Allowing overtime hours can be a cost-effective way to increase your distribution center’s capacity to meet unexpected surges in business. However, if overused, it can become an ineffective and expensive solution that can increase your turnover, decrease your productivity and ultimately damage your bottom-line.

The first step in reducing unnecessary overtime expenses is to identify the cause. Overtime can typically be traced back to a few operational issues including:

• A lack of labor planning
• Low productivity levels
• Limited real-time visibility into progress/productivity which can severely handicap your managers from managing proactively

Overtime Cost More Than Dollars…

Many organizations focus on the dollars spent on overtime without realizing that there are many other negative impacts overtime can have on a business. In addition to higher costs, excessive overtime can lead to:

Low Productivity

Excessive overtime can significantly reduce morale which often leads to lower productivity levels. Lower productivity levels in turn lead to more overtime – creating a vicious cycle. In order to avoid excessive overtime, your organization’s managers must assure that they have the right number of people in the building. To do so, they must have access to real-time performance data.

High Turnover

As we all know, high overtime can often-times lead to burnout. In fact, recent research indicates that higher than average turnover rates are the norm at busy fulfillment centers. For example, the average turnover rate for warehouse workers in counties with Amazon fulfillment centers was a whopping 100.9 percent.
Once high turnover rates become the norm, it’s difficult to reverse the trend, as turnover perpetuates low productivity levels and more overtime because new employees need time to be onboarded and begin their climb towards an acceptable performance level. A typical performance ramp for a new employee can take 10 weeks or more. Additionally, all too often, organizations use their best pickers or packers to train the new associates which takes away from an operation’s capacity and leads to lower throughput and more overtime. Bottom-line? Employee turnover is not cheap! It can cost as much as 2.5 times an employee’s salary depending on the role.

Increased Safety Risks

There are numerous studies indicating that fatigue contributes to workplace incident and injury rates. Fatigue can affect an individual’s mental and physical capabilities, impairing judgement and concentration, slowing reaction time, and increasing risk-taking behavior.

How to Reduce Overtime Costs in Your Distribution Center

Whatever the cause, unplanned overtime presents an opportunity to leverage labor management technology to plan better and boost workforce performance. Here are three capabilities within a Labor Management System System (LMS) that will allow you to eliminate or dramatically reduce overtime.

#1 Real-time performance visibility and progress reporting

A LMS can be instrumental in overtime reduction by simplifying and automating performance tracking and management. A LMS provides greater visibility into your labor operations, enabling you to better understand where and why you’re experiencing delays, bottlenecks or employee performance issues. Performance data can be updated continually to give you a real-time picture of productivity and utilization, alerting you to negative trends that can result in overtime.

#2 Ability to pinpoint and address the cause of your turnover

As long as you are experiencing a high level of turnover you are going to experience low productivity levels which in turn will result in higher levels of overtime. Turnover is typically caused by a few things including low wages, poor culture and a lack of engagement between floor managers and hourly associates.

Obviously, it is difficult to raise base pay enough to make a significant difference in the short term, but a LMS can help you implement a self-funding incentive program that can bridge the wage gap very effectively. Having a positive culture oftentimes centers around recognition and effective and consistent communication. Utilizing production boards to constantly update your associates results in a win/win for everyone. Lastly, it’s imperative to train your managers to properly communicate with their team members. Consistent one on one communication can go a long way in creating the relationships your associates crave.

#3 Ability to implement recognition and reward programs

Rewarding higher performance with an incentive pay program will motivate your associates to work at a higher level. This increased throughput can eliminate the need to add extra hours to the work schedule. An incentive program can also put your organization into a higher wage category making you a “preferred employer” which will make it significantly easier to attract new employees. In addition to a reward/incentive program, recognition is critical in improving your relationship with your team members. Today’s LMS can help you formalize both an incentive and a recognition program.

The Best Overtime Solution is the Use of a LMS

Today’s Labor Management System Systems are designed to provide your floor managers the real-time data needed to effectively manage your distribution center. The ability to labor plan accurately, effectively use Learning Curves, accurately design your performance standards, formally coach your employees, and incent your employees are just a few of the capabilities of a LMS. These capabilities will allow you to formalize your performance management strategy and execute it effectively on the floor. The result is higher performance levels, lower overtime and reduced turnover.
If you’re interested in more insight into this topic, check out our white paper: Strategies for Managing and Reducing Overtime.