How to Reduce Warehouse Labor Costs to Increase Profitability

Tips to help you reduce warehouse labor cost & optimize your workforce

Typically, the largest single cost component of warehouse total operating cost is labor.  Although hourly labor rates have increased over the past few years, overall work productivity has tended to remain somewhat stagnant.  With the shortage of supply chain workers and turnover rates, warehouse operators and third party logistics providers need to focus on decreasing labor costs without sacrificing performance.

Having effective training and management strategies for your warehouse operation will pay off in reduced overall expenses including labor costs.  Cutting costs can be accomplished without reducing warehouse labor.  Reducing warehouse labor costs is often a matter of many small adjustments and process improvements to existing operations.  Yes, “tweaking” your operation can produce solid dividends in reduced warehouse labor costs as well as achievements of productivity goals, increased production and a reduction in overall expenses.


Here are some useful tips for actions you can take to reduce labor costs in your 3PL, warehouse or distribution center facility:


Evaluate Your Warehouse and Find Clues to Help Reduce Labor Costs

Yes, your warehouse may be neat and clean but is it organized in the best way for today’s operation?  Are there areas that need to be re-engineered to enable labor resources to operate more quickly and accurately?  Are there areas that present trip hazards or otherwise cause safety challenges, delays, manual workarounds or other time-consuming problems or dangers to your workforce?

Begin by getting feedback from workers about potential problem areas.

Next, request help from a few key warehouse employees.  Choosing those who have excellent powers of observation and who are open to making changes is especially important.  Walk through your warehouse from end to end as if seeing it for the first time and be sure to bring your list of potential problem areas identified by your warehouse team.  Make sure you have at least one designated notetaker.  Use a cell phone to take photos and video and make sure you can label each accurately.  Diagram existing and potentially new or revised processes can help you to envision how this can be improved as well as how changes can impact other areas and processes in the warehouse. As you walk and inspect, document thoroughly and keep labor cost drivers in mind.  3PLs and warehouse and distribution center operators may want to conduct warehouse evaluations at least twice a year and archive the results of their inspection, including video and photos for comparison with the results achieved after changes have been made.

  • Which are the most error-prone operations and zones? Pay close attention to this as this is related to labor cost.  Identify the cause(s) and work on remediating these issues.
  • Be sure to identify the role of each warehouse worker including the major issues of-who, what, when, where, why and how work gets accomplished. Given labor cost, consider whether each worker is in the correct role.  Look at the exact way that workers execute tasks. Are workers completing tasks in the best way possible?
  • Understand how much time each task typically takes so that you can measure and improve upon your current operation. This will help you to benchmark performance and know the acceptable range of performance for future improvement.  Make sure you correlate this with the labor cost.  This will help you determine if the appropriate amount of time, effort, etc. is being spent on a particular task, activity or process.
  • Streamline processes to reposition workers into an integrated process to create efficiency in line and support positions, cut down on wasted steps, inefficient activities, etc.
  • Because order picking is typically a significant portion of the warehouse labor, this deserves special scrutiny during your inspection.
  • Think in terms of appropriate labor management. Find ways to get rid of “workarounds” and paper based processes, manual operations and poor decision making
  • Identify areas where costs are too high and in need of potential process improvement
  • Identify work processes that include redundancies and plan accordingly to reduce labor costs associated with duplication of efforts
  • Pay special attention to the ergonomics of warehouse management operations. This is an issue that can improve work quality and worker safety for those directly affected by these operations. Positioning inventory, tools etc. in order to alleviate back strain and potential injuries can increase the available labor pool, shift the burden onto machinery and reduce injuries.  This can help improve workforce satisfaction and reduce employee time away from work and turnover rates.
Labor Management Begins with Recruiting and Hiring

When writing job postings, recruiting and interviewing potential new warehouse employees, it is especially critical to focus on “soft skills”.    Job seekers who have these skills tend to be a better “fit” within organizations.  They are people who tend to bring positive energy and a willingness to communicate and collaborate to an established team. Look for people who are self-motivated, real “go getters”.

