Amazon recently announced they are raising their minimum wage to $15 for its 350,000 permanent, temporary and contract workers. While there are several ‘people oriented’ reasons for doing this, there are also several business reasons why Amazon may have raised their starting wage:
- They could be responding to political pressure from critics to improve their labor practices
- They could be feeling wage pressure in a tightening labor market
- They could be fending off stronger antitrust regulation
Whatever the reason, one thing is for sure: this bold move by this large creative disruptor is sure to cause upward pressure on other companies who depend on unskilled and low skilled workers to run their businesses, especially those with manufacturing, fulfillment and distribution operations.
Waging a War for Workers
The move by Amazon to increase minimum wages to $15 is designed to attract workers away from competitors and position the company for long-term growth and dominance. This investment in people power parallels their heavy investment in Kiva robots and other automation for their 100+ sorting and fulfillment centers. To compete for workers, other large companies also plan to increase wages. In 2019, Wal-Mart will raise their starting wage to $11 for 1.5 million workers, and Target will increase its starting wage to $15 by 2020 for 323,000 team members.
These are big moves by big companies, but where does this leave companies who were already feeling the pinch to raise wages before Amazon’s announcement? How will the distributor, fulfillment company or warehouse who can’t afford to raise its labor costs 40, 50 or 100% continue to compete? In the very short-term, these companies can rely on worker loyalty and intangible rewards such as a familial culture and accrued PTO to retain workers. More practically speaking, however, these companies will need to re-think their entire labor strategy. Some companies, we believe, will decide to exit the unskilled labor market altogether and turn to outsource and automated solutions.
Changing Your Labor Game: A Playbook for Outsourcing
If you have a labor-intensive kitting, packaging or fulfillment operation and are grappling with the “Amazon Effect,” consider the benefits of an outsource solution that could change the game for your company and put you on a more profitable path to growth. Here are key elements from the outsourcing playbook:
- Think cost per unit, not cost per hour. Have you ever measured how much it costs to process each individual package or order through your operation? Cost per unit is an innovative cost model Productiv uses to manage throughput and shift uncertainty and wage pressure from clients to us. Over the course of a decade, we’ve been able to consistently deliver operational cost savings of 20-70%. Need help with your business case? Take a look at this eBook by Paul Baker, Productiv’s CFO. In the book, Paul highlights the hidden costs of using temp labor and helps Ops Managers begin to understand managing unit costs and ways to be more strategic and profitable.
- Explore embed or outsource solutions. If you’re looking to exit the unskilled labor market, two excellent options are either embedding Productiv workers in your operation, or sending goods to one of Productiv’s nine locations for kitting, assembly or packaging. Either way, you simply pay a cost per unit, and we manage the workers and throughput, and warrant the quality.
- Understand Productiv’s ‘secret sauce.’ We’re often asked “how come you can find labor when I can’t? How do you do the same thing for less?” Our ‘secret sauce’ is no secret at all. It’s simply a honed productivity model that we continually invest in coupled with an obsession with this market. As an outsource partner, we are happy to share the foundations of our model:
- Lean principles – We use lean-engineered lines and workflows that are super-efficient and ergonomically advantageous
- Gainshare incentive – We incentivize workers with a gainshare based on throughput and quality metrics
- Servant leadership – We stay flat and keep workers engaged offering real-time support and reinforcement
- Focus on strengths, not non-core functions. Kitting, hand-assembly and packaging are often non-core functions for many contract manufacturing and fulfillment centers. You may know firsthand that these low-skilled functions can be ‘black holes’ of managerial time, focus and hidden costs. When you outsource your labor-intensive operations, you’ll have time to shift focus to more profitable aspects of your business.
- Make your cost/benefit business case. There are numerous measurable benefits to outsourcing your labor-intensive operations. Some simple math factoring in uncertainty around wage pressure will help bolster your business case. Consider these benefits of outsourcing to Productiv:
- Outsource to a true specialist in the field
- Reduce the number of unskilled workers on payroll
- Refocus those payroll dollars on skilled workers, mid-level managers and automation
- Insulate your operation from further wage hikes
- Don’t waste money competing for a limited pool of unskilled workers
Reacting to external factors such as competition and wage pressure can have you playing constant defense, instead of growing stronger and improving your customer value proposition. In light of Amazon’s $15 wage announcement, it might be time for you and your team to call a timeout and shift to a more aggressive offensive strategy.
If you have unskilled workers in your fulfillment center or similar operation, a smart play call would be to start analyzing an outsource or embed solution using a company like Productiv.
Productiv specializes in managing unskilled workforces for a lower cost without sacrificing throughput or quality. For almost 10 years, we’ve been successfully partnering with large consumer goods and packaging companies to change their game and improve their profitability. Not only are they reinvesting dollars in forward-thinking initiatives, but they are now buffered by wage pressures and Amazon’s dominance of the labor supply.