Retail Logistics: Open for Renovation

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Retailers are deploying a number of survival strategies and tactics to cope with the U.S. economic downturn.

Higher fuel and food costs and a low consumer confidence index led shoppers to put away their wallets in June, plummeting retail sales by the sharpest amount in nearly two years, according to the U.S. Department of Commerce.

"Consumers are currently sitting on the sidelines, causing retailers to focus more intently on cost," notes Richard Jackson, executive vice president, Limited Logistics Services, Columbus, Ohio.

"Functional organizations that are responsible for transportation and distribution have to operate even more efficiently."

Retailers are deploying a number of survival strategies and tactics to cope with the U.S. economic downturn. Most of these efforts occur in the background, garnering little fanfare outside their own corporate environs.

But in the long run, they play a deciding role in retailers' ability to weather hard times.

Looking at the retail industry holistically, "companies need to work toward visibility—from point of demand all the way back to order of materials, so they know where product is at any given moment in the entire supply chain," suggests Joe Fantasia, a director and lead of Deloitte's retail supply chain practice.

At the same time, retailers have to coordinate all their planning activities.

"This means integrating demand planning with overall supply planning, and using this complete picture to drive how the supply chain responds to change most cost-effectively," says Cort Jacoby, also of Deloitte's retail practice.

"It means synching up demand from the store-shelf level where consumer decisions are being made, and feeding it back to suppliers."

Two leading retailers—Limited Brands and Dick Blick—seized the current economic downturn as an opportunity to re-think supply chain and warehousing strategies, and implemented new techniques to help weather the storm. Here's how they found opportunity in adversity.

Limited Brands: A Supply Chain Effort That Knows No Bounds

Founded in 1963 with one women's apparel store in Columbus, Ohio, Limited Brands has developed into a retail powerhouse.

Historically, the company was viewed as a multi-divisional, largely apparel-based, popular-priced retailer. Ten years ago—when lingerie, personal care, and beauty items made up less than 30 percent of its sales—that perception was true.

Today's reality is very different. During the past 10 years, Limited Brands has transformed itself—personal care, beauty, and lingerie products now generate more than 70 percent of sales.

The company's brands include Victoria's Secret, Pink, Bath & Body Works, C.O. Bigelow, La Senza, White Barn Candle Co., and Henri Bendel. Its products are available in more than 2,900 specialty stores nationwide, through the Victoria's Secret catalog and on four Web sites. Through the La Senza brand, its products are available in Canada, as well as about 40 other countries.

In 2007, Limited Brands opened a state-of-the-art distribution center in Columbus—with the capacity to serve the company for the next 20 years—for Victoria's Secret Direct, its online channel.

Limited Brands' direct business totals nearly $1.5 billion in annual sales. The retailer also implemented sophisticated supply chain systems for its Bath & Body Works segment to support growth both domestically and internationally.

Limited Brands' policy is to maintain a sufficient quantity of inventory in its retail stores and distribution centers to provide customers an appropriate selection of current merchandise. It emphasizes rapid turnover and takes markdowns as required to keep merchandise fresh.

In anticipation of a continued U.S. economic slowdown, the company took action to reduce retail inventory by 25 percent per square foot at the beginning of 2008.

Limited Brands' operations are seasonal, consisting of two principal selling seasons: spring (the first and second quarters) and fall (the third and fourth quarters). The fourth quarter, which includes the holiday season, accounted for approximately one-third of net sales over the last three years.

Managing such a highly service-sensitive, fashion-oriented supply chain during the current economic environment makes it more difficult to balance cost with service.

"Economic slowdowns drive retailers to focus more intensely on cost structure," notes Jackson. "Limited Brands has always been vigilant regarding costs. We view our supply chain as a service proposition model of how we move goods quickly and efficiently to stores or directly to consumers.

"That model has a speed, a service, and a cost associated with it. Fortunately, it presents many opportunities for cost reduction."

Expecting the Unexpected

As stewards of Limited Brands' supply chain, Jackson's group develops contingency plans for unexpected events, such as fuel costs rising to $200 a barrel.

"We assess the impact of these kinds of events on our network and come up with alternative cost/service scenarios," Jackson explains.

"For example, do we want to use more ocean transport? Can we reduce the number of store deliveries we make each week, but add more volume per delivery?" he adds. "We also determine the tradeoffs associated with those decisions."

