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Material handler Vargo develops software that speeds purchase, delivery process

By Tim Feran

While UPS and FedEx waged a high-profile battle to see who would deliver all gifts by Christmas, the folks at Columbus-based material handling company Vargo were quietly enjoying the show.

They knew which retailers were most likely to get merchandise late to the delivery services, making UPS and FedEx look bad.

“We had some ideas, because they’re on our hit list (of future customers),” said Carlos Ysasi, vice president of integrated systems at Hilliard-based Vargo.

Vargo has developed computer software that runs the “intelligent warehouses” for such national retailers as American Eagle Outfitters, L.L. Bean and others. Vargo’s software system knows where inventory is located inside a distribution center, knows where workers are within the building and makes instant decisions about which people should work on a sale order.

Vargo created the software to help traditional retailers compete with fast-growing online retailers such as Amazon that have succeeded partly by getting individual orders processed as fast as possible, said Art Eldred, client executive for systems engineering at Vargo.

Traditional brick-and-mortar retailers were accustomed to using their warehouse and distribution centers far differently, focusing mostly on shipping massive amounts of product to their stores as efficiently as possible.

“When you start thinking about it, though, what’s good for retail stores is the opposite of what’s good for an e-commerce customer,” Eldred said. “One approach is to go for mass and efficiency, the other is to get individual orders processed as fast as you can.”

In order to resolve these seemingly opposite approaches, retailers often simply created separate distribution centers for their online businesses.

But even while that solved one problem it created others.

“These retailers would make a bet in the beginning of year,” Eldred said. “Where would they put inventory, in the retail distribution center or the online distribution center? If they had inventory in the wrong place, they could be sitting on too much merchandise in one place and starving in the other.”

But having too much inventory forces retailers to mark down prices, taking a bite out of profit margins.

“All these fast fashion companies, they can’t afford markdowns,” Ysasi said. “They have to get inventory into customer hands.”

The answer seemed obvious: Combine the distribution centers into one, as American Eagle has done in its all-in-one fulfillment center in Hazle Township, Pa.

American Eagle opened the center in 2014 serving online distribution first, then added the retail aspect last summer, a month or so before back-to-school shopping began.

“From the direct-to-consumer side, it’s been working really well,” said Christine Miller, facility director. “It’s very efficient. We’re still learning how to work with it in the best way. On the retail side, we still have work to do in building out fully, but it worked pretty well there, too.”

The tricky part in combining everything under one roof is that retailers accustomed to pushing out vast quantities of merchandise at set dates are no longer sure “if the next order is a hoverboard or something else,” Ysasi said. “Ultimately, you have to operate in real time.”

In 2014, American Eagle could handle a peak of 316,000 units a day for direct-to-customer orders and 571,000 units a day for retail-replenishment orders. After the system was installed last year, peaks stretched to almost 450,000 units a day for direct-to-customer orders and 642,000 units a day for retail-replenishment.

The impact of Vargo’s computer software on American Eagle’s facility was impressive during the holidays. American Eagle shipped its holiday merchandise to retail stores in November, then shifted focus to the online distribution side in December.

And when the American Eagle center faced its biggest test on Cyber Monday, the result, Ysasi said, was “zero backlog.”