Navigating dynamic labor: Building strong warehousing operations

| Podcast

In this episode of McKinsey Talks Operations, we explore the ongoing challenges faced by the warehousing industry as a result of the pandemic, which has led to a surge in e-commerce-driven demand and a significant shift from services to sales of goods. Not only has this shift increased the pressure on warehouses, but also it has resulted in a significant rise in inventories. Additionally, labor attrition intensifies the complexity and concerns about productivity. Join us as we gain valuable insights into how McLane Company and GXO Logistics have successfully adapted and excelled in this rapidly evolving landscape.

Host Daphne Luchtenberg is joined by Chris Smith, president of Grocery at McLane Company, Richard Cawston, president of GXO Logistics, Europe, and Alan Davies, a senior expert and associate partner in McKinsey’s Operations Practice. Their conversation has been edited for clarity.

Daphne Luchtenberg: Your company’s future success demands agile, flexible, and resilient operations. I’m your host, Daphne Luchtenberg, and you’re listening to McKinsey Talks Operations, a podcast where the world’s C-suite leaders and McKinsey experts cut through the noise and uncover how to create a new operational reality.

Seemingly overnight, the COVID-19 pandemic put a spotlight on supply chains, requiring companies to coordinate more effectively as they move products from raw materials into the hands of their consumers. For the warehousing industry, the ripple effect and resulting impact of the pandemic continues to be felt. The industry was already struggling with labor availability, but then the pandemic increased sales of goods relative to services, triggering a step change in e-commerce-driven demand and driving high inventories. At the same time, companies saw further labor attrition, all adding to productivity woes. The ability of warehouses to keep up with demand has been at the forefront of C-suite conversations ever since, as it poses a real threat to business continuity.

I’m joined today by Chris Smith, president of the Grocery division at McLane Company.

Chris Smith: Hi, Daphne. Very happy to be here today.

Daphne Luchtenberg: And Richard Cawston, president of GXO Logistics in Europe.

Richard Cawston: Thank you, Daphne. Delighted to be here.

Daphne Luchtenberg: Also with us is my colleague and senior expert Alan Davies, an associate partner based in our Miami office.

Alan Davies: Hi, Daphne. Thanks for the opportunity to speak today.

Daphne Luchtenberg: McLane Company provides grocery and food service solutions for convenience stores, mass merchants, drugstores, and chain restaurants. GXO provides cutting-edge logistics solutions for multinational companies and blue chip market leaders. We’re happy to have you here, representing these diverse logistics arenas and covering a range of geographies. I’m keen to dig in to explore how companies such as yours are addressing the current warehousing environment and get your take on the outlook going forward. A warm welcome to all three of you.

To kick off, one of the first questions I want to fire your way is, how you would describe some of the main challenges you’ve faced in the warehousing business over the past three years. Richard, may I ask you to comment on that first?

Richard Cawston: For GXO, it was clearly about the shift from retailing and wholesaling to online. We had already witnessed double-digit organic growth in e-commerce. However, overnight we observed a near halt in certain supply chains within the retail environment with everything moving online. We assisted companies in establishing online platforms and helped those shipping small volumes to quickly multiply their output. However, this transition also brought about challenges in reverse logistics, creating a crisis-like situation. It was a time of uncertainty, with inbound and outbound challenges. The key change we noticed was the rapid surge in online retailing. Since then, the growth rate has stabilized, but it has not retracted. It has remained significantly higher than pre-COVID levels, and we anticipate this growth to persist.

Daphne Luchtenberg: Chris, how about you in the business that you are in, which revolves around groceries and convenience stores? How are you affected, and what pivots have you had to make?

Chris Smith: Like many, we have witnessed dramatic changes in the supply chain, both upstream and downstream, from the partners we serve. Internally, we, like others, were significantly affected by labor disruptions. We experienced a high turnover in our workforce and faced challenges in terms of labor availability for distribution centers. Obtaining outbound drivers and shipping products to our customers became increasingly difficult during the COVID-19 pandemic and its aftermath. Our manufacturing partners, with whom we collaborated, also encountered similar internal challenges. Consequently, we experienced product unavailability, out-of-stock situations, and uncertain recovery times, which impacted our ability to meet customer demands. Furthermore, our customers experienced shifting demand profiles, where recent trends diverged from their past practices. As a result, traditional demand-signaling methods were rendered ineffective due to the unprecedented changes in demand. These challenges have played a significant role in disrupting the supply chain within the grocery and food sector over the past several years.

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Daphne Luchtenberg: Alan, let me bring you in here. You work with a lot of clients in this industry. What are some of the lessons that you think logistics companies have learned over the past three years as they’ve had to adapt?

