Gainsharing in the Warehouse: Power from the People

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Programs that properly motivate and compensate workers can send warehouse productivity soaring.

Enterprises are relentlessly challenged to find new and creative ways to grow their business while at the same time shrink costs. While many look to outsource offshore, build better relationships with preferred carriers or 3PLs, or court new technologies, some are discovering the real key to profitability lies within their warehouses— and their employees.

Focus on warehouse productivity continues to sharpen, especially as companies find it difficult to drive value in other areas of their enterprise.

"Many businesses realize they have lost control of transportation costs, yet they still face pressure from the boardroom to optimize the supply chain," says Ron Hounsell, director of logistics services for Denver, Colo.-based Cadre Technologies.

Some businesses are rethinking the location of stateside distribution centers or the role of a specific facility in a given network—essentially finding out how to use physical assets more effectively. Others are looking inside the warehouse to better leverage human resources so they can more efficiently meet corporate benchmarks and customer requirements.

A recent Gallup Poll, however, suggests enterprises are still not doing enough to motivate and engage employees. The Gallup Management Journal surveyed U.S. employees to probe their perceptions of how happiness and well-being affect job performance.

Of those surveyed, 27 percent consider themselves "engaged" while 59 percent and 14 percent respectively identify themselves as "not engaged" or "actively disengaged."

That 73 percent of respondents feel they are not properly motivated by their supervisors and/or corporate departments indicates a major void in how businesses perceive the importance of labor management. For industries heavily reliant on labor—logistics and distribution, for example—this inefficiency presents a major bleed to profitability.

"Traditionally, there has been a gap in managing labor because it is often difficult to get hourly employees on the same page as management," adds Hounsell. "These employees are not motivated to be more productive and accurate if they just go around in circles picking orders."

Forward-thinking enterprises must therefore be cognizant of the potential value they can achieve by carefully analyzing how they measure and monitor activities in their warehouse and distribution facilities. To begin with, they can start by properly engaging their employees.

The True Value of Gainsharing

When retailer True Value Hardware, Chicago, Ill., began looking for a better way to motivate and compensate warehouse employees five years ago, Pat Kelley, director of logistics, wanted a program that was more intuitive than traditional compensation strategies.

"I discovered that DC managers found the traditional system complicated and cumbersome," Kelley says. "In 2000 we came up with a more simplified plug-and-play gainsharing methodology. It was easier for employees to tune into because it was based on individual performance rather than group incentives and we offered sliding-scale compensation with no cap limitations."

Kelley's vision of "Simplified Gainsharing" focused on four primary tenets:

1. Individual incentives are more powerful than team incentives.

2. Incentives should be paid as an hourly wage rather than a lump- sum bonus.

3. Establishment of "home bases."

4. Gainshares should be paid as soon as possible after performance.

"Traditional gainsharing often centers on how to read balance sheets, and incentives are usually meted out separately. Employees have less control over what they make," says Hounsell, who co-authored the book Warehouse Productivity, Improving Workforce Performance with Simplified Gainsharing with Kelley.

Additionally, most gainsharing models are based on annual or quarterly performance metrics, which lack immediacy in terms of motivating and compensating employees. Kelley recognized that employees were less interested in deferred gratification, preferring recognition and rewards right away. A quicker return similarly gave laborers a new appreciation for their effort and role in the larger corporate machine.

"The reality is that salaried employees and hourly wage earners have different perceptions of time, especially when they have few incentives to work toward," says Kelley. "A compensation program that targets individual performance helps laborers cut through the boredom and ultimately turns them into entrepreneurs."

This approach also brings hourly wage earners into the corporate fold, offering them motivation to be more productive and accurate in fulfilling their responsibilities.

But typically, most gainsharing models miss the target in terms of properly driving productivity because they measure group-based performance. This approach skews effort and compensation.