To assess those tradeoffs, the company's 3PL division—Limited Logistics Services—collaborates closely with the brands it supports.

"We're prepared if we have to pull the trigger and make changes," Jackson says. "We have to understand how we can best reduce costs without compromising service to the point where it will be detrimental to the brand and its customers."

Limited Brands owns and operates all six of its distribution centers—more than 4.5 million square feet in the Columbus area—and outsources all transportation to third-party providers.

"We are interested in better understanding our 3PLs' networks so we can take out transportation and logistics costs collectively," Jackson observes.

The company's intent is not to penalize vendors by beating them up on margins. "We want our 3PLs to come to us with opportunities," Jackson says.

For example, the company's delivery agent, which moves merchandise to stores from 50 cross-dock facilities nationwide, can leverage its infrastructure and trucks across customers, thereby reducing costs through network sharing.

Collaborate to Orchestrate

Limited Logistics Services finds one of the best ways to meet the challenges of the current business climate is to work collaboratively with Limited Brands' marketing and planning organizations to orchestrate operations.

"We need to be able to make changes rapidly around how they want to touch the customer," Jackson says. Such changes can happen weekly, especially in the direct, online channel.

For example, Victoria's Secret Direct may decide to run a promotion—offering special savings on shipping or pushing a particular product group. This promotion falls outside the anticipated schedule.

After an email blast goes out, customer response may ratchet up shipment volume dramatically for that week. Jackson's organization must be able to respond rapidly, and adapt its operation to handle the surge.

As an indication of how volatile the retail market has become, last year Limited Logistics Services met weekly with planning and marketing to look at the day-to-day business, and met monthly to look forward.

"Now we meet every morning," Jackson reports. "We may not move the dial every day, but we meet to watch it."

While the current retail environment may be challenging, Jackson and his team remain undaunted.

"It is healthy for an organization to think about strategies and processes it doesn't usually think about," Jackson believes. "That's what's happening now. Just when you think you're doing a great job, new challenges, such as an economic downturn, arise and you have to find ways to take the business to the next level."

Dick Blick: Perfecting the Art of Warehouse Management

While it may not be a household name like Victoria's Secret, Chicago-based Dick Blick Company happens to be the largest distributor of art supplies in the country.

The nearly 100-year-old company maintains three separate sales channels: individual artists and consumers served via the Web site and mail catalog; schools and institutional businesses served via catalogs and the sales force; and 30-plus retail stores.

"Those three sales channels represent a huge challenge because their order characteristics are drastically different," reports John Polillo, executive vice president of operations for Dick Blick.

"A consumer order might be for one or two product lines; a school order is for 15 to 20 lines; retail orders are for hundreds of lines. We stock about 60,000 different SKUs. Spread that order complexity across our large SKU base and you see the operational challenge we face."

Now add the fact that each year Dick Blick's customers expect better service at the same or lower cost.

The art supply company operates two distribution centers in Galesburg, Ill. A 150,000-square-foot facility that handles conveyable items is highly automated, housing two to three miles of conveyors and carousels.

By contrast, its non-conveyable products DC, a low-tech, 400,000-square-foot facility, uses pallets and carts for materials handling.

Dick Blick serves most of its consumer and education customers from the two DCs, with some direct drop-shipping of high-value items. Until two years ago, it used a paper-based system to manage these facilities.

To stock its large (about 20,000 square feet) retail stores, Dick Blick direct-ships about two-thirds of the merchandise from vendors; the balance is shipped from its DCs. Those percentages are flipped in the smaller (about 5,000 square feet) stores, with 80 percent of product coming from the DCs, and the remaining 20 percent direct-shipped from vendors.

Dick Blick was chronically plagued with maintaining accurate inventory.

"It was easy to pick and receive wrong items," Polillo acknowledges. "If a receipt was identified wrong, the product was put away wrong and picked wrong. All sorts of problems would develop as a result.

"Once a year, we had to shut down and spend four days locating every product in every nook and cranny of the warehouses to reconcile the inventory."

In the conveyable DC, product characteristics made order-picking accuracy difficult. "A paint line might comprise 72 colors, for example, and other than tiny type on the tube, they all look the same," Polillo explains.

"If a worker is doing each-picking for a customer, and the turquoise and aquamarine tubes are next to each other on the rack, it's easy to pick the wrong tube."

