17 Feb Payback: Labor vs. Technology Costs

Material handling technology is positively impacting the way we store and distribute product. Implementing technology solutions reaches beyond lowering costs and increasing work flow, companies also benefit from improved customer service, more accurate shipping, faster response time and lower liability of workplace incidents.

Warehousing and distribution functions have always been considered as nothing but a corporate cost center, a necessity for doing business. But in today’s global economy, competition is driving margins continually downward and you can only raise prices so much before you out pace the market. It is for this reason that companies must look at any area where costs can be reduced without sacrificing their quality or service levels. By reducing your distribution costs you add net dollars to the bottom line, effectively creating a profit center from what once was a cost center.

The most significant cost factor in any warehousing or distribution operation is labor. And it is labor that should drive the return on investment (ROI) analysis prior to any decision as to whether or not to purchase technology. Salary, benefits, training, insurance and the transient nature of the typical warehouse employee are all costs that exist in perpetuity…They never go away!

So, why do companies hesitate to spend money on technology, opting to increase labor instead? Many times it is because labor costs come out of an operating budget where technology comes from a capital expenditure budget. Distribution center managers, who request funds for technology, have difficulty persuading upper management that the expense is justifiable. If they hire more workers, the added expense is less scrutinized. The mentality is, “We’re doing more business, so we need more people to get the product out the door…that’s understandable. Frankly, I’m glad we’re doing so well!” It’s not an irrational perspective. However, companies must eventually realize that spending money for operational improvements and depreciating them over time can be much less expensive and improve effectiveness in the long run.

Let’s look at a theoretical example:

• Picking orders in a paperless environment can generate picking rates of between approximately 50 and 200 picks per hour, per operator based on the density of the pick locations
  and concentration of picks (i.e. 6 items of product A vs. 2 items each of A, B and C).
• 30 employees picking at 200 picks per hour (high end of the range) could pick 48,000 lines per day.
• Each employee makes $14.00 / hr + benefits; 25% of salary (basic health, workman’s compensation and liability) = $17.50 / hr.
• 30 employees, 2080 hrs/year at $17.50/hr = $1,092,000 per year in salary costs.
• A Pick-to-Light process which visually directs the picker to a location and directs the pick requirements can generate conservative rates from 300 picks per hour and up depending on pick density.
• At 300 picks per hour it would take only 20 workers to pick 48,000 lines in an 8 hour shift. (48,000/300/8)
• A small system of 2500 lights where one light is assigned to each location would average around $250.00 per light including all fixed costs would be $625,000
• Saving 10 employees = $364,000 in savings per year
• Payback would be less than 2 years. This cost is reduced by the use of one light bar to cover 2 sku positions (above and below); your payback would be less than one year.

Keep in mind that this only covers the direct costs. Operationally, moving to a pick-to-light system increases the ease in training new employees, allows for a greater pick zone to be created, reduces employee turnover by simplifying the picking operation and improves picking accuracy to rates above 99.5%

Bottom line: Sometimes you have to spend money to make money.