Kelley groups warehouse employees into three categories:

  • Banshees, or workers who scream with productivity because they are hardwired that way.
  • Zombies, or low performers.
  • Those who are somewhat engaged and fall somewhere in the middle.

"In a traditional group-based compensation model, zombies receive incentives based on the productivity of the banshees," says Kelley. "But when you consider individual performance, as Simplified Gainsharing does, banshees take off because they are in it for themselves."

Power to the Person

Paul Wolf, vice president workforce performance management, RedPrairie, a logistics solutions provider based in Waukesha, Wisc., recognizes similar problems when incentive programs are based on group performance.

"Companies don't always look at the individual level when creating appropriate time-parameter standards, so they don't have a fair and accurate performance measurement," he says. As a result, businesses track progress and productivity as they have always done, rather than on potential.

Simplified Gainsharing lets employers look at an individual's performance over a shorter timeframe—one month, for example—measure their performance and productivity during that period, and compensate accordingly.

"Simplified Gainsharing relies on an uncomplicated method—comparing actual performance of work at the individual level against predetermined expectations. These may be historical averages, engineered standards, or something in between," write Hounsell and Kelley in their whitepaper, Unleashing Warehouse Productivity—The Case For Simplified Gainsharing.

"When workers perform above those expectations, they are compensated in the following month by an increase in their hourly pay rate for the whole month. So long as quality is maintained along with increased productivity, the rate increase continues. This pay improvement is funded from the productivity gains," they say.

Roughly one-third of the savings are returned directly to the employee while the company recoups two-thirds.

"At True Value we looked at our baselines and realized we might be able to do a better job because past standards were underachieving," Kelley adds. "Implementing a Simplified Gainsharing program brings greater accountability into the warehouse. It has changed the way we allocate labor and resources."

True Value has implemented Kelley's gainsharing initiative at 16 distribution facilities in the United States and has improved network productivity 71 percent over four years. Considering the hardware retailer's distribution environment includes more than 65,000 SKUs of varying characteristics, 90 percent picks, and union and non-union warehouse facilities, these gains are impressive.

At one facility in particular, productivity improvements saved more than 66,000 hours annually—equivalent to 32 full-time employees.

Among other advantages, the retailer has improved turnover rates 87 percent—from 22 percent attrition to five percent.

"Considering the time and capital spent training new employees, that is a considerable gain," Kelley notes.

But building a performance-focused workforce presents challenges, both externally and internally.

External challenges manifest themselves in customer requirements, cost, service, and accuracy. "Customers want more for less. They want the right product in the right place at the right time, often with special requirements," Wolf says.

Internally, individual barriers may include:

  • Employees who don't know the best way to do their job.
  • Employees who don't know what is expected of them.
  • Insufficient and/or slow feedback.
  • Poor training.
  • An unclean or unsafe physical environment.
  • Inconsistencies attributed to group performance measurement.

Wolf sees two key variables enterprises must ultimately harness in order to create a more productive and efficient warehouse environment.

"First, businesses must have control of metrics and standards—the appropriate time required to fulfill a task, for example—as well as control over the process and best practices used to monitor these base standards," he says. "Second, they must have the visibility to measure and examine these metrics in a real-time environment."

Technology Ties it Together

The true challenge is collecting and turning out data so that it is meaningful to multiple departments. Technology must tie this all together.

Automated Distribution Systems (ADS), a third-party warehouse and distribution company with two facilities in New Jersey and a new DC in South Carolina, began using RedPrairie's WMS and labor management module about one year ago to drive productivity.

Despite the fact that its facilities are highly automated and that it has built a great deal of "trackability" into its systems, the Edison, N.J.-based 3PL wanted to engage employees in a more proactive way.

"In terms of labor we want our employees to move fast. But if orders and shipments are not accurate, speed is no good," says Bruce Mantz, executive vice president, ADS. "We have helped employees become more accurate and encouraged them to be aware of quality standards through our incentive program."