This largely manual warehouse management system caused additional problems. For example, warehouse employees had to pick by order—taking a packing list to different warehouse zones, adding boxes as needed to fill an order. "Manually keeping two to six boxes together is a problem," notes Polillo.

To remedy these and a host of other issues, two years ago Dick Blick installed a warehouse management system (WMS) from software solutions provider RedPrairie, Waukesha, Wisc. While interested in the overall capabilities of the WMS, the company was primarily focused on the solution's labor management module.

After implementing the WMS solution, Dick Blick added the labor management module six months ago. Today, the system tracks every warehouse task—every pick, put away, and receipt—and compares actual task performance time to estimated time.

"We used to manage on gut feel," Polillo says. "Now the WMS monitors and manages employee productivity."

Thanks to the cycle-counting module, as well as RF scanning technology, the art supply distributor's inventory accuracy currently stands at 99.99 percent. "And we don't have to shut down for four days," Polillo notes.

Dick Blick can also email to customers—in this case, retail stores—a packing list identifying the exact contents of each carton in advance of a shipment.

"This is important to stores because when the shipment arrives, they can go to the right carton and immediately pull out what they need," Polillo explains.

Dick Blick's WMS has produced specific service improvements—reducing the customer return rate for shipment errors from 3.5 percent to 1.9 percent, and improving pick accuracy from 98.7 percent to 99.2 percent.

Making Better Mistakes

Those numbers are impressive. But what's more impressive is how the system changed the types of mistakes the company makes.

"Before using the WMS, of the 1.3 percent of lines that were wrong, 80 percent were delivering the wrong item to the customer; 20 percent were delivering the wrong quantity," Polillo reports. "Now, shipping accuracy is 99.2 percent, with about 80 percent of those .8 the wrong quantity and 20 percent the wrong item."

This is an important difference. "If customers order a tube of paint and we ship a brush, they get mad," Polillo explains. "But if they order one tube of paint and we ship three, they don't care."

The WMS has enabled Dick Blick to grow its product base, adding 12,000 SKUs in two years. "We used a manual system to manage 48,000 SKUs and tore our hair out," Polillo recalls. "Now we can easily manage the growing base."

After two years of operating the WMS, Dick Blick has begun to mine a treasure trove of information about distribution processes. "We can develop in-depth analytical reports to help management make better decisions," Polillo concludes.

Making strong decisions and reinventing operations is no longer optional for retailers such as Limited Brands and Dick Blick, says Deloitte's Joe Fantasia.

"Retailers have reached the point where, to remain competitive, their supply chain operations have to change," he says.

"The drastic rise in fuel costs was the best thing to happen to the supply chain segment. It grabbed the attention of the executive suite, and that opens the door for real change."

Retail Survival Checklist

10 techniques & strategies for weathering an economic downturn

1. It may sound obvious, but selective price hikes work well. Test different prices on the same product to see what works best.

2. Aggressively promote products whose prices have not yet gone up.

3. Coordinate product promotions even more closely to demand, which leverages every sale the promotion creates.

4. Know what you have on hand. Some readers report product lost in supply chain back alleys and warehouse Bermuda Triangles. Don't assume all your inventory is accounted for. You may be surprised.

5. Hoard inventory against expected continuing price hikes. Inventory arbitrage may be effective in some cases, but be mindful of fickle consumer demand, inventory total cost of ownership, and currency fluctuation. For example, if the dollar rises quickly, an increase in purchasing power could wipe out any savings.

6. Emphasize to team members that customer service ensures job security, especially when things go awry. With all the competitive choices, the customer is "kingier." Happy customers mean more sales, keeping jobs secure.

7. Cut transport costs by thinking of "competitors" when forging infrastructure, shipment consolidation, and capacity-boosting initiatives. Share the wheel instead of reinventing it.

8. Where possible, work with suppliers long-range to move manufacture/supply facilities closer to demand. One example: the cost of inbound containers has risen enough to spur reexamination of sourcing from North American vs. Pacific Rim locations.

9. Improve demand-driven logistics practices to aggressively limit stock-outs. How many sales are you losing to stock-outs? How is that diminishing your brand over the long haul?

10. Supply chain excellence gives your customers more products and reasons to buy and fewer reasons to go to your competitors.

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