Warehouse labor is usually the biggest driver of cost in the inbound supply chain. Workers employed by a warehouse are most often paid an hourly rate that scales up based on the worker’s tenure at the company, level of experience at hire, or seniority.
This is a straightforward approach that is easy to account for. However, along with benefits, incentivzation, and liability issues, hourly wages and overtime rates that vary among employees are another variable warehouse operators must wrestle with on a daily basis. Consider some disadvantages of tying your production to hourly wages versus a piece rate system.
Potential Pitfalls of Hourly Wages
When workers are paid an hourly rate, there may be less incentive for them to get the job done quickly. This view may seem cynical to some, but consider the example of an office setting with hourly wage employees. On days where there’s less work to be done, no one in the office is going to pipe up to the boss about inefficiency—they’re going to maximize their time on the clock by finding creative ways to stay productive.
In the same vein, hourly warehouse workers without a performance-based incentive in place may take longer to move a given quantity of units. Mileage will vary across organizations, and this effect will be lessened in warehouses with a very strong culture, but in general hourly wages do not account for worker efficiency and productivity. All workers get the same pay regardless of performance, which contributes to a lack of teamwork and a disloyal atmosphere.
Are you paying your warehouse labor overtime on a weekly basis? Staffing inefficiencies or fluctuations in demand can result in regular payment of overtime wages, which can exceed forecasted labor costs. In many cases, companies who employ workers in-house or use standard temp agencies exceed annual staff budgets on a regular basis.
Overtime is clearly a motivator for employees, but potential health risks arrive when the same go-getter workers volunteer to stay late or clock extra hours. These workers, who are often the hardest-working and most valuable members of the team, risk over-exerting themselves or succumbing to stress injuries as they push their limits week in and week out. Then, the cost of hiring another highly experienced (or worse, highly inexperienced) worker to take their place gets layered into the mix.
Finally, a workplace with regular overtime must create policies to prevent employees from working beyond their scheduled hours without authorization, which presents another management headache.
Advantages of Paying Per Unit Versus Hourly Wages
Working with a warehouse labor provider can simplify your labor cost structure dramatically. When a retained firm charges a piece rate for work performed, warehouse managers can control labor costs better and more accurately predict the cost for a day’s work throughout each season, eliminating many of the management burdens resulting from hourly wages.
Cost Per Unit Works Better for Workers and Managers
In times of high activity, your warehouse may be handling more pallets than usual. In a contract with a managed labor provider, you can do a simple multiplication to calculate your labor costs for the day based on the incoming freight, rather than figuring an hourly rate per worker and factoring in overtime.
With this simpler cost structure comes improved efficiency at scale. If there’s a surge in units to be processed at your facility, most operators will see enhanced profitability when paying a fixed rate versus staffing up temporarily and paying our hourly and overtime wages.
When workers hours are built into a transparent, easy-to-account-for cost per unit model, everyone wins.
Incentivizing Top Performers
The “per-unit” mentality applies not only to a managed labor client’s costs, but to laborers pay as well. When workers are paid according to how many units they fulfill (rather than how much time they put in), top performers are motivated to do their best work over the course of a workday and to come back and continue winning the next day. Pay-for-performance rewards people’s innate competitive spirit, increases accountability, and makes reporting and measuring output against benchmarks easier.
Consider Cost Per Unit For Your Operations
Costa Solutions has experience implementing these models in warehouses and DCs of all sizes. In almost every case, incentivized labor led by industry-expert managers is a recipe for improved profits.