Alan Davies: Some of the lessons learned that have been very apparent are that we’ve moved from thinking about automation as a discrete ROI into being a real business continuity discussion at the C-suite. That’s one of the biggest changes that I’ve seen. The attrition rate is 70 percent, with turnover happening in three months, which has been so hard to cope with. Therefore, it has shifted from being a hiring challenge to how we can avoid the need for hiring and mitigate that issue.

Daphne Luchtenberg: Chris, can you comment on how that has been affecting productivity overall?

Chris Smith: This issue with labor has really doubled. So many companies’ efforts have been put into becoming an employer of choice, because having a tenured, stable workforce is critical for operational excellence. And as we have seen, employee turnover put pressure on the productivity of our warehouse, as our tenured workforce was not there anymore. We saw productivity rates go down. The need to hire more people became a pressing need. And even though we had more bodies in our warehouse, more teammates in our warehouse, overall throughput was not the same because our productivity rates had diminished. And that also then created service disruptions for our customers with on-time deliveries and service challenges. But as we have seen that focus around becoming an employer of choice and really focusing around retention and keeping our teammates, we’re starting to see that trend, thankfully, over the last six to eight months, flip the other way with retention numbers starting to move in a much better manner. And not surprisingly, our customer experience is also improving.

Daphne Luchtenberg: Yes, that’s great news. Well done. Richard, can you comment a little about that? Because I imagine a large chunk of your businesses across Europe with a very complicated labor market are very diverse. So what kind of lessons did you learn at GXO?

Richard Cawston: We learned how to quickly re-trend and repurpose, how to reorganize warehouses. I’ll give you an example: we had a warehouse that was purely handling returns for e-commerce, and we repurposed it for outbound operations because the outbound flow was much higher than the inbound flow, considering that many returns were halted due to store closures in the early days of COVID. So we gained valuable insights into becoming even more flexible. We thought we were already highly flexible until we faced the need to pivot within a matter of days, involving thousands of people in different locations. What was ultimately crucial was that we didn’t experience a significant drop in productivity. Many of our businesses were somewhat protected, as we were involved in moving essential goods such as food, consumer goods, and medical supplies. These warehouses remained open.

We had to put in productivity restrictions, so we had a lot of one-way walkways, a lot of partition in between colleagues, and work in a lot of extra hygiene time and downtime. In that sense, the productivity dipped. But across Europe, probably the biggest factor overall was the labor movements. People can work in any country. But we saw people returning home and coming out of one labor market into a home labor market. And that took maybe six months before we saw that workforce normalized back to its usual position across Europe.

Daphne Luchtenberg: Alan, we have already discussed digitization and automation, and how they have now become topics of discussion in the C-suite, whereas in the past, they may have been seen as bolt-ons or add-ons. How is the senior leadership team now approaching the adoption of technology?

Alan Davies: It has now become a part of strategic programs for many companies. They are elevating it to the board level and securing commitments to modernize their footprint, warehouses, and operations. I believe it all comes down to the necessity to be different. Events like COVID are likely to occur again, and we can’t rely so heavily on labor. This concern has been thoroughly addressed. The question is, how do we develop the right strategy for the future? Once board approval is obtained, a series of choices need to be made, including decisions on digitalization, automation, the order of site implementation, and vendor selection. These implementation choices can be complex, but it all starts with that strategic perspective at the C-suite level, which has been a big shift.

Daphne Luchtenberg: Really helpful. Chris, you mentioned the significance of workforce loyalty and the talent value proposition. Do you see technology and investments in technology as factors that attract employees?

Chris Smith: We do, and it’s a matter that weighs heavily on our minds at McLane. As we contemplate the adoption of technology and systems, we prioritize those aspects that directly impact our frontline teammates. Currently, we are actively involved in implementing new warehouse management systems and labor management systems. Our goal is to have a more robust and dynamic software package that enables our team members to perform their jobs more efficiently. For instance, labor management software allows supervisors to have visibility into performance, enabling coaching, feedback, and engagement. This is a strategy we are really focused on. Additionally, we are keenly interested in employing technology to streamline the process of assigning and signing up for labor schedules for effective labor planning. As a business, we find that these strategies are paying off as we witness increased adoption across the organization.

Daphne Luchtenberg: Very interesting. Richard, as your company had to adapt and bring in new technologies, how did you approach the whole capability-building angle, the learning angle, for those technologies to be used properly?

