some processes for forecasting labor requirements have been defined and documented Some throughput reporting at a facility or work cell level typically ad hoc spreadsheets not integrated to other systems Some historical metrics for measuring productivity (units per hour) by work function Engineered and documented process and information flows for work functions Common measurement across work functions for labor resource allocation and planning Historical performance standards at an individual level Service levels defined, documented and tracked using units per hour improvements and total delivered cost. Some defined training programs High Well defined, continuous improvement programs Dynamic, engineered work standards Labor management technology and executive dashboard reporting In-sourcing, out-sourcing or collaboration decisions based on detailed requirements analysis and total cost of ownership Workforce incentive and discipline programs well defined Formal training programs at all levels of the operation 2 Figure 1

4 The reality is that only a small percentage of companies have reached the pinnacle of a High Workforce, even though there are significant cost and performance advantages for those companies that advance along this maturity matrix. The chart in Figure 2 shows the relative distribution of companies in terms of their workforce strategy maturity levels. Company Distribution by Workforce Productivity Basic Maturity Level Figure 2 60% 25% 10% 5% Managed Engineered High There are significant cost and performance advantages for those companies that advance along this maturity matrix. Moving Up on the Workforce Maturity Matrix Typically, moving up each level along the workforce maturity matrix results in significant gains in productivity and utilization as well as cost reductions. Companies moving from a basic level of maturity to a high performance level have experienced productivity and utilization gains of 10% to 20%. Some have realized even greater savings in specific functional areas of their distribution operations. In addition to these productivity gains, cost reductions in cost/unit can be significant as well. How do companies progress along the workforce maturity model to capture savings in what is becoming a challenging labor market? How can they get there quickly in order to realize these kinds of benefits? 3

5 Distribution Center Staffing Strategies Determining what is best for your company boils down to three components: Risk, Cost, and Benefit. Determining what is best for your company boils down to three components: Risk, Cost, and Benefit. On one end of the spectrum, the use of staffing firms is a popular approach in which certain components of distribution operations are staffed. Companies can save money by utilizing the recruiting, administration and benefit costs of a staffing firm. Depending on the size of a distribution center, the benefits that staffing provides include reducing the need for a significant HR staff to deal with personnel issues and a cost savings resulting from a potentially less robust benefit structure. The risks of this approach include the likelihood of creating an underperforming workforce in a fully part time environment or creating a coemployment situation that would negate any benefits savings originally realized. Training effort and costs, quality and productivity are often cited as being difficult issues to deal with in short-term staffing solutions. It is often very difficult to create and maintain a high performance work environment with the constant workforce churn typically associated with short term staffing. On the other extreme, many companies choose to use third party logistics companies to handle their entire distribution operations for them. This is a significant decision and much has been written about the success and failure of many 3PL arrangements over the years. Some major 3PL organizations have achieved high performance status for their clients. As such, they can bring tremendous value to companies. One way to jump to the high performance end of the workforce maturity matrix is to outsource your distribution center to one of these 3PLs. Their level of sophistication in supply chain operations, technology and integrated service offerings can make them very attractive. These companies are looking for a way to balance the costs and risks associated with strategic workforce options. Just as important, the solution needs to move companies along the workforce maturity matrix to achieve a High Workforce rapidly to drive operational and financial benefits. 4

6 With regard to these possible workforce strategies, there is a significant difference in the range of services available, from simple staffing solutions to full blown outsourcing agreements. As such, service providers at both ends of the spectrum are attempting to scale their offerings into contract labor solutions in an effort to expand their market presence. Some staffing firms are attempting to take on some operational responsibility by providing on-site supervision or providing a staff engineer to time study a specific work function to offer a piece rate commercial structure. At the same time, some 3PLs are trying to scale back their service levels to field a labor-only solution. At the same time, larger 3PLs who have achieved the high performance maturity level are looking for opportunities to bring a full, comprehensive warehousing solution to their customers. This would include not only the labor and operational management, but also systems, material handling equipment and a real estate solution. Utilizing the Managed Services Model Within this wide spectrum of possible solutions, many companies are seeking a performance solution that is lighter and more flexible than the expensive, full outsourcing of a 3PL, but carries significantly more sophistication than a staffing firm model. Companies are searching for a way to gain the process knowledge and execution expertise that the major 3PLs have to offer, but want to do this in a more cost-effective manner. Many companies seek a staffing solution that is lighter and more flexible than the expensive, full outsourcing of a 3PL. This is where managed services offerings, often called in-sourcing, from software and consulting companies, bring a different approach. Managed services providers can offer a high performance workforce solution and implementation methodology built on top of their experience in engineering and process improvement, performance management consulting, productivity software as well as training and organizational development programs. These offerings are designed to provide most of the value of a sophisticated 3PL at the cost and risk profile of a staffing firm. 5