ADS began operations 12 years ago, with elementary productivity systems. Essentially, the more employees did, the more they were compensated, notes Mantz. With RedPrairie's labor management solution, it has created a more robust and customized program to track productivity as well as compensation for meeting standards above a certain pre-determined criterion.

Eyes and Ears in the Warehouse

In addition to higher baseline standards and greater efficiency in the warehouse, ADS has fostered a more intuitive and responsive labor force.

"Employees want to make their incentive so they have become our 'eyes and ears' in the warehouse," says Mantz. "If they hear a motor making a noise it shouldn't they let us know as soon as possible. They are brought into the process and have a vested interest in meeting expectations. This creates an added level of accountability.

"Workers also have become frontline auditors," he adds. "If they see a carousel coming into a DC without the proper stock numbers, they are quick to let supervisors know."

Since implementing RedPrairie's labor management solution, ADS has seen significant improvements in its warehouses, with 50 percent to 60 percent productivity gains. But, more importantly, ADS has had far fewer incorrect shipments, which has a huge impact on customer service.

"Our accuracy rate has risen from 98 percent to 99.8 percent," Mantz notes. "When dealing with retail customers who require point-of-sale replenishment, accuracy is extremely important. These customers can be certain that shipments coming into their stores are precise."

Briggs & Stratton, the world's largest producer of air-cooled gasoline engines for outdoor power equipment, found similar success installing RedPrairie's Workforce Performance Management solution in 2003. Prior to that, the manufacturer's Menomonee Falls, Wisc., parts replenishment facility had no standards for measuring employee productivity.

When it first piloted the Workforce Performance Management solution to gauge a baseline metric for improvement, it found it was operating at 67 percent of standard. After installation, the benefits were immediate:

  • Distribution productivity grew from 67 percent of standard to 110 percent.
  • Briggs & Stratton reduced its workforce 18 percent in the first month, while increasing pick, pack, and ship throughput.
  • It increased packaging productivity 20 percent within the first two weeks of implementation, while accruing labor savings of about $1 million annually.

More importantly, Briggs & Stratton has been able to change the way it manages its workforce environment. Employees are now accountable to themselves, so line managers act as facilitators rather than enforcers.

Gainsharing Pays Dividends

The potential return on investment for creating a customized gainsharing program that engages and motivates employees, and creates accurate performance metrics, is considerable.

"Creating a Simplified Gainsharing program involves a low capital investment, aside from some training and planning," says Hounsell. "Gainsharing programs often pay for themselves within four months of installment, and potential savings can exceed the anticipated benefit of 50 percent, or $2,500 per full-time employee."

But, as he acknowledges, businesses must commit to full-time, long-term labor; properly train employees in how to perform their responsibilities; and, in some cases, cross-train them so they have a more diverse skillset.

Solutions providers are doing their part to help businesses create more harmonic and productive working environments.

RedPraire's suite of labor management tools, for example, covers an array of productivity initiatives—from incentives and rewards to scorecard and analytics.

And, Cadre Technologies offers a consulting program to help manufacturers, distributors, and third-party logistics companies deploy the system. Cadre tailors the program to each operational environment and culture, including training of a corporate sponsor and champion who will implement and manage the program.

As transportation costs and capacity become increasingly difficult to control, businesses will be compelled to look elsewhere within their supply chains to drive value. DC productivity is an area ripe for picking.

"The arrow of competitive advantage generated through Simplified Gainsharing can be pointed in many directions—higher profit, reduced cost, better quality, more reliable service, less inventory," say Hounsell and Kelley. "For early adopters, it represents an important strategic advantage. It is a low-capital, cost-effective way to enhance labor performance."

For Kelley, the benefits of implementing a gainsharing program go well beyond simply shaving costs and improving productivity metrics. Businesses can create a more rewarding environment for their employees.

He recalls visiting a True Value facility in Springfield, Ore., and being stunned at watching warehouse workers jogging around the facility to pick products faster, and to be more productive. That is the power of gainsharing.

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