Richard Cawston: We’ve seen over the last five years a real growth in the capability, the capacity, and the intellectual value of technology. We have around 30 percent of our warehouses automated, which is around four times the market average. But even with that, we still have a long way to go. What we love about automation is that it makes everyone’s job easier, increases capacity, enhances safety, improves quality, and boosts efficiency, potentially up to six times or even ten times depending on the application. We also observe continuous technological advancements. Therefore, we now have technology for greenfield end-to-end fully automated processes, as well as technology for brownfields—so adding technology into existing warehouse flows, automating parts of it, and putting technology alongside people. Despite all the technology, we’re still a people-centric business, but what we see is the need for upskilling. Exactly as Chris said, more focus on technology, maintenance, application, solution, design, deployment, project management, and adapting that technology, which in some cases is mechanically very robust, but the process involved in the warehouse needs some tailoring.

Daphne Luchtenberg: Yes, I can imagine. I assume also that means the profile of the type of talent that you need to bring in has shifted as well. Is that right, Richard?

Richard Cawston: Definitely. There are still warehouse jobs involving manual handling, of course, and there always will be, but the vast majority of jobs are now shifting toward deployment, design, and engineering aspects, as I mentioned. People in the industry perceive that we are just at the beginning, and we could discuss AI throughout this call. It’s just the initial stage of how automation can become highly intelligent, adaptable, and further enhance job upskilling. I believe we’re at the turning point of the industry. Another fascinating aspect of automation in the coming years, as Alan mentioned earlier, is that automating just for the sake of automation and ROI is no longer sufficient. However, the ROI is becoming increasingly compelling as we witness labor inflation and changing workforce dynamics. The real-term cost of automation is falling.

Daphne Luchtenberg: Interesting. And I wanted to build on that because I think both you and Chris mentioned that you’ve made great strides in technology adoption, but you’re only just at the starting gate. So technology and your adoption and how you build your strategy going forward, do you see it as a real competitive advantage, Chris?

Chris Smith: We certainly do. And even beyond technology, I truly believe that the factors that will give us a competitive advantage are how we approach supply chain technology, our ability to be an employer of choice and retain our workforce, and driving capacity and throughput through business systems and automation. I believe that people want a reliable workplace where they can benefit from automation and technology to improve their lives and reduce the physical demands of work. By leveraging technology, automation, and robotics, we can remove some of the manual aspects of work and focus on more value-added and employee-centric aspects of the supply chain. I firmly believe that companies with a strong focus on these areas will emerge as winners and become more agile in the future.

I truly believe that the factors that will give us a competitive advantage are how we approach supply chain technology, our ability to be an employer of choice and retain our workforce, and driving capacity and throughput through business systems and automation.

Chris Smith

Daphne Luchtenberg: Richard, I imagine that you’ve also had to develop different types of relationships with your customers and share information in a different way, as well as share technologies and systems. Is that right?

Richard Cawston: Very true. We need to be almost plug and play with our customers to ensure that the integration layers are easy, fast, and highly scalable for them. Additionally, when it comes to technologies that bring efficiency savings, we need to share that investment with our customers and have a win–win partnership. One of our key objectives with customers is to establish long-term relationships. We have customers who have been with us for more than 15 years, and our retention rate is in the high 90 [percent range]. This level of loyalty comes from our commitment to innovation and the willingness to share both successes and challenges. Our customers have adapted to being much more open to the investment and recognize the benefits that technology brings. They rely on GXO to deliver scalable solutions and leverage our expertise in the field.

We need to be almost plug and play with our customers to ensure that the integration layers are easy, fast, and highly scalable for them.

Richard Cawston

Daphne Luchtenberg: Alan, I wanted to bring you back in as you work with clients across various industries. When it comes to warehousing and logistics, what do you see as the next frontier?

Alan Davies: I see two unlocks as we move toward a more digitized and automated future. The first is how we upskill our supervisors in this new world to maintain a high level of employee retention. It has been proven, especially during COVID, that the way supervisors treat their employees plays a vital role in retaining them. With the introduction of automation, which attracts individual employees, how do we keep supervisors engaged on the floor, having the right conversations, and driving the right performance to retain these individuals? I think that’s huge. The second area of focus, in my opinion, is the utilization of analytics. I believe that the warehousing sector still largely remains an untapped space when it comes to harnessing the wealth of data available through the census and various automation technologies. We need to leverage this data to our advantage. Let me provide you with an example from an automation perspective.

If we consider the case of picking in a retail fulfillment environment, the demand profile often fluctuates from day to day. For instance, we sell goods in stores over the weekend, and stores typically don’t want to receive goods on a Sunday. As a result, there is a demand spike on a Tuesday for most retail fulfillment operations. In this scenario, my objective is to maximize the efficiency of my automation by maintaining a consistent level of activity throughout the week. I aim to distribute the workload evenly across five or six days. These demand patterns and their continuous nature prompt us to explore analytics in a different light. We ask ourselves questions like, “What is causing these fluctuations? How can we shift some of the demand to other days of the week? How can we incorporate this information into retail replenishment signals and systems to fully optimize the automation we have implemented?” Therefore, I believe the next level of advancement involves extending connectivity beyond the four walls of the distribution center to achieve end-to-end integration.