7 The managed service approach provides the workforce in much the same manner as a staffing firm, but the workforce is pre-enabled with the core process and technology experience of the managed services solution provider. In most cases, managed services, or in-sourcing solutions include: Managed Services can provide most of the value of a sophisticated 3PL at the cost and risk profile of a staffing firm. Engineering expertise for process improvement and best practices Cost-based performance improvement plans Employees trained in best practices and methods On-site performance managers and supervisors Dynamic engineered labor standards Operational accountability to productivity, quality and safety Sophisticated Labor Management software Well-designed training and organizational development programs designed to develop managers and supervisors into more effective leaders Guaranteed cost performance through fixed piece rates and/or gain sharebased management fees The managed service approach is also scalable from a single work cell to an entire facility. The implementation methodology can call for taking over an existing workforce and/or management team. This eliminates the large, risky and expensive hurdle of successful knowledge transfer in larger implementations. The result is the managed service will out-perform a staffing firm by 30% or more. Essentially, the market demands have created a way to deliver the value of hiring a 3PL to run your operation at the expense of a staffing-only solution. Comparing Staffing Alternatives The chart in Figure 3 compares the difference in capabilities and value brought by the different approaches. As this comparison illustrates, for companies who are looking for new ways to progress along the workforce maturity model, but have not become vested in an outsourcing solution or where staffing does not provide the desired operational benefits, there is an alternative workforce strategy for implementing a high performance workforce. 6

8 A Comparison of Workforce Strategies Human Resources Staffing 3PL Managed Services Recruiting Yes Yes Yes Benefits Administration Yes Yes Yes Safety Programs No Yes Yes On-site Management No Yes Yes Organizational Development No Limited Yes Operations Best Practices No Yes Yes Engineered Processes No Limited Yes Dynamic Standards No Limited Yes Every company needs to compare the difference in capabilities and value of the different approaches. Labor Management System Software No No Yes Dashboard No No Yes Incentive and Discipline Programs No Limited Yes Operational Accountability No Yes Yes Guaranteed Piece Rates No Limited Yes Guaranteed Service Levels No Yes Yes Continuous Improvement Workforce Training No Yes Yes Strategic Planning No Yes Yes Network Design No Yes Yes Facility Design and Layout No Yes Yes Slotting No Limited Yes Asset Management Warehouse Own / Lease No Yes No Equipment Purchase No Yes No Value Savings Potential vs. DIY -25% -15% to 10% 15% to 30% Timeline to Savings N/A 18+ months 2 to 4 months Figure 3 7

9 The Changing Face of Staffing Managed service offerings can provide a compelling financial and operational alternative. When faced with increased labor demands in a changing, competitive business environment, being able to intelligently deploy your workforce to maximize productivity is imperative to success. Knowing the ins and outs of staffing can help you determine the right strategy for your distribution center. Managed service offerings can provide a compelling financial and operational alternative to short-term staffing and full 3PL outsourcing choices. Although you must assess your company s position on the performance matrix and determine the specific capabilities required by your operations, for many companies managed services can bring significant intellectual capital and experience in developing a high performance workforce. 8

10 TZA, founded in 1984, is a leading supply chain consulting firm delivering management consulting, engineering, technology, managed services and human capital solutions to assist companies to achieve world-class customer service and a least-cost operating position. TZA s expertise helps develop a high performance culture across supply chains. It has served the supply chain performance improvement goals of some of the world s leading companies Salem Lake Drive, Long Grove, IL TZA. All rights reserved. D