Case 2: Organize, Optimize, Synchronize*

Prompt: To get closer to its customers, American Eagle Outfitters (AEO) conducted several site assessments that factored in its customer population, order profiles, transportation, and labor costs. Christine Miller, the firms director of operations, says AEO established a strategy based on what its road map would look like for the next 5 years: A second fulfillment center with omnichannel capabilities was needed to support AEOs continued growth, as well as to get physically closer to customers. Most of our customer base, online and in stores, is on the East Coast, Miller says, and we needed to be closer to our customers.

The firm also needed to improve direct-to-consumer fulfillment time. With the Kansas facility in the middle of the country, getting to either coast took too long: On average, Miller says AEO took anywhere from 5 to 7 days to deliver an order. Reducing that time was definitely something that was a goal for us and a challenge, just based on having that one facility in the middle of the country, she says.

After securing the Hazleton, Pennsylania location, AEO selected the Vargo Solutions company to design the operations of the 1 million-square-foot facilityeverything from processes to equipment. Vargo synchronizes operations in fulfillment centers with its continuous order-fulfillment system. Carlos Ysasi, Vargos vice-president of systems engineering, says the key to efficiency was creating channel-immune distribution centers that use one inventory, one workforce, and one fulfillment engine to meet the inventory needs of physical stores and E-commerce. Having separate distribution centers for the channels doubles your costs.

Before, workers unloaded incoming trailers to build, move, and reorganize pallets, which Ysasi says required everything to be touched multiple times, and every process had a buffer system that needed a lot of space. The new system lets cartons be quickly placed on the conveyor and pulled anywhere needed in the facility. The facility is also free of mobile equipment. There is no need for pallet storage or for pallets to move in the center. Material handling maximizes up-time and optimizes energy efficiency.

Vargos continuous order fulfillment enterprise system extends functionality beyond traditional warehouse execution systems. The system can control all work resources, including machinery and associates, and organize, optimize, sequence, and synchronize everything across the work process.

All inventory at the Hazleton facility is loaded directly onto conveyors in the receiving mezzanine and sent to two sorters with automatic variable-speed controls that adjust the throughput demands. The sorters can automatically detect surges or declines in flows and adjust speed to more efficiently accommodate activity. Inventory is then routed to pick modules in a four-level, 400-foot-long picking structure in a 288,000-square-foot section of the facility. Operators pull products from the conveyors using a radio frequency picking process. Along the entire route, conveyors are controlled by photo eyes that sense totes, so the conveyor remains off when a product doesnt need to move anywhere.

Sections of motorized roller conveyors are divided into small zones that can be independently powered and operated, creating an on-demand system that increases energy savings and decreases noise. Miller says the system also saves space and is easier to use. Theres not a big motor hanging from the conveyors every 10 feet, she says. We were able to lower them and theres a big ergonomic benefit for the workers. Theres also less maintenance, and theyre efficient because they only run when needed.

With the new distribution center, 90 percent of direct orders are fulfilled in 2 to 3 days.

Questions: 1) Comment on this statement: AEO established a strategy based on what its road map would look like for the next 5 years. 2) Explain the concept of channel-immune distribution centers. How does this fit with retailers store location decisions? 3) What factors should be considered in determining where to locate distribution centers? Explain your answer. 4) What factors should be considered in determining how much inventory to carry at the store rather than at a distribution center? Why?