Creating a win-win warehouse productivity solution
What if you could pay associates more and save money with a system that pays for itself? In part two of this three-part series, Paul Vollmer shares the insights he gained transforming a warehouse operation for a major 
appliance maker. While there are challenges, most companies discover that the long-term benefits of leveraging an incentive-based pay strategy vastly outweigh the cons.
In my first post, we explored the basics of Lean labor management, reward-based pay and engineered labor standards and how this approach delivers a one-two punch to lagging performance. The rationale for this approach: the most effective way to ignite productivity is to standardize work processes and then reward workers for steady, safe and quality work. However, as with any other transformation initiative, pay-for-performance programs have pros and cons.
Pros: 5 things to love about pay-for-performance
A system that combines engineered labor standards, Lean labor management and rewards-based pay can be the best thing that ever happened to your warehouse, because it helps you:
- Create a culture that lowers costs, while increasing productivity
Whether you’re a 3PL providing warehouse services to retail customers or managing your own distribution center, Lean labor management and pay-for-performance can dramatically lower costs. Companies typically save four times what they pay out in rewards (for every 25 cents extra you pay an employee, you get $1 in savings). - Recognize efficient work ethics and top-performing employees
Unlike the long-standing situation where two people working side–by-side produce vastly different outputs and receive the same compensation, pay-for-performance rewards employees who work hard, safely and steady. It also sets an example for underperformers, while reducing inequities and resentment. - Drive performance and long-term retention
One of the great things about Lean labor management is you can pay workers who meet or exceed standards more. And that’s a good thing. Monetary incentives help you reduce turnover and keep your best and most experienced workers around longer. For example, instead of defecting to the facility across the street for 50 cents more an hour, your best employees could stay and make an extra $1 or $2 an hour or an extra $100 each week. - Empower workers and improve morale
We’ve all heard the saying, “the beatings will continue until morale improves.” It’s most commonly associated with long-standing methods of extracting productivity via punitive measures. Rewards-based pay is an open-book process that builds trust, teamwork and camaraderie. Employees know what to do to earn more. Do it, and are rewarded. - Sustain success through empowerment, public praise and recognition
People love monetary rewards. They also love to be recognized. Engineered labor standards make it easy to fairly and equitably measure and reward “above-and-beyond” performance. Whether it’s verbal praise in a quarterly review, sharing wins in town hall meetings, setting up best-improved or employee-of-the-month awards or something as simple as giving out top performer tee shirts: recognize outstanding work in a public way.
Cons: 4 things to think about before you implement the program
- You can’t put everyone in the rewards system
Pay-for-performance systems can be wildly successful, but they only make sense if the scope of the operation justifies the expenditure. If you can’t measure output or demonstrate a savings ratio, the operation probably can’t support a PFP program. As a result, not everyone gets an opportunity to make more money. The solution is to find other ways to reward high-performing workers on non-participating teams. - Speed bumps
Rewards-based pay programs are designed to push associates to work safely and steadily. However, some workers will do anything to increase rewards. Some employees may not want to take time to perform essential functions, like maintaining a clean workspace – even though the standards allow time for these activities. Associates may try to rush through tasks or work at unsustainable speeds, jeopardizing safety, causing lost work or burning out mid-week. The best way to address these issues is through constant coaching and by demonstrating that steady and stable performance pays best. - Engineered standards aren’t easy to understand
Engineered labor standards assign an average time of completion for every task by breaking it down into its basic component parts. The calculations used to set these standards aren’t always readily apparent. To counter the confusion, involve workers in the process used to develop the standards. - There will always be attempts to game the system
Unfortunately, there will always be people who will try to work around the system to increase their rewards. In the process of developing a pay-for-performance system, checks need to be developed to ensure everyone follows the rules. As coaching increases in the supervisor’s role, associates realize it is easier to stay focused and producing instead of trying to find a way around the system.
Could strategic changes in your approach to labor management help you save money, get more done in less time, retain your best employees and boost morale? You can download our whitepaper on lean guiding principles.
Paul is Senior Director of Customer Logistics for Ryder Supply Chain Solutions. He has extensive experience managing large, complex, labor-intensive operations and designing/operating global logistics networks. Throughout his career, Paul has been an active sponsor in transforming supply chain operations.
