Best Practices: The Art of Supply Chain Optimization

A logistics team is called upon to craft supply chain processes that update logistics and inventory management at the growing retail chain Michaels Stores Inc.


For Dallas-based Michaels Stores Inc., the world's largest retailer of arts and crafts, a supply chain must do more than get the right product to the right store on time. It also needs to squeeze new levels of productivity upstream from its vendors to the downstream in-store operations to enhance customer satisfaction, meet growth goals and gain new levels of profitability.

In 2003, Michaels was achieving record growth with approximately 820 stores in North America, and a planned expansion in the Midwest and Canada was on the table. With its supply chain bursting at the seams, the retail giant was rapidly outgrowing its inventory information systems and warehouse capacity. Michaels' senior management called on its logistics team to develop a scalable long-term solution.

"We had four distribution centers that were completely out of capacity," says Les Gardner, Michaels' vice president of logistics and distribution. "We had to go back and re-engineer the entire supply chain process."

Redesign Time

Michaels began its redesign with a set of transportation and logistics innovations devised to cut costs, control truck loading and manage the routing of 35,000 core products between its suppliers, warehouses and stores. The new supply chain and inventory management plan was designed to streamline product flows to the stores and shorten order fulfillment times throughout the distribution network, including by installing new point-of-sale (POS) systems in all its stores. With its building blocks in place, Michaels was ready to include its distribution centers (DCs) in the supply chain evolution.

The cornerstone of the Michaels supply chain optimization plan for its DCs was a change in order fulfillment operations to complement the new transportation logistics plan. With their new strategy, the team at Michaels aimed to reduce direct-to-store shipments and the overall number of stock-keeping units (SKUs) held in total inventory at any one time.

To implement the plan, Gardner and the Michaels team turned to long-time material handling solutions partners, KEOGH Consulting and FKI Logistex. First, according to Tom Guschke, managing principal at KEOGH, "Michaels needed to integrate improved material handling systems that could offer real-time or near-real-time information processing about products moving through the supply chain."

The second part of KEOGH's recommendation called for Michaels to replace an outdated warehouse facility in Kentucky with a new 690,000-square-foot automated DC to serve the chain's Midwestern and Canadian expansion. The optimal site for the proposed DC was in New Lenox, Ill., just one hour south of Chicago.

Fulfillment and Order Visibility Get a Makeover

Making life easier at the stores was a central part of the Michaels plan from the beginning. To simplify in-store receiving, an order fulfillment system from FKI Logistex was designed to pick, pack and ship items by departments corresponding to store planograms. In addition, the Michaels team expected to reduce shipments directly from vendors to stores, and eliminate product-to-paper checking. All of these order fulfillment changes would reduce in-store replenishment time and cost, freeing up staff to better serve customers.

The New Lenox DC uses a RedPrairie warehouse management system (WMS) to manage and control orders and inventory replenishment. The WMS organizes order fulfillment and truck loading in a sequence that shortens store-restocking times. Also, an FKI Logistex EASYpick Trak3 pick-to-light and controls system manages both full- and split-case picking and conveyor zones. EASYpick receives orders from and reports order status information to the WMS, and sends conveyor routing messages to the system's FKI Logistex BOSS sorter controls.

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