These are people who do not depend upon others or external rewards for motivation. Other desirable soft skills include the ability to remain focused as well as the desire to remain conscious of their metrics; ability to gracefully accept feedback, motivation to continually improve performance; and the desire to be fast and accurate in their work.

Providing Workforce Training Produces Labor Savings & Productivity Gains

Even experienced warehouse workers need orientation when coming to work in a new location.  Whether it is a new warehouse or for a new company, workers need to understand the company’s expectations, policies, procedures, processes and facility layouts in order to be as productive as possible.  This also helps to alleviate fears, frustration, wasted time and reduced focus on the tasks at hand.  Every orientation should include the same elements and follow an established plan.

This ensures that all new or re-assigned workers have access to the same information and have the ability to ask questions before any work is done. During the initial training period, it is advisable to establish expectations.  This is the time to provide the key performance indicators by which each worker’s performance is measured.  The supervisor should explain each metric and show how it is tracked, monitored and viewed by the company executives so that the employee understands the value of a fast, accurate, effective work performance.  In addition, it is important to share with each employee how their work performance impacts their team, the operation, the customers and the company as a whole.

Understanding each worker’s place in the work ecosystem can aid in setting the standard for a solid work performance, one that helps the company and its clients be successful and profitable so that everyone can benefit. After establishing KPIs for each worker, the real time data needs to be reviewed and discussed at regular intervals, ideally in a way that provides useful guidance and positive reinforcement.

Having a focus on continual training helps workers understand the need for optimized, accurate operations.  This provides a framework on which the workforce can depend for new, updated and archived information on current operational processes, ways to improve job performance, etc.  By providing training for workers past the original start date, your company is providing new tools and resources to enable workers to focus on and improve the quality and quantity of the work they produce. Follow up training could be done in many ways, including providing a video, interactive in person Q&A session or demonstration or other means.  It does not need to be extensive, boring or costly.  Here are some additional ideas:

  • Engage some of your company’s top performers to help with training so that workers can “copy” their productivity enhancement methodology.
  • Consider providing a treat, coffee and snack or lunch to help make the learning session an event.
  • Video the learning sessions so that they can be archived and used in multiple ways in the future

Establishing a rapport, staying in close communication with workers and focusing on performance management helps your workforce know that you care about the quality of their performance and their future with your organization.   Taking additional steps to reduce employee turnover can result in significant labor savings for your company.  Employee turnover is an extremely costly challenge that warehouse operations usually have to face in order to keep costs under control.


Maximize the Impact of Your Workforce as Valuable Resources

Do you know who has great ideas?  Your workforce!  They are the on-the-ground, real time experts on your operations.

Take advantage of their expertise and honor them by encouraging them to share feedback, new ideas, tips and more with your executive team and other warehouse workers. Identify your top performing workers and ask them for advice.  They probably have ideas for positive changes you can make to operations, processes, training and staffing and much more.  While you may not be able to implement all the ideas, listening to their feedback demonstrates their value to your organization.

Consider offering a monthly bonus to the employee with the best labor saving tip.  Even a $25 or $50 gift card or cash incentive can make a positive impact on your business and show your workforce that you are listening.

Begin an increased focus on error reduction.  The cost of errors can be dramatic.  Think about it.  First there is the cost of the initial labor (that caused or resulted in the original error).  Next, there is the cost of fixing the error and the time that the worker who remediates it loses when doing so.  This can cause a delay and sometimes added cost from taking time away from regular work to fix the error.  There could also be added cost for supervision, reporting, fixing reports, invoices and other documents, and on and on.

Consider providing awards or incentives to warehouse workers with the lowest error rates each quarter.  This can demonstrate to your workforce that error reduction is one of the top priorities in your business.  What better way to make a statement that accurate is essential?


Optimize Workforce Planning and Shift Scheduling

Take a fresh look at your operation, warehouse scheduling and employee working hours and shifts.  It may be possible for you to execute new compressed schedules that can accommodate your operations as well as provide a better work-life balance for your warehouse employees.  By reducing the number of work shifts, you may be able to reduce labor costs.  Another benefit?   Improving the work-life balance can result in enhanced job satisfaction and reduced turnover, a major part of labor cost.


