Driving With the Rearview Mirror: Pay v. Value

That damn stubborn labor number.

I knew that to get our labor cost below 2%, one of two things had to happen. Either our shipment value had to increase dramatically, or I had to find a way to cut the labor cost.

The oppressive heat of summer in the Arizona desert yielded to what the locals call, "the change of season." I didn't know how the change in weather was going to affect the shipments out of the distribution center. I knew from my past experience in the Midwest, that the fall was never as busy as the summer. I was about to learn that it was a different story in the Southwest.

Expertise and Skill

Lauren was the highest paid guy in my warehouse. He not only earned the most money per hour, but also racked up serious overtime hours. Lauren had more time with company than anybody else in the facility, including Claude. Claude was older than dirt, and the story went that he had started with the company as a baby, but Lauren had actually been there longer. The company didn't have wage caps, and after 22 years with the company, Lauren’s hourly rate was well over $12 an hour. Working an average of 11 hours a day, Lauren started earning overtime pay by early Thursday afternoon.

I sat doodling on a Friday afternoon. That day, for every hour we paid Lauren, we could have paid for two-and-a-half other employees. I sketched out a teeter totter, putting Lauren on one end and two guys on the other end. I needed to figure out a way how to eliminate Lauren’s overtime and not hurt the operations.

Lauren was our truck loader. He actually did much more than just load the trucks. He led the warehouse picking team, sometimes picking orders himself, and then throwing himself into the loading of the trucks. We could ship a lot of loads per day; our operation loaded at most four trailers, sometimes five on a busy day. But where we did ship a lot of trailers, there was a lot of value loaded in every one of those trailers. It was important to us to make sure that we loaded those trailers tight, because many of our loads traveled a long distance.

That's where Lauren really earned his money. He knew the product so well that he could look at the orders when they printed and figure out how to load the truck in such a way as to maximize the space on the trailer. This was in the days before the 53-foot trailer. Almost all our trailers were 40-footers, able to hold 20 pallets. We could squeeze 22 pallets onto a trailer by pin-wheeling them, but the pallets had to have no overhang in order for that to be possible. Still, most orders built out between 25  and 30 pallets of merchandise, more pallets than could fit onto our trailers.

Claude would pitch a serious fit if we had an overflow. Usually it was because he could not get a truck under the load, but lately he was fighting overflows because they drove his transportation higher than the goal on Tom’s board. Claude had figured out how to meet his transportation goal by eliminating overflow loads. That affected the decisions on the dock. If the load looked big, as most of them did, then Lauren would work hard on rebuilding pallets, or breaking pallets down and hand stacking loose cartons into the space between the trailer roof and the tops of the pallets. If he was not careful, Lauren could overload the trailer, wedging more than 40,000 pounds of freight into it.

All that effort drove Lauren’s overtime. That kept us from reaching our labor number. I knew that to lower our labor costs, we had to reduce Lauren’s hours. Looking at the total cost of his overtime, we could support almost 35 hours of another worker, so even if the replacement was only half as productive as Lauren, we would come close to breaking even. The trick was to find places where others could do some of Lauren’s work. So, I started looking for ways we could replicate Lauren.

A Focus on the Value

I started thinking about the hours that Lauren worked, and what he did in those hours. I had shadowed him the entire week, arriving when he did and watching what he did throughout the day. I had over 20 pages of notes from the week. Somewhere in those notes was my answer.

Lauren was an early starter. An old Iowa farmboy, he was used to getting up early and starting to work early. He was the first guy in the building each day. With a key and the alarm code, he opened up the building at 6:00 AM. After starting the heavy-duty coffee brewing, he pulled the reports from the printers.

After stacking the different green bar reports on Sherri’s desk, he pulled the white sheet reports from the second printer. The bulk of that paper consisted of the pick lists for the orders that we would pick and ship that day. Lauren broke the orders down, first by order and then by pick zone. He then stapled the orders together by pick zone and organized the paperwork. The system printed the replenishment reports in the same batch with the orders, and some other management reports. Lauren would pull those and put them into the bins for Tom, Claude, and me.

After pouring a cup of coffee, Lauren would sit down and start looking at the orders, taking notes on a sheet of paper. For the next 30 minutes, he looked at each of the orders, figuring out how he was going to stuff everything onto the trucks that day.

At first, I thought Lauren was wasting his time just to open the DC, make coffee, and pull the reports from the printer. As I sat looking at the pages of notes, I realized the big deal was not what he did in the first 20 minutes; it was the next 30 minutes he spent sitting at the break room table with his coffee and the orders. What Lauren did while looking at the orders and making notes created the biggest value for the day, as he planned what to do, when to do it, and how to do it.

Gaining Perspective

I sat looking at the doodles on my scratch pad, and the notes across my desk. I had just finished the daily Hours Worked report to put on Sherri’s desk. I took my daily copies and totaled up the hours for the week. Receiving and stocking had no overtime, which was progress. Picking and loading was way over, however. Lauren had 56 hours that week alone—just a little over his average.

Every time I would bring up Lauren’s overtime hours to Tom, I got a funny kind of resistance. At first, I thought that it had to do with Tom personally liking Lauren, or fearing that cutting Lauren’s pay would upset Lauren and he would leave. Lauren filled a critical position; many things could go wrong—would go wrong—if he weren’t there. Perhaps Tom’s resistance stemmed from a fear of what could go wrong?

“I’m not sure if Lauren’s overtime is really the problem,” Tom would say. I glanced at one of my pages of notes, where Tom’s quote was at the top of the page.

I scratched out the numbers, thinking about the payroll impact. Assuming he worked his average overtime hours, Lauren made just under $40,000 (remember, this was in 1986). If he worked just 40 hours per week, he would earn $25,000. So Lauren’s overtime was worth about $15,000 in additional annual pay for him. That was big money—60 percent of his pay came from overtime. That was a lot of cash! Cutting his hours would mean a big cut in pay for the guy.

I attempted to put Lauren’s hours into perspective, one that I could understand and feel. My salary as a warehouse supervisor was $27,000 per year. We worked just about the same hours, but Lauren earned $13,000 more than I did. A new 1986 Ford F-150 cost about $8,300! The sharp Volkswagen Scirocco I was looking at was $9,900. Man, that pissed me off. I had gone to college and gotten a degree in industrial management—to earn a lot less than the guy loading trucks! Hell, the world was really unfair!

After sitting there at my pity party for a few minutes, I started to think about the problem from a different perspective. Was I really earning my pay? Was Lauren earning his? We both worked for the same company, and the same manager. What was the deal in the manager’s eyes?

Lauren’s hours, and his pay, did not change after I started working at the DC. With my arrival, the payroll had gone up $520 per week. I stopped and asked myself the question, “Have I earned my pay?”

My hand moved over to the adding machine and I did a quick calculation. On average, we shipped about $4 million a week in Cost of Goods. At 2.5% labor factor, our payroll was $100,000 per week. A one-tenth of a percent drop in the labor factor, from 2.5% to 2.4% was $4,000 less payroll. Over a year, the drop in payroll cost was $208,000.

I then thought about what impact eliminating Lauren’s overtime would have on the labor factor. Lauren’s weekly overtime pay averaged $288. When I looked at that from the labor perspective, $288 / $4,000,000, Lauren’s overtime was .0072 %! That was such an insignificant number.

Lauren’s overtime was not the problem! Great. Tom was right! I had to find something else that would move the number.

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