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.

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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.

Real-time feedback to the WMS indicates whether an order is complete or short. EASYpick sorts and checks order shorts to see whether they are occurring in multiple locations. If they are, EASYpick registers an out-of-stock closure of the location, allowing associates to skip over the order pick, which provides time savings and order fulfillment efficiency. Whenever the WMS registers an order short, it automatically sets up a replenishment request.

Picking accuracy at the New Lenox DC now runs at 99.5 percent. "Picking by departments is so much easier; it makes for a much shorter time to restock stores and saves on labor," says Sanderson.

Other technologies that the New Lenox DC is using are the FKI Logistex UniSort XV ultra quiet high-speed sorter for outbound cartons, the FKI Logistex Accupass pick-and-pass transfer system and the FKI Logistex Wireless Information Module (WIM), which allows Michaels maintenance personnel to closely monitor the system via system alarms, exception notices, and I/O debugging reports.

A Strategy for Excess Inventory

Michaels is also piloting a new distribution design that uses a cross-docking and batch processing flow-through system to maximize transportation and DC fulfillment efficiencies. This system is part of a strategy to reduce the number of SKUs warehoused in each DC from 16,000 to around 12,000 and to gain increased throughput as a result.

To achieve this expected inventory reduction, Michaels divides all inventory into two basic groupings. The first group, type A, includes fast-movers that all DCs will carry. Types Bs, however, are slow-movers that will be warehoused by the DC located closest to the supplier. As a result, each regional DC will, in effect, become a national warehouse and distribution hub for a unique set of type B items, thereby reducing the total number of slow-mover SKUs handled in each DC.

The cross-docking plan is central to the new Michaels supply chain optimization. "With any dynamic retail business, poor-performing SKUs are discontinued and new SKUs are added," says Gardner. "When all poor performing SKUs are in one building, your clearance risk is reduced."

Reveal Time

The New Lenox DC came online in a series of stages. First, inventory and order fulfillment was moved from Kentucky to Illinois. Next, order fulfillment was moved from a non-departmental to a departmental system. Finally, material handling progressed from a manual process to full automation.

The challenge for Michaels and the rest of the project team was to transition from the older Kentucky facility to the new, fully automated New Lenox operation without interruption of service to the stores. The New Lenox inventory handover was a 12-month process, from its conception in 2003 to start-up in June 2004. Freight transition began in March 2004.

"Everything went smoothly and we even opened one month early," says Gardner. "The only way our store associates should have been able to tell that there had been a change was that boxes were shipped by department and that paper picking had gone away."

Productivity metrics tell the success story of the New Lenox DC. Early in the design phase, the project team set down goals for the new facility. After just three months of operation in 2004, the New Lenox team was achieving more than 90 percent of its planned throughput goals. Cartons picked per hour and cartons received are being processed at a rate that is 500 percent higher than expected.

"Last year, we couldn't have told you precisely what stores owned at any point in time," comments Gardner. "Now we have direct-from-the-register real-time data, and a perpetual inventory system that allows us to automate replenishment. Once you know what you own, and what you have sold, then you can replenish automatically back to the quantity you want to keep on hand.

In just seven months of operation, New Lenox has already been ranked third out of the company's nine DCs in terms of production dollars per hour. Gardner expects that the new DC will easily become the most efficient of all Michaels' facilities.