Feb 14, 2023 4 Min READ

The Impact of Labor Efficiency on 3PL Profitability

4 Min READ
The Impact of Labor Efficiency on 3PL Profitability


Third-party logistics (3PL) companies play a critical role in managing and optimizing supply chain operations for businesses. The success of 3PLs is heavily dependent on their ability to effectively manage their resources, including labor, to meet the demands of their clients. Labor efficiency, or the ability to optimize the use of human resources, is a key factor that can significantly impact the success of a logistics provider and a secret to profitable growth.

Through a better understanding of the importance of labor efficiency and the tools available to surface metrics, 3PLs can take steps to enhance their operations and grow their business. Let’s explore the impact of labor efficiency in the industry and different strategies to improve your bottom line when the future of our economy is full of uncertainty.

Defining Labor Efficiency

Labor efficiency is a broad term, but before we dive into the relationship with profit margins, let's quickly define this concept and clarify where we are focusing our attention. Labor efficiency is the ability of an individual or team of individuals to complete key warehouse activities as quickly and accurately as possible. From the moment bulk inventory arrives to a customer’s order leaving for its final destination, each warehouse employee is tasked with completing their assignment in a timely manner.

Productivity can be commonly misinterpreted as the end-all, be-all metric when evaluating efficiencies. Productivity metrics simply assess the speed at which the tasks are completed, but high productivity metrics don’t translate into high profit margins. To be efficient, you have to be more than productive, you need to be cost-effective in your approach.

Time Is Money

Entering into an agreement with an ecommerce brand touches several elements, including storage, fulfillment, and labor costs. Of all the elements, labor costs are critical because they can significantly vary when servicing one brand compared to another. It’s the most difficult variable to solve and a challenge that has faced the logistics industry for far too long.

A great example of cost-effective labor is tech time in the automotive industry. If you take your car to a dealership for service, automotive technicians are paid on what is referred to as “tech time.” Tech time is the fixed labor cost associated with a specific service or job. If an oil change is supposed to take 2 hours but a technician falls behind and is only able to complete 3 in an 8-hour shift, he is only paid for 6 hours of work. It doesn’t matter how many hours a technician actually works; they are compensated for their ability to meet daily demands.

Variables in the 3PL Industry

3PLs don’t have that luxury. Pickers and packers are paid an hourly wage, which means they receive the same paycheck for a 40-hour week whether they picked and packed 500 orders or 5,000 orders. That proves to be challenging when planning labor capacity and quoting labor costs for a particular customer a 3PL is looking to onboard.

Customers come in all shapes and sizes, as does their inventory. Pallet-in, pallet-out customers are far different than D2C ecommerce customers as are the type of goods you are managing for them such as refrigerated, hazmat, bundles/kits, etc. All the unique attributes of businesses can become a burden for logistics providers to manage effectively.

Comparing customers is not a case of oranges to oranges. In the end, fulfilling 500 orders for Customer ABC could be efficient while fulfilling 5,000 orders for Customer XYZ could be inefficient because of the time and resources required. It makes sense when analyzing the situation from a birds-eye view, but have you set up your partnership agreements or service level agreements (SLAs) in such a manner? If not, you’re risking opportunities to grow your business. Let me explain why.

When it comes to efficiency, it is white and black; you either are or are not. There is no middle ground. If you’re inefficient with labor, you’re leaving money on the table. Labor is eating into your profit margins, and in some cases, the partnership with a customer can cost you money instead of putting that money into your pocket. If this is the case, renegotiating the terms of your partnership and SLAs can be necessary.

On the other hand, you may be raking in profits with a particular customer of yours. Sweet! However, with the economy facing uncertainty, every dollar matters to you and your customer. You are risking your ability to retain that customer as budgets become tight and they reassess their operation, including their relationships with logistics providers. Be cautious when depending on a single or small group of customers to drive the majority of your profits because at the end of the day, you need to diversify your portfolio. This parallels how 3PLs diversify customer types, so when one market takes a hit, your 3PL doesn’t go down with it. Use labor efficiency to guide your competitive pricing.

Strategies To Apply

Before you can address the situations presented above, you need to understand if your 3PL warehouse is efficient with labor and what you can do to track your performance. The proof is in the pudding, or in this case the data. Data and analytics have become a north star for businesses of all types as they look to drive profitable growth.

To understand current labor efficiencies, you need to start tracking the performance of your team, but more importantly how your team is performing by each customer. It is critical to drill down into specific customers as I’ve already touched on. Through a combination of productivity metrics and time associated with each customer, your warehouses can make precise estimates on labor costs. Reevaluate current partnership agreements for opportunities to renegotiate terms and use similar fulfillment requirements to quote prospective brands to offer competitive pricing and expand your customer base.

This is all easier said than done. Without the right technology in your warehouse, you may be trying to decipher mountains of data in excel. Extensiv digitally evolves 3PLs with mobile scanning and a warehouse management system (WMS) available to capture data and surface insights on your workforce. We’ve streamlined reporting to offer logistics leaders real-time access to powerful metrics that tell you who did what and how long it took them. We’ve taken the guessing out of reporting for 3PLs with a specific Labor Analytics dashboard created to give warehouses more control and visibility into their workforce.

Extensiv is connecting 3PLs and brands like never before, and we’re committed to innovating omnichannel fulfillment with technology like Labor Analytics. Join us on February 23 for a live webinar with industry leaders to discuss labor efficiency in further detail and learn more about how you can leverage your team to drive profitable growth. 

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