Establish Key Performance Indicators (KPI) Standards and Measure, Measure, Measure

Do you know the key metrics on which you should focus for your operation to reach the maximum rate of success?  Here are a few labor related warehouse KPIs about which you should be aware:

  • Order Accuracy % – Error-Free Orders vs Total Orders Shipped
  • Line Accuracy % – Error-Free Lines vs Total Lines Shipped
  • Orders per Hour – Orders Picked/Packed vs Total Warehouse Labor Hours
  • Lines per hour – Lines Picked/Packed vs Total Warehouse Labor Hours
  • Items per hour – Items Picked/Packed vs Total Warehouse Labor Hours

Using your warehouse management system, make sure you can run reports and use dashboards for easy visualization and have access to drill down details of the key performance indicator data.


Evaluate Barcode Scanners, Mobile Computing Devices, Printers and Other Hardware
  • Are all the hardware and tools used by warehouse workers in good working order?
  • Is battery life acceptable?
  • Is there a need for any accessories? Mobile device repairs or service?
  • How frequently are devices unavailable, offline or out of service? Take a look at the age and technology involved in your mobile computing devices.  Are you on the latest software version?

You may also want to consider mobile device management (MDM) as a labor and time saving tool.

This will free up your IT resources to pursue mission critical work and helps ensure maximum uptime of your devices while they are in the hands of your workforce, not in a repair depot or IT office.  Many companies offer mobile device management services and charge a per device fee per month for this.

MDM services include automatically “pushing” updates to devices, managing security, troubleshooting, configuring, tracking and providing field support.  MDM service providers monitor device memory and performance and have access to devices anywhere at any time.

Because warehouse workers depend on RF devices to do most of their work, making sure that your workforce keeps the devices in prime working order and in their hands can produce noticeable labor savings.

Harness Technology to Improve Labor Productivity & Performance Management

Today’s technology can provide tremendous enhancements to your workforce, automate operations to reduce decision making and enable faster, more accurate operations.  Here are some ideas for how IT technology can help reduce labor costs in warehouse operations.

  • Utilize labor enablement tools such as light enabled systems (pick-to-light, put-to-light ), voice enabled systems (voice picking, etc.). These types of systems can be especially useful when dealing with workers with disabilities or those with language barriers
  • Material handling solutions and automated label application
  • Passive RFID portals to help reduce the incidence of lost inventory provide rapid ROI and reduce labor costs
  • Make sure you are using an advanced workflow-based WMS. Using a workflow-based warehouse management system that can automate (and customize) operational processes helps ensure that each step of your process will be executed accurately and seamlessly.  This will aid by reducing errors, wasted time and labor inefficiencies.
  • Utilizing a labor management system or labor management module of warehouse management software will enable you to measure, plan, track, monitor and report on your company’s labor assets. Having these abilities will enable you to spot inefficiencies, reduced labor productivity, reduce in-warehouse travel time and maximize individual worker productivity.  By implementing a labor management system, your company will be able to identify and remedy issues before they impact your business, reduce “deadheading” and have real time access to data to improve the operation of your business.  Labor management system benefits include labor productivity gains and improved workforce planning leading to overall reduced labor costs.  Directly affected, both the workforce and executives can have access to real time data for labor tracking, reporting and decision making.  This makes it easier to recognize outstanding execution as well as to hold warehouse employees accountable and aid in plans for training and performance management and improvement.
  • Execute multi-task interleaving to make the best use of each and every worker, reduce wasted time and optimize operations.


Across the supply chain and in the warehouse, there is a labor shortage.  Labor is one of the single most significant expenses in warehouse operations.  Reducing labor costs in the warehouse can be done by investing some time and effort.  First, conducting a comprehensive inspection and evaluation of the warehouse facility, processes, safety issues and staffing is critical.  It is essential that this be done with “fresh eyes” and an open mind geared to be willing to make changes.

Secondly, time spent in planning and executing a program that has been optimized to attract, hire, train and retain a workforce that has a solid array of soft skills and is self-motivated and focused on worker performance can make a positive impact on reducing labor costs.

Finally, relying on current technologies to enhance and extend fast, accurate workforce performance can help to maximize workforce productivity and provide a competitive advantage for your company.

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