Daphne Luchtenberg: Fascinating. So much more to do. Chris, as you look ahead, what is your outlook for the next five years? Where do you anticipate growth to come from?

Chris Smith: In terms of the near-term horizon, I believe that while labor markets are improving in terms of labor availability for both distribution centers and drivers, there will still be ongoing supply chain constraints. These constraints are currently present and are likely to persist for the next 12 to 18 months. Therefore, we recognize the need to focus on becoming an employer of choice. We want to ensure that we do everything we can to retain our current team members. Having a tenured workforce is closely tied to achieving operational excellence, and we understand the importance of maintaining both aspects.

From a capacity perspective, our focus will be on driving capacity within our business. We will continue to invest in automation, systems, and technology, as discussed earlier, as part of our strategy to succeed with our team members. Another important aspect is our commitment to driving transparency with our customers. We aim to provide them with technology solutions that offer visibility into the supply chain, enabling them to understand the operations of our business. Additionally, I believe that advanced analytics will play a crucial role in the coming years. Given the significant disruptions we have experienced, I anticipate seeing advancements in advanced analytics and AI within the next one and a half to five years. These advancements will help us better predict the demand for goods and services and the labor required to meet those demands. I consider this to be a major factor in the coming years.

Daphne Luchtenberg: Richard, anything that you would add there in terms of the outlook for GXO?

Richard Cawston: I wholeheartedly agree with Chris and Alan’s comments. To add to their insights, it is important for us to prioritize flexibility for our workforce. We are observing an increasing desire among individuals for different work–life balances and shared responsibilities within households. Therefore, traditional shift patterns are becoming less applicable. As an industry, we must adapt to meet these evolving needs, striving to provide a gig economy-like environment. Automation can greatly assist in achieving this goal. Additionally, our customers rely on us to solve their problems. In order to overcome inflationary pressures, innovation and continuous improvement are vital. Taking cost out of the supply chain is currently the most effective means of countering inflation. With regard to automation, we are seeing advancements in areas that were traditionally less automated, such as loading containers. This technology is rapidly improving, and its commercialization and industrialization are imminent.

And finally, I completely agree with Alan regarding the significance of predictive analytics and data. In our case, these technologies are particularly applicable to returns management. Considering that returns can make up to 70 percent of e-commerce orders, we need to find efficient ways to handle and process these returned products. Our aim is to streamline the process of getting returned items back into the warehouse without relying solely on the traditional receipt-put-away-repeat approach. We strive to optimize the workflow by finding ways to match inbound returns with outbound orders. This ensures the highest level of efficiency for our customers.

Daphne Luchtenberg: Super. I’ve loved hearing you both talk about the outlook for the future and the importance of technology and thinking strategically about end-to-end integration of technology and systems. What you’ve also discussed are talent, value proposition, and loyalty. It strikes me that purpose is such an important part of building that differentiation. We’ve covered it in separate episodes on operational excellence. Richard, can you say more on how purpose is important to GXO?

Richard Cawston: At the end of the day, everyone wants to come to work and do a good job. They want to achieve their daily goals and contribute to the mission of the organization. People have a desire to build their own value and make a positive impact within the company. In terms of being an employer of choice, it’s essential to provide training, opportunities for career growth, and the development of degree-level skills. In a global industry, this translates to offering significant opportunities to employees. I think the purpose of being in the industry is to satisfy customers and achieve the goal of individually supplying our customers with those e-commerce packages where we’re the last person to touch them.

Daphne Luchtenberg: Very well said. Chris, anything to add to that thought?

Chris Smith: When I think about purpose, I think about it from two different angles. I think there’s one element of ensuring that people connect it to the purpose of what they do every single day, that they understand the value, that they receive good feedback and engagement from the company to recognize all the important work that they do. And we’re very focused on that as a business. But there’s another element regarding the purpose of the teammate coming into work and what’s important to them. We need to understand what their purpose is.

Daphne Luchtenberg: Thank you all for your time. Richard, thank you.

Richard Cawston: Thank you.

Daphne Luchtenberg: Chris, thank you so much for being with us.

Chris Smith: Thank you very much.

Daphne Luchtenberg: And Alan, thank you for joining and providing valuable industry perspectives.

Alan Davies: Thank you.

Daphne Luchtenberg: Thank you all for your time today. You’ve been listening to McKinsey Talks Operations with me, Daphne Luchtenberg. If you like what you heard, you can subscribe to our show on Apple Podcast, Spotify, or wherever you listen. We’ll be back with a brand-new episode in a couple of weeks.

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