VARGO®’s work with American Eagle Outfitters featured in MMH

VARGO®’s work with American Eagle Outfitters is featured in the cover story of the September 2016 issue of Modern Materials Handling. Read the full article:

American Eagle Outfitters’ Omni-channel Journey

The fashion retailer has used warehouse execution software and automation to create a true omni-channel distribution center.

By Bob Trebilcock · September 1, 2016

It’s been a little over nine years since Modern visited what was then American Eagle Outfitters’ new 552,000-square-foot distribution center in Ottawa, Kan. The facility was truly ahead of its time: In 2007, no one was using terms like multi-channel, omni-channel, waveless picking or warehouse execution system (WES), but those attributes are exactly what distinguished the facility from any we had visited in the past. It was designed from scratch to handle three distinct retail brands including American Eagle and Aerie; to crossdock cartons and mixed cartons; to replenish stores; and to fill direct-to-consumer (DTC) orders across the brands for American Eagle Outfitters’ burgeoning e-commerce business.

At the time, the facility used a mixed storage method: In its primary reserve storage area, a pallet load of American Eagle merchandise might be stored next to a pallet of Aerie merchandise if that was the most optimal way to put inventory away. It used voice- and light-directed picking along with ring scanners, all based on the velocity of the SKUs. A large unit sorter made certain that pieces went to the right packing station.

But what really set the facility apart was a unique software system Vargo that was referred by American Eagle Outfitters and the solution provider as an optimization engine. Today, we’d call it a WES. Instead of creating pick waves and directing the work on the floor, the warehouse management system (WMS) was relegated to the management of receiving, inventory and shipping and communicated with the order management system. The optimization engine managed order fulfillment without traditional pick waves. Instead, it allocated work across the facility based on the workloads at the various picking and packing stations.

“We believe we have the first waveless, dynamic picking solution in direct-to-consumer order fulfillment for a specialty retailer,” an American Eagle Outfitters executive told us at the time.

Fast forward nine years later, and today we see one retailer after another trying to solve the problems that American Eagle Outfitters confronted in Ottawa nearly a decade ago. Meanwhile, the company has not stood still. It’s applying the lessons it learned over the years from its Ottawa DC to a 1-million-square-foot, omni-channel distribution center in Hazle Township, Pa., that serves the American Eagle and Aerie brands.

The lifeblood of the facility is an inbound conveyor and sortation system that routes incoming merchandise to where it is needed most, whether that’s in a retail replenishment area or a direct-to-consumer fulfillment area. It also features six four-level pick modules serviced by motor-driven roller conveyor (MDR), a large unit sorter that sends pieces to a putwall area for multi-line orders and multiple picking methodologies, including ring scanners and put-to-light.

Once again, it’s the latest iteration of the warehouse execution software developed by the original vendor that makes it all happen. While the WMS talks to upstream systems, the WES makes real-time decisions about how product should be routed through the facility and manages operations on the floor.

The result, says Christine Miller, director of operations, is a new facility that serves several functions.

  • It reduces the risk in American Eagle Outfitters’ supply chain. “We were reaching full capacity during the peak DTC season in Ottawa, and we didn’t have a backup facility for business continuity,” she says.
  • It positions e-fulfillment closer to the majority of American Eagle Outfitters’ customers, who live on the East Coast. “With Amazon leading the way on customer service, turn times are more important than ever,” Miller says.
  • Flexibility was built into the design, which allows order selectors to move seamlessly from the retail picking operations to direct-to-consumer as needed. “We would need a larger workforce to support both channels if we were housing inventory in separate buildings,” Miller says.
  • Last, and most important, it paved the way for American Eagle Outfitters to become a true omni-channel retailer that can fill an order from multiple distribution centers or the retailer’s stores. “The facility and systems we now have in place allow us to share inventory, so that when customers order from us online, they can have access to inventory both in the DC’s and in the stores,” Miller says.

Room to grow
Publicly traded, American Eagle Outfitters is a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under its American Eagle and Aerie brands. Today, the company operates more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom and ships to 81 countries worldwide through its Websites. Merchandise is also available at 146 international stores operated by licensees in 22 countries.

As with other retailers, e-commerce has been an increasingly important segment of American Eagle Outfitters’ business. By 2011, the retailer realized that it needed a new strategy to keep up with growth. “At the time, we only had the one facility in Ottawa to service our e-commerce customer, and we could see that it was going to soon reach full capacity,” Miller says. “And, we didn’t have a backup facility in terms of business continuity.” What’s more, the retailer wanted to redesign its network to be closer to its East Coast customers.

At the time, American Eagle Outfitters operated a facility for retail replenishment outside of Pittsburgh. The decision was made to close that DC and build a Greenfield facility in eastern Pennsylvania.

From the outset, Miller says, American Eagle Outfitters wanted to take what worked best in its other facilities. For example, the retailer worked with the same WES software provider as in Ottawa, since it understood the retailer’s business. Similarly, a decision was made to use the same put-to-light system in the new facility as is used in Ottawa and was in place in the western Pennsylvania location. “It was a business continuity decision,” says Paige Marvin, senior manager of distribution systems for American Eagle Outfitters. “We knew how to install it, and we knew how to manage it.”

