Mar 07, 2023 4 Min READ

Best Practices for Cost-Effective 3PL Warehouses

4 Min READ
Best Practices for Cost-Effective 3PL Warehouses


For any third-party logistics (3PL) warehouse, a cost-effective operation and happy customer base are key elements to grow and become successful. This is easier said than done. Managing labor costs and daily planning are crucial factors to ensure that the warehouse runs smoothly and profits are maximized. To achieve this, it is important to track employee performance and understand labor capacity to meet service level agreements (SLAs) all while ensuring partnerships are generating a positive bottom line.

At the end of the day, warehouses need to receive inventory and fulfill orders within their commitment to each customer as quickly and accurately as possible. Failure to meet the conditions of a service level agreement can incur additional costs and damage the relationship with your customer(s). For warehouses, the ability to meet commitments heavily relies on the efficiency of your employees that are actively navigating thousands of square feet of space each and every day. We refer to this as labor efficiency, and if you’re not measuring this, let me tell you why you need to start.

The more productive your employees are, the more cost-effective your operation becomes. However, tracking their performance and establishing standard operating procedures can be difficult. Understanding what activities to track and establishing realistic benchmarks are often generalized. Reporting on this is typically done through the “eye-test” or requires significant manual work to compile and decipher mountains of data. On the other hand, not all customers are the same. Orders come in all shapes and sizes, making it difficult to realize your true labor capacity. As a result, it's complicated to ensure you are staffed correctly to meet customer demands on a daily basis, let alone prove the relationship with each customer is profitable.

Let's take a look at how you can create a cost-effective strategy to grow your 3PL.

Measuring Labor Efficiency

We’ve explored the connection between labor efficiency and profitability, but identifying what exactly warehouses should be measuring and how can be perplexing.

While it's important to be proficient in all activities within the warehouse, start by looking at value-added activities that customers are paying for. Once a sales order is received, it's time to pick, pack, and ship it to the final destination as quickly as possible. Picking and packing productivity, how many orders are picked in a given period are great metrics to indicate if enough orders are progressing through the fulfillment process. Order volumes fluctuate during the day, so it's important to evaluate productivity metrics consistently so you can address bottlenecks before they impact SLAs or customer relationships. Another metric to keep an eye on includes cycle times, which measures the average time between picks. Measuring these activities will provide visibility into how many orders are picked and how quickly employees complete one job before moving onto the next.  

Relying on the “eye-test” to track performance simply is not enough, and reporting on this manually takes some serious work to be accurate. Technology is crucial in streamlining insights, but you don’t need to look for a Labor Management System to capture and leverage performance metrics. Instead, look to the most popular technology for warehouses, a warehouse management system (WMS). WMS software ranks as the most implemented technology in warehouses, serving as the central hub for warehouse operations.  

A WMS can provide valuable tools to directly improve performance, such as mobile scanning solutions, and digitize paper-based processes. Implementing barcodes and mobile scanning devices not only improves picking accuracy and speed, but it creates a digital footprint of warehouse activities with timestamps. The right WMS captures these activities and surfaces key performance indicators (KPIs), streamlining reporting to provide easy access to the data that matters.

Understanding Customers’ Unique Needs

Even with the right technology in place, each customer is unique, and the level of support needed to meet their specific SLAs can vary. While some customers are B2B and others are D2C, their orders can come in all shapes and sizes. It is essential to understand their specific labor requirements to truly evaluate your labor capacity and plan effectively.

Without a deep understanding of your labor capacity, managers can frequently experience times when the warehouse is understaffed and missing SLAs or overstaffed with labor costs eating into their profits. Using stopwatches and conducting time trials is a popular method to measure capacity for individual customers but is not a sustainable solution.

Turn to your customers and historical data for help. Odds are your customers are forecasting demand and can share insight into how they expect their order volumes to evolve. But relying on forecasting isn’t enough; as George Santayana famously said, “those who cannot remember the past are condemned to repeat it.” Referring to historical data and trends in addition to customer forecasts are great techniques to leverage data and improve planning.

Why Planning May Not Be Enough

Of course, meeting SLAs and planning effectively helps, but at the end of the day, you need to make sure you’re generating profits that will grow the business. That isn’t always the case. Through a deeper understanding of labor costs, capacity, and requirements, warehouse leaders can revisit partnership agreements and make decisions that are in the best interest of the organization. That may mean adjusting terms using data to ensure the business is fairly compensated for their services or cutting ties with a customer because it will cost more to maintain the relationship.

As we head into economic uncertainty, this methodology is particularly important not only to validate profitability but also to remain competitive in the 3PL market. Hiking prices can cause customers to look elsewhere for a logistics provider. Leverage data to ensure your 3PL is priced in a position to retain and acquire high-value customers.  

Extensiv Can Help

Explore how cost-effective your warehouse can be with Labor Analytics from Extensiv. Labor Analytics is a powerful reporting dashboard in our cloud-based warehouse management system, 3PL Warehouse Manager. We help 3PLs transform paper-based, error-prone businesses into efficient operations using a suite of technology. Request a demo today or listen in on what industry experts have to say about how Extensiv can put the power of data in your hands to drive labor efficiencies and profits. 

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