Reducing Labor Costs to Counteract Market Pressure

Market forces mandate changes and shrink margins, requiring distributors to find new ways to trim costs.

Finally, consumers increasingly are demanding value, convenience, and organic and eco-friendly products. For example, sales of organic food and beverages grew from $1 billion in 1990 to an estimated $20 billion in 2007. Private-label goods also are gaining share—accounting for about 16 percent of all U.S. food sales in 2007. These shifts are forcing foodservice distributors to refocus their product and branding strategies and confront new competitors, such as supermarkets and convenience stores.

Customers are counteracting rising food prices by demanding lower-priced food items for their menus.

According to U.S. Bureau of Labor statistics, wholesale food prices rose 8.2 percent during the first six months of 2008, up from 7.6 percent for all of 2007—a result of rising oil prices, demand from rapidly developing economies, and a larger share of the grain market going to ethanol production. As a result, foodservice companies and their customers are developing concepts that utilize lower priced items, such as less expensive cuts of meat and seasonal produce.

Distributors are improving technology and operations.

Today’s customers demand lower prices, but without altering their service expectations. To compensate, food distributors increasingly are investing in systems and technology and improving their supply chains.

Industry consolidation is producing fewer, but many more formidable, competitors.

The industry’s needs to scale operations, cater to larger customers, and serve wider geographic territories have produced a moderate and steady level of acquisition activity. Continuing consolidation of grocery stores and the growth of national chain restaurants also have encouraged consolidation among foodservice distributors. Private equity deals in the U.S. food industry reached a peak in 2007.

Eliminate indirect activities.

Foodservice distributors lose a large amount of productive time to indirect activities—usually the product of inefficient processes—performed by order selectors and forklift operators over the course of their work day. These activities raise the cost of operations. With proper training, frontline managers can identify and remedy these situations.

Apply discrete engineered labor standards.

Discrete engineered labor standards define, scientifically, the time required to accomplish a given task—information that can improve the way a company manages workforce productivity, plans and schedules work, and compensates workers. Traditional standards, which are based on Key-Value-Indicators (KVIs), aren’t enough. Discrete standards remove averages all together and provide the highest level of value in managing labor costs—sometimes as much as 15 to 20 percent over KVI-based systems.

Train managers to manage the workforce.

Managers at all levels must be able to direct the workforce properly, and supervisors must be able to recognize and address day-to-day impediments and schedule workers in a way that lowers overtime and increases service levels. Proper management training can improve these processes.

Train employees to apply proper methods.

Establishing a high performance environment requires training employees to work in an optimal fashion—for example, teaching order selectors how to improve their methods so that they can work at a faster pace.

Rationalize SKUs.

Distributors face a constant battle between merchandisers and operators over the optimal number of SKUs; for example, how many different types of canned tomatoes must a distributor carry in order to satisfy clients’ needs? Delisting SKUs can lower inventory costs and shorten pick paths to improve productivity. Rationalization starts with an unbiased, systematic analysis of SKUs, looking for opportunities to lower costs and improve efficiency.

Implement activity-based compensation.

Activity-based compensation—pay or incentives for performance—increases productivity, accuracy, and assiduity. A well-established program benefits employees and the company, but it is important to have the proper baselines in place beforehand to ensure that the program is attractive to employees and lucrative for the company. Solid discrete standards are paramount to this approach.


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