There were also shortcomings to address in the design. “The first thing was to reduce the amount of time it took to get inventory from inbound receiving into an active pick location,” Miller says. In the old facility, newly received merchandise went to a pallet-build area before it was put away into “back stock,” or reserve storage. That meant a case might be touched two or three times before it went into a pick location.

In the new facility, there is no pallet-build area and no pallet rack for reserve storage. Essentially, it is a flow-through facility, where new merchandise becomes available for fulfillment soon after it is received. “Merchandise is put away in the cartons we receive from our vendors, and we run MDR conveyor right into the pick modules,” says Miller. “That way, cases flow from the inbound sorter directly into a pick module or to the retail fulfillment area to replenish a store directly from receiving.”

Since most merchandise is handled at the case level and almost all merchandise is moved by the inbound conveyor and sortation system, there are only three lift trucks in the facility, which also cuts down on lift truck traffic. Instead, the inbound sorter, which runs the length of the building, is the key to flow. “Not only are we receiving on the sorter and moving cases into the pick modules, it also manages empty totes that are reused in packing,” says Miller. “If the inbound system goes down, we not only can’t receive, but we can’t direct totes to other places for packing and shipping.”

Another change is that only one case, one SKU, is stored in a location in Pennsylvania. “In Ottawa, we use pallet and flow locations for multiple units and SKUs,” Miller says. “If we run into an issue at a location, we freeze that location, which can impact the entire location. In Pennsylvania, the WES will simply direct an associate to another location with the same SKU.” At the same time, there is no separation of inventory by brand: Merchandise for Aerie or American Eagle, or retail or DTC can be stored in any of the six pick modules.

As noted earlier, the Hazle Township DC is a very flexible facility. Not only is inventory shared across multiple channels, so is the workforce, which can move easily between retail and direct-to-consumer processes, reducing the size of the workforce needed to operate the facility.

Last, but not least, it is a Silver LEED-certified facility. That was achieved in part through the extensive use of MDR conveyor, which American Eagle Outfitters estimates saves up to 40% on energy costs compared to conventional conveyor and LED lighting in the pick modules.

Software driven
The Hazle Township DC is highly automated, with extensive conveyor and sortation systems, including a high-capacity unit sorter to handle individual items. But the key to making it work is the way American Eagle Outfitters uses its WMS and WES system.

The WMS is truly a management system, rather than an execution system, according to Marvin. For one, it handles the messaging associated with a retail network, such as EDI messages, advanced ship notices (ASNs) and shipping manifests. It also serves as the interface between the facility and the enterprise resource planning (ERP) system, including the distributed order management and inventory management systems. As an example, when an order is allocated to a facility, the WMS confirms that the inventory is available for fulfillment.

Within the facility, the WMS is responsible for receiving inventory when it arrives at receiving, cycle counting and packing, and manifesting direct-to-consumer orders for shipment. Last but not least, it creates order waves that are then passed on to the WES.

The WES directs the order fulfillment and replenishment activities on the floor. When newly received merchandise is scanned before the inbound sorter, the WES makes a real-time decision about where that inventory is most needed and where there is available space for storage. Orders are handed off from the WMS into a pending pick pool in the WES every eight to 10 minutes. Available orders, such as whether it’s an overnight order or a two-day order, are then allocated to pickers based on criteria such as the shipping method or the customer service agreements.

Going live
The DC went live in June 2014 as a direct-to-consumer facility. Miller says that while the facility had the usual hiccups associated with a go-live, it experienced a smooth start. The real test occurred during the holiday season. “Up until that Thanksgiving week in 2014, we could control how much work came into the DC,” she says. That all changed with the holidays. “The spike came about three weeks faster than we’d planned.”

The system, however, was up to the task. “We processed the same number of orders in the last six days of the month as in the prior three months, and it went remarkably well,” Miller says. In all, the DC shipped seven million units in that first six months.

In 2015, American Eagle Outfitters transitioned from a direct-to-consumer to an omni-channel DC, adding retail fulfillment to the facility. Miller says it was a challenging time: Her team added 180 retail packers to operations in one day, added an evening shift and doubled the management staff, including supervisors on the floor. Volume for the year peaked at 45 million units shipped. “What got us through all of this was the support of our systems team, our partnership with our WES vendor, and a very strong operations team,” Miller says. Today, the facility is shipping two million units per week.

The Hazle Township DC has laid the foundation for American Eagle Outfitters to transform into a true omni-channel retailer. “Over the past two years, in addition to our distribution capabilities, we’ve updated our mobile app and created better customer interfaces,” she says. “We’re now able to share visibility into our inventory across the network of facilities and stores, so that you can buy online and ship from the stores. We’re also improving our distributed order management, with better logic to split the fulfillment of orders if necessary.”

The results have been impressive. American Eagle Outfitters has increased the capacity of its supply chain, while turning orders more quickly and at a lower cost. “Eighty percent of our direct-to-consumer orders are delivered within one to three business days, which is a two- to four-day improvement over when we had just the one facility in Ottawa, Kansas,” Miller says. What’s more, there is room in the facility to add more picking modules and capacity as needed. “That two million units we’re shipping per week is not our full capacity,” Miller says.

“I couldn’t be prouder of the team we’ve put together here,” she adds. “We’ve accomplished a lot, and we’re supporting the business and driving it forward.”