What You Need To Know About Third Party Logistics Moving Into 2016

January 14, 2016

By Valerie Bonebrake
Senior Vice President, Tompkins International

The time has come when Third Party Logistics (3PL) providers will no longer be able to squeeze the wages and benefits of their warehouse workers in order to find cost savings when pursuing new opportunities. In the past, shippers with their own warehouse employees were seeking a lower cost base, greater flexibility and the ability to convert fixed costs to variable costs. They often accomplished this by outsourcing operations to a third party. Third party logistics providers generally would come in with a lower hourly rate and a lower cost benefit package and a mix of full time and contract workforce, such as 70/30. The savings from this strategy, along with design improvements in the layout, workflow, systems, etc. enabled the 3PL to present a value proposition that resulted in a lower cost base for the operation. While cost reduction is not the highest, or the only goal for outsourcing, survey after survey indicates that cost reduction is always in the top three criteria when shippers elect to outsource. As we look forward to 2016, the labor market for warehouse workers will continue to tighten, and the market will demand a higher wage base in order to attract needed talent. Consider the fact that from 2002 to 2015 the Consumer Price Index for items such as transportation, medical care, housing, food, apparel, recreation and communications grew 35.5% while hourly wages grew 7.4%. This low base is simply not sustainable. And, when you look at certain markets where big shippers like Amazon, Walmart and others all locate, the challenge of hiring enough warehouse workers is greater. Labor experts state that it now requires at least a $1.00 per hour increase to dislodge workers. During the recession the number was much lower. To find enough of the right talent today requires base wages of $15 per hour and higher.

This is not all bad news. Many companies who pay the highest wages also enjoy the highest productivity, highest quality, lowest turnover and lowest total cost. The labor shortage presents a great opportunity for 3PL to up their game. Let’s look at some of the ways to accomplish this:

1. Insure that your warehouse layout is efficient.Too much travel time is still a big offender. Improving efficiency receiving, storage, put away and order picking all offer opportunities to reduce wasted  manpower which frees up dollars to fund wage increases. Establish engineered standards for all tasks. Measure performance and put the right training and incentives in place to maximize productivity.
2. Consider investing in new warehouse solutions.With the onset of smaller and more frequent orders, solutions such as put systems can improve labor management and order accuracy.
3. Consider non-traditional employees. People with disabilities represent a highly underutilized workforce. Companies like Walgreens and P&G are leaders in demonstrating the potential of developing a great workforce of loyal and capable workers. This requires effort and investment on the front end,but the payback will be there in more ways than one.
4. Invest in new technologies.3PL find it challenging to make the kinds of investments required to automate facilities primarily due to the short timeframe of the typical contract which makes it difficult to achieve the required ROI. Additionally, in many cases, cost plus pricing or fixed and variable pricing drive revenue,labor cost is the biggest component of revenue. 3PL and shippers must work in partnership to develop new and creative ways to price and pay for results delivered, not just tasks perform. Those who do this will flourish, innovation will increase, performance will increase and    relationships will sustain and thrive through the changes that occur in all businesses today.
5. Don’t forget the basics. It is more important than ever to really focus on getting the most out of your workforce. The goal here is to be the employer of choice. The base wage is clearly the most important element, so you must get that right. But don’t stop there. Invest the time to really understand the environment and what is needed to recruit, hire and retain the best. You may need more wage tiers so that more complex roles get paid more. You may need to consider shift differentials if warranted for your hours of operation. Look for ways to improve ergonomics. Even finding ways to lower the weight lifting requirement could open up positions to a new source of employees.