Early this summer, the Los Angeles City Council voted to raise the minimum wage from $9 to $15 an hour. This increase follows California’s increase in minimum wage from $8 to $9 an hour last year and to $10 effective January, 2016. Under Los Angeles’ new requirements, the minimum wage will increase to $10.50 an hour in July, 2016, followed by annual increases through 2020 until the minimum wage hits $15 an hour. A similar proposal is being considered by the Los Angeles County Board of Supervisors, which would dramatically expand the number of cities impacted throughout Southern California.
According to the NCSL, 29 states and Washington DC now have minimum wages above the federal standard of $7.25 per hour. And, effective July 1, Washington DC will have an $11.50 per hour minimum wage making it one of the highest hourly wages within the US. The vote in Los Angeles has the potential to set off a surge of minimum wage increases across Southern California as cities and employers will be forced to match the higher minimum wage rates to remain competitive and attract employees. Seattle, San Francisco, Oakland and Chicago have already moved to raise their wages and there are proposals for minimum wage increases across the country including in New York City, Washington, D.C. and Kansas City, MO.
How will this Impact my Business and 3PL Costs?
If you operate a warehouse in Southern California — or any of the other impacted areas — wages, overtime and related payroll taxes will increase significantly. If you are outsourcing to a 3PL expect a series of potential increases in 3PL costs starting the first of the year, followed by a mid-year increase in 2016 and large annual increases for the next four years.
What can you do to mitigate 3PL Costs with the wage increases?
Whether you are personally for or against minimum wage increase, your business must address the impact of such significant and protracted increases on its ongoing profitability (and viability). Absorbing wage increases of $1.00+ per hour will have a significant impact on margins. This will be one of the greatest challenges 3PLs and their clients will face in the coming years. Margins in the 3PL industry are already thin and competition is fierce. Here’s a few ideas of what 3PL clients may be able to employ to mitigate impending wage increases as it relates to increases in 3PL costs.
- Leverage the Competitive Landscape: 3PLs in Southern California and in other major metropolitan areas will face the impact of escalating wages and related payroll taxes, and be forced to pass those increases on to their client’s in order to maintain margins. However, there could be an interesting dynamic. As 3PL clients begin to receive these increases they’ll likely shop their business to other 3PLs who may be willing to take on new business at lower margins, essentially buying market share. In this scenario, 3PL clients may be able to leverage the competitive landscape to mitigate some of the impact of escalating wages with 3PL margins suffering. However, there’s no guarantee 3PLs will capitulate and absorb those increases to grow market share.
- Lock in 3PL Agreements: As a 3PL client, now may be the best time for you to approach your 3PL and lock in an extension in exchange for a cap on cost of living increases over the next several years. Your current 3PL may be willing to absorb a portion of wage increases as a way to lower 3PL costs in exchange for an extension but don’t expect them to absorb it all.
- Force Improved Productivity: Client’s may be able to leverage their position to force their 3PL to employ more efficient processes that will help reduce labor hours, thereby mitigating the full impact of wage increases. For example, employing pick to light or pick to voice systems may improve labor productivity by reducing throughput times and reducing errors, thereby reducing the labor required to fulfill orders. Of course, there’s a capital cost to these systems which will not be completely absorbed by the 3PL and it takes time to research, purchase and integrate these systems.
- Alternative Solutions: An innovative solution is leveraging our neighbors to the South in Mexico. Using one of the specialty Mexican-based 3PL’s that focuses on U.S. order fulfillment can not only enable you to avoid rapidly escalating labor costs but actually reduce your current internal or 3PL costs of labor by an average of 30%. Employing time-tested trans-border processes (utilized by dozens of Fortune 500 companies currently operating in Mexico), shipments from Mexico back to the U.S. can actually be treated as U.S. domestic parcels — with identical rates and delivery times as if shipped from within the U.S. – but at substantial savings.
Whatever you do, don’t wait. Increasing minimum wages in Southern California and across the state are a reality and there’s clearly a national trend. Act now, and proactively address this challenge and try to mitigate 3PL costs and the impact to your 2016 margins.
XB Logistics’ is a U.S.-based 3PL that specializes in operating Mexican-based facilities focused on serving its customers’ U.S. and Mexican distribution needs. It guarantees its customers 30% savings over their current 3PL’s pick, pack, ship and value-added service charges. To learn how, please contact email@example.com or visit us at www.xblogistics.com.