Keeping DC costs at bay Apr 1, 2008 12:00 PM
, By Curt Barry
JobZone
Search and post jobs for the Multichannel Merchant. Including jobs for brand & agency marketers, e-commerce, catalog marketers, ops & fulfillment, direct marketing and more.
While there's not much you can do about postage or paper prices, your DC is a prime area for reducing costs. Better still, you don't have to make major capital purchases to institute measures that lower expenses and boost productivity.
Based on our consulting work and our industry share groups, we've come up with several ways to reduce your cost per order, increase capacity without expansion, and improve service levels.
Know where you stand Where to start? An operational audit will help you identify your needs and recognize potential improvements to process, layout and use of space, staff productivity, systems and freight analysis. The objectives are to lower the cost per order, increase storage capacity within the center, reduce inbound and outbound freight costs, and improve service levels and turnaround times.
Where are merchants spending the bulk of their budgets? Direct labor; indirect labor; outbound freight; inbound freight; occupancy; and packing materials represent the largest expenditures — and the greatest potential savings.
An internal benchmarking program will help reduce your cost per order or hold the cost in line as volumes increase. While external benchmarking will give you valuable insight into the productivity and practices of other companies, it's always best to develop work standards that apply to your business type, product type, level of warehouse automation, labor rates, etc.
Our company looks at industry wide benchmarking numbers that represent an extensive range of business types, sizes, productivity levels, and pay rates. The overall average cost per order ranges from $3 to $5, and comprises direct labor, indirect labor, occupancy and packing costs.
The chart “Cost-per-order benchmarks” on pages 44 and 45 shows the back-end fulfillment expenses — including direct and indirect labor, occupancy and packing materials — for 20 merchants. All these businesses average between 1.5 and 2.5 items per order.
Keep in mind that the cost per order column does not include shipping costs; nor does it include any offset for shipping and processing revenue. Why not? These metrics distort comparisons because of average package weight and distance.
The companies in the chart with the cost per order at the low end of the table ($1.10 to $2.90) have a high degree of automation in their DC. Other merchants with a higher cost per order may also have automation, but they are not as productive.
What's more, order volume doesn't always translate to lower cost per order. Direct labor costs range from $10 to $14 — plus anywhere from 15% to 30% for benefits, depending on the company.
The facilities themselves are another variable affecting costs. Keep in mind that some are modern, air-conditioned, highly automated facilities; others are more basic.
Management often wants to compare companies based on percent to net sales. Though this can be dangerous because of the wide range of average order values in this industry, the average company is in the range of 3% to 5% of net sales. Using this range of values and determining where you fit in can pinpoint areas where you might want to focus attention.
In addition to exchanging benchmarks with other merchants, it's also a good idea to tour the facilities of other companies. This will teach you a great deal about how others gain efficiency, provide customer service, and apply best practices.
Managing the work force
The chart “Breakdown of total fulfillment costs” (below) shows the direct labor, indirect labor, occupancy and packing costs as a percentage of the total warehouse cost per order for the average company. Note that nearly half (48%) of the cost goes to direct labor.
Because labor is the largest controllable expense item in your DC, you should capture regular and premium hours and labor dollars. Set these daily against volumes (such as orders and lines); include history as a cumulative report by month, week and day, and measure your continual improvement internally against yourself. This history helps with your budgeting next season.
Have a labor budget by season, month, and week based on order forecasts and planned productivity. This is the tool to use to determine your detailed staffing plan, hiring and training plan, and seasonal hiring plan.
Take a good look at your current staffing ratio. Full-time help, if not kept productive, may be costly, so you may need to change the mix of full-time, part-time and flex-time staff. Consider different shift structures and schedules to match regular labor to the volume. For instance, you might try three 12-hour or four 10-hour shifts, or split weeks.
If you have high turnover, you need to discover why attrition is so high and work to close the gap. Review your hiring, retention, and training practices. How well are you able to staff for the peaks?
Consider some type of incentive for keeping good people. Spend more time in the hiring process explaining the job and your expectations. Don't underestimate the need for adequate training; consider cross-training in jobs where it makes sense. Use your staff to provide leads for new hires. Stay in touch with past seasonal help and offer them incentives to return.
If you constantly have problems staffing for the peak, you may need to seek out a good temporary agency. This can bring more flexibility to your operation; the trade-offs can be overstaffing or overtime.
Look for ways to improve picking and packing, as about 50% of the labor dollars are in these two areas. For example, take advantage of off-shift functions such as primary pick slot replenishment, staggering start times by functions (picking and packing), multiple shifts, and doing your inventory slot moves at night. Better use of space means less congestion, and it improves labor efficiency and materials handling equipment utilization.
