nothing to lose, a lot to gain

Even by the standards of one of the nation's biggest and best-performing DCs, Pete, a slender fellow sporting a gray ponytail, has become something of a legend. Pete is an order picker, picking pipe— 20-foot lengths of PVC, copper, and other pipe—eight hours a day, five days a week for shipment to hardware stores in the True Value, Servistar and Coast to Coast Hardware co-operatives (all of which operate under the umbrella of True Value Hardware). What makes him stand out, even in a DC noted for its high productivity, is that Pete regularly clocks in at more than 200 percent of the performance standard for his position and department. He has literally doubled the picking productivity of the pipe department, picking volumes of product that used to require two or three employees.

What does Pete gain from this? For one thing, a huge boost in his hourly pay. Pete is an all-star participant in the company's Simplified Gainsharing program, an incentive system that rewards DC workers for exceeding productivity standards by upping their hourly wages. The harder an employee works, the more he or she can earn, with no upward limit. And it's not just the worker who benefits. For the employer, the payoff is a big leap in productivity and reduced employee headcount.

True Value's program, now more than five years old, has been implemented in 16 DCs in three distribution networks, both union and non-union facilities, around the country. Though participation is voluntary, the majority of the 1,200 employees who work in the True Value DCs take part in this program today. The advantage to the employees is obvious: the opportunity to earn higher wages. But the company has also come out way ahead. In the program's first five years alone, the DCs have seen a triple-digit reduction in full-time equivalent employees (FTEs) and a savings of several millions of dollars annually. Turnover has dropped by a whopping 87 percent, while quality has improved by 40 percent.

Simplify, simplify
True Value's Simplified Gainsharing program was born out of the company's frustration with traditional gainsharing, which it found to be complicated, difficult to implement and time consuming. Simplified Gainsharing, by contrast, is a snap to administer and has virtually no drawbacks. It's decidedly low tech, it takes as little as five weeks to implement, and it's compatible with whatever is already in place on site—labor management software, engineered standards, historical averages, pegged rates or all of the above. And unlike automation or engineered standards, Simplified Gainsharing requires very little startup capital, which means payback is typically achieved in well under a year.

But more to the point, Simplified Gainsharing is simple to understand and administer. The basic idea is to reward workers with a higher hourly wage for exceeding standards. That extra pay is calculated as a percentage of what the productivity gain is worth to the company. For example, a company might offer workers who are already earning $10 an hour a 25-cent increase in their hourly wage the following month if they exceed performance standards by 10 percent. If they perform at 10 percent above standard, they're worth $11 per hour to the company. If the company's benefits average 30 percent of labor costs, a 10-percent per-hour productivity gain is really worth $11.30 to the company. So for the $1.30 increase on the first 10-percent gain, the company pays the worker 25 cents and the company profits $1.05.

But the benefits to the company don't end with its percentage of the gainshare; there are indirect benefits as well. Because workers become more productive over time, eventually fewer workers will be needed. As the workforce headcount drops, the least skilled and least productive portion of the group disappears, either through attrition or because those folks become better workers. In either case, it's not long before the facility's workforce is performing at levels that are well above what you'd find in the typical workforce in the area.

Similarly, because those employees are more satisfied with their jobs (not to mention more highly compensated), retention levels are higher. That adds up to big savings too. Although estimates vary, turnover costs are often put at around $4,000 per person, which means a 10-percent turnover rate would cost a company that employs 1,000 workers $400,000 annually. With Simplified Gainsharing, turnover plummets, and those costs disappear.

Looking beyond the arithmetic, what makes Simplified Gainsharing work is its simplicity and its implicit acknowledgment that workers and managers see the world differently. For the typical manager, there are never enough hours in a day to accomplish what he or she wants. For most warehouse workers, however, time tends to drag—the tasks are repetitive, which means that for most, the goal is just to get through the day. Simplified Gainsharing takes that into account and aligns the interests and goals of workers with those of management. As Pete would say, "Have a goal, and waste no time."

Leveraging "buyouts"
While the incentive program in theory has no upper limits, the reality is that sometimes adjustments are necessary. For example, the addition of new technology, changes in the external market or improved skill levels can render initial metrics obsolete. That's where "buyouts" come in.

Buyouts are the Simplified Gainsharing program's mechanism for adjusting metrics as the program matures. They are a safe, fair way to gain the broad consensus needed to raise the bar while overcoming employees' fears that the program is a backdoor way to raise the productivity standards against which they'll be measured.

Managers typically initiate the buyout process by approaching the top-performing workers (the program's "banshees") to explain that management would like to raise the bar and is prepared to offer a one-time lump sum payment to do so. Any employees who have not done so are granted a specific grace period in which to raise their performance to the new minimum level. Word soon spreads among the group that a buyout is available. But a change is made only when details have been communicated to all affected workers and everybody has agreed that the plan is acceptable. This illustrates one of the cardinal rules of Simplified Gainsharing: No one gets hurt by Gainsharing.

Although this approach may take longer than might seem strictly necessary, to charge ahead without gaining a consensus would be to court disaster. In instances where minimum rates have been changed by management without this consensus, trust was eroded and the program soon collapsed entirely.

One word of caution: Don't be too anxious to implement buyouts. The perception of trust and fairness among the workers is an essential ingredient for success. Being too aggressive in seeking to raise the bar will compromise that perception. The short-term gains realized by rushing a buyout simply aren't worth the risks of undermining workers' confidence. And considering that two-thirds of every dollar saved already accrues to the company, there's no point to rushing the buyout process.

Sharing the wealth
Though the savings are potentially limitless, there obviously will come a time when the facility has pretty much maxed out on productivity improvements. What happens then? Can a typical DC network really expect to keep saving money over time?

Indeed it can. Exhibit A shows representative savings by type for a typical distribution network with 1,000 employees over the first four years. You'll note that the source of the biggest savings varies from year to year. For example, savings from attrition will surge in years two and three and then level off. Likewise, the savings from productivity improvements tend to peak in the second year and then decline as the program matures. Savings sparked by the buyout process, however, will continue to accrue. In this case, buyout-related savings grew three-fold between years two and four. These savings recur for the indefinite future.

Whatever their source, the savings clearly add up to big money. All told, the accumulated total savings from this prototype model organization have exceeded $24 million in just four years.

That may sound highly improbable, yet several DCs we know of are achieving results in line with those projections on a regular basis. One typical moderate-sized facility that adopted Simplified Gainsharing paid out more than $300,000 in gainshares in the program's second year alone. The productivity improvements that generated those employee incentives saved 66,800 hours. For the company, net savings exceeded $1,000,000.

Another particularly high-performing facility in that same company's network was able to reduce its headcount by 144 FTEs in five years' time, with a savings of $5.3 million. These gains were achieved in a context where inbound and outbound volumes remained essentially the same. Truly, more is being done with less.

Finally, it's important to point out that in the model cited above, savings per FTE are conservatively estimated at $2,500 annually. However, today, many companies are finding that the savings actually run to nearly three times that rate. What portion of that savings could be yours? All indications are that it's a large figure—and the sky's the limit.