VARGO President and CEO Mike Vargo

Innovation Spotlight: Vargo’s pioneering distribution centers draw big clients

By Kevin Kidder

VARGO
3709 Parkway Lane,
Hilliard, 43026
vargosolutions.com

Business: Vargo designs, builds and supports customized distribution center systems, helping companies make fulfillment as lean and efficient as possible. The company’s COFE, or Continuous Order Fulfillment Engine, software uses an automated, demand-driven “waveless” approach, an industry first.

President and CEO: J. Michael Vargo

Number of total employees: 47

Additional Offices: Austin, Texas; Berkeley, Calif.; Grand Rapids, Mich.

2014 revenue: $83 million

Mike Vargo looks on as his colleague draws a funnel on the board. It is the same kind that most people have around the house, the kind that you use to get liquid in jars or gasoline into a tank.

But the president and CEO of Vargo Companies is using it to illustrate what his business does best: Eliminate the backups at warehouse distribution centers. Make everything go smoothly through that small opening of the funnel. Make warehouses efficient and lean.

Vargo, based in Hilliard, designs, develops and builds innovative warehouse fulfillment center systems for clients around the nation. The roster of companies that use Vargo systems has some big names: LL Bean, American Eagle Outfitters, Lockheed Martin, Micro Center and even American Honda Motor Company.

The homegrown company was founded in 1971 by Mike Vargo’s parents, Julius and Mary Ann Vargo, who are central Ohio natives.

Vargo has evolved into three divisions: Vargo Integrated Systems Inc., Vargo Adaptive Software LLC, and Vargo Material Handling Inc.

It has a nationwide reach and four branch offices, including a new one opening this summer in Grand Rapids, Mich. that will house sales, engineering and control staff.

At the center of its business is its proprietary Continuous Order Fulfillment Engine software, a real-time warehouse fulfillment system that the company bills as an automated, waveless approach for distribution centers.

“The difference is we do not work off of a planned event. We work in true—and I emphasize true—real time,” Vargo says.

With COFE, the second an order is placed, it is dynamically assigned to the warehouse picker closest to the item. If the worker passes the item, that order is then reassigned to the next nearest person. The system knows where employees are, and it knows where the stocked items are.

Traditional systems use a wave approach, where piles of orders build, and workers are then assigned a predetermined list of items to retrieve. COFE gets rid of the wave.

“COFE allows that streamlined, continuous, flow. Think of a faucet, continuously running, versus a faucet running and the bucket’s filling up. You don’t really need the water in the bucket, you just need the water to go through the hole in the bottom,” says Bart Cera, Vargo’s COO and CFO.

In the case of American Eagle Outfitters, the system has allowed the company to go “omnichannel” — that is, fulfilling both to-store inventory orders and e-commerce purchases made by consumers from the same warehouse.

Traditionally, companies have two separate warehouses, one for store inventory fulfillment, and one for e-commerce orders. They have two separate inventories, two separate workforces and two separate fulfillment systems.

Vargo’s system makes it possible to do both from one warehouse. Warehouse workers don’t even know which kind of order they are fulfilling.

American Eagle rolled out Vargo’s COFE-based omnichannel system to its new Hazel Township, Pa. warehouse in June. The company says it will lower operating costs by 10 to 15 percent, and will be smaller than its other warehouse in Ottawa, Kan. Most customers will get orders in two days.

“It really allows us to leverage our capital investment. The Hazelton facility is 20 percent smaller from a square-foot standpoint than our Ottawa campus, but can do just as much in terms of servicing our stores and customers,” says David Repp, vice president of North American Logistics for American Eagle. “From an investment perspective, we were able to invest less capital there and get just as much help with capacity.”

With e-commerce becoming more popular, Vargo and Cera see the potential for growth. Companies will want to be lean, efficient—and fast.

“The Gen Xers and Millennials are used to doing everything on their smartphones and online,” says Cera. “You’re going to see a run up on the e-commerce side.”