How Young Living Essential Oils Has Saved Money Via a Labor Management System

Save money by paying your warehouse employees more? Doesn't seem to add up. But that's just what's happening for Young Living Essential Oils, a cross-channel retailer of essential oils and oil blends, oil-enhanced nutritional supplements, bath and body products, skin-care solutions, and natural preparations for the home. In a session yesterday at the National Conference on Operations & Fulfillment in Las Vegas, Ron Harris, chief logistics officer at Young Living, and Steve Johnson, principal at Johnson Stephens Consulting, a supply chain operations consulting firm, detailed how a labor management system has increased warehouse productivity and decreased payroll costs for Young Living.

Young Living opened a new North American distribution center in 2007 that was an integrated production and distribution facility. Upon the opening of the distribution center, Young Living instituted a labor management system. The system was a win/win for both parties involved, said Harris: Warehouse staff would receive bonus incentive pay for exceeding productivity benchmarks and meeting attendance standards, and Young Living would realize increased productivity and reduced payroll costs from a smaller workforce. (Harris pointed out that Young Living didn't lay off staff, choosing to leave vacated positions from organic employee turnover unfilled.)

“Folks want a scoreboard when they come to work every day,” said Johnson, referring to tracking Young Living's warehouse employees’ productivity each day. The company's warehouse staff are measured on number of items picked, accuracy of their picks, among other factors. Those results are then compared against pre-established benchmarks. Production at or above 100 percent qualifies an employee for incentive pay.

Benefits of a Labor Management System

Young Living implemented a labor management system for multiple reasons, Harris said. They include the following:

• timely performance feedback and gratification for employees;
• higher associate compensation with the addition of incentives recognizing the retailer's hardest working employees;
• reduced cost per unit;
• improved service level/throughput cycle time;
• increased job satisfaction among employees;
• reduced employee turnover;
• a more knowledgeable management team as the company got hard data into who's really working hard and who's not; and
• cost savings from a reduced workforce (that includes no longer having to hire temporary seasonal workers at Christmas).

Young Living's labor management system was implemented over a three-step process. Step one constituted management being trained on the system, identifying opportunities for lean distribution and reviewing standard operating procedures; step two involved benchmarking metrics and performance standards; and step three involved offering daily feedback (posting the results for all to see) to employees.

Weekly Incentive Plan
Employees who reach the benchmark are paid at “one to one” above 100 percent. For example, if an employee works 10 hours at an 11 hour productivity rate, they're paid for 11 hours. Employees’ incentive pay is subject to deductions for lateness, unexcused absences, accidents or safety issues, and verbal or written corrective actions. Deductions are a percentage of the additional pay the employee is scheduled to receive. The incentive program is not in lieu of raises or the company's quarterly bonus program, said Harris.

The labor management system is paying off for Young Living. The company's warehouse staff has been reduced from 84 workers in January 2010 to 72 workers in January of this year, resulting in a 6 percent to 8 percent decrease in payroll costs. Units picked per hour have increased from 356 to 404 in the same time period. Overall production for the distribution center is up to 94.3 percent vs. 80 percent in 2010.

We had a good workforce in place already, said Harris, but this program was able to get more out of them. Specific areas of the distribution center that saw productivity gains included receiving (96.4 percent vs. 58.9 percent), packing (94.4 percent vs. 75.6 percent) and trailer loading (81.7 percent vs. 44.6 percent).

Future plans for Young Living's labor management system include implementing group and/or building incentives for those work functions not measurable using individual standards, supervisor/manager incentives, and LED and LCD scoreboard displays placed throughout the warehouse to provide more visible feedback to employees.