Strategies to Reduce Overtime Costs in the Warehouse

Significant employment decreases occurred in many industries during the pandemic. But in transportation and warehousing, demand for labor continued and even grew. When there are not enough reliable workers to fill the need, warehouse operators must rely on overtime to fill the gap. This article looks at overtime-related problems and offers some strategies to reduce overtime costs in the warehouse through improved hiring and retention.

Problems with overtime in the warehouse

The primary downside of overtime as an answer to meeting the order processing load is higher costs. Federal law requires you to pay at least time-and-a-half for every extra hour worked beyond 40 hours. Without better planning to reduce overtime costs in the warehouse, labor costs could increase 10-25%.

Most shippers want to avoid paying overtime rates, but will do so if it’s the only alternative that allows on-time processing of orders and keeping customers happy.

There are other, more hidden, costs associated with overtime, including warehouse employee turnover. Excessive overtime can put physical and mental strains on associates that lead them to seek positions with more predictable hours. When this happens, it costs at least $7,000 to replace a warehouse worker.

Quality can also degrade as tired workers are more likely to make mistakes. Emerald TC reports that the average cost per error is anywhere from $50 to $300 dollars or an 11-13% drain on profitability.

Strategies to Reduce Warehouse Overtime Costs

There’s no magic bullet to curbing excess overtime. You’ll need a range of strategies that include different hiring practices, greater focus on retention, and leveraging technology to improve forecasting. Let’s take a look at a few.

• Improve forecasts. That’s easier said than done in today’s unpredictable supply chains, but it’s where you need to start. The better informed the warehouse team is on future volumes, the better they can plan schedules to avoid overtime. Forecasts should be revisited at least weekly, not monthly, with frequent communication with the warehouse team or 3PL on things like upcoming promotions, delayed inbound shipments – basically anything that might impact order volume. 3PLs like Kane Logistics can and should play an active role here, too. We are constantly looking at actual versus forecasted volume and can often spot flaws in an initial forecast based on historical knowledge.
• Increase productivity. The more productive your existing associates are, the less overtime is required to process orders. Use labor management tools to identify the low performers and retrain them. It’s important also to recognize and incent high-performers for helping the company achieve throughput goals with fewer workers.
• Increase wage rates to match the local labor market. In today’s market, you’ll need to pay more than you’re used to paying. With hourly workers, offering sub-market wage rates to new hires is a non-starter. With existing associates, low wages can lead to absenteeism and higher turnover, which can negatively impact the bottom line even more than a wage rate uptick.
• Offer incentives. For new hires, an attractive signing bonus – paid out over time – can make a real difference. For tenured workers, you can offer attendance bonuses. If you or your 3PL run 2nd and 3rd shifts, these are the most difficult shifts to staff. Raising the shift differential may be required to get workers to come or stay.
• Be flexible. People trying to manage family responsibilities place a high value on policies that allow them to flex work schedules to accommodate child care, elder care, or coordinate better with a spouse’s schedule. Don’t under-estimate the power of this non-monetary perk.
• Focus on retention. The turnover rate for Transportation, Warehousing, & Utilities is 46% (US Bureau of Labor Statistics). It’s almost impossible to control overtime costs when as many people leave your operation each year as stay. If you manage your own warehouse operations, focus as much effort on retaining staff as on recruiting If you outsource warehousing and distribution, work with a 3PL, like KANE, that has warehouse staff turnover rates well below the industry average. High retention significantly reduces the need for overtime and unpredictable temporary workers.

3PLs can help reduce overtime costs in the warehouse

Shippers have relied on 3PLs for decades to provide flexible solutions for labor management. While meeting this goal has become challenging in the current labor market, it remains a strong 3PL core competency. To discuss labor management strategies, including how to reduce overtime costs in the warehouse, contact KANE today and talk to one of our distribution experts.