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This article was published in the February 2016 issue of STORES Magazine.

American Eagle Outfitters’ new distribution center integrates e-commerce and store fulfillment

As retailers continue to improve their omnichannel capabilities, fulfillment remains one of the most challenging aspects of the seamless experience. In an environment where consumers expect to buy, pick up and return products anywhere, meeting their complex needs calls for rapid and flexible replenishment and distribution systems.

Because traditional distribution centers weren’t designed to handle e-commerce, many retailers have responded over the years by constructing separate facilities to handle Internet fulfillment.

American Eagle Outfitters has expanded its omnichannel operations in recent years. The specialty clothing, accessories and personal care products retailer implemented a buy-online/ship-from-store program that has exceeded expectations, and is also adding new features to its website, including 360-degree product viewing and more on-body product display. AEO also released an updated version of its mobile app, which features a better interface and faster performance.

Along with those improvements, though, comes the challenge of establishing the optimal balance in distribution centers that can replenish stores and fulfill e-commerce orders. The Pittsburgh-based retailer recently went live with a new distribution center in Hazleton, Pa., that was specifically designed to handle e-commerce and store fulfillment with maximum efficiency.

Before the facility was constructed, the company maintained two separate distribution centers, neither of which were optimized for the company’s growing e-commerce sales. One facility in Kansas provided direct-to-consumer order fulfillment and in-store replenishment, handling all women’s AEO and Aerie-branded products; the other, near Pittsburgh, exclusively served bricks-and-mortar locations, handling all men’s products and footwear and accessories for both genders.

“We needed a facility that could serve both and do it more efficiently,” says Christine Miller, AEO director of operations. “We also needed redundant capabilities for the direct [to store] business.”

“The majority of our customer base, online and in retail stores, is on the East Coast, and one thing we needed was to be closer to our customers.”
Christine Miller, American Eagle Outfitters

Getting closer to customers

AEO began by conducting a number of site assessments that factored in the company’s customer population, order profiles, transportation and labor costs. Miller says the company established a strategy to follow based on what its road map would look like for the next five years, and determined a second fulfillment center with omnichannel capabilities was needed to support the continued growth of the business, as well as to get physically closer to customers.

“The majority of our customer base, online and in retail stores, is on the East Coast,” Miller says, “and one thing we needed was to be closer to our customers.”

The retailer also needed to improve its direct-to-consumer fulfillment time. With the Kansas facility in the middle of the country, getting to either coast was taking too long: On average, Miller says AEO was taking anywhere from five to seven days to deliver an order.

“Reducing that amount of time was definitely something that was a goal for us and a challenge, just based on having that one facility in the middle of the country,” she says.

After securing the Hazleton location, AEO selected Vargo to design the operations of the 1 million-square-foot facility — everything from processes to equipment.

Vargo synchronizes operations in fulfillment centers with its proprietary continuous order fulfillment enterprise system. Carlos Ysasi, Vargo’s vice president of systems engineering, says the key to driving efficiency is creating what he calls “channel immune” distribution centers that can use one inventory, one workforce and one fulfillment engine to meet the fulfillment needs of physical stores and e-commerce.

“Maintaining two separate distribution centers for the channels is doubling your expenses,” Ysasi says. “Handling the online presence has many challenges but combining facilities, inventories and workforces to accommodate both is the Holy Grail of efficiency.”

Vargo was also contracted to manage the installation of the systems, conduct testing and get the facility up and running. Vargo worked closely with AEO, analyzing everything from order profiles and shipping methods to inventory flow and business processes to understand how it could best improve and bring efficiencies to the system.

Vargo and AEO worked to make the most efficient use of space, equipment and placement. Miles of conveyor systems move products through the warehouse; the conveyor system has been instrumental in driving efficiency by minimizing “touch,” moving product faster and reducing the need for bulky equipment.

In the old system, workers would unload incoming trailers to build, move and reorganize pallets, something Ysasi says “required everything to be touched multiple times.” Every process also had a buffer system which in the previous facility required a lot of floor space. The new system allows cartons to be quickly thrown on the conveyor and “pulled” anywhere they need to go in the facility.

The facility is also free of mobile equipment. There is neither a need for pallet storage nor for pallets to move within the center. All material handling was selected to maximize uptime while optimizing energy efficiency. “We took out a lot of the equipment, the ‘touches’ and the people that used to be this buffer,” says Ysasi.

American Eagle Outfitters distribution center 2

Moving through the system

Vargo’s continuous order fulfillment enterprise system extends functionality beyond traditional warehouse execution systems. The system can control all work resources, including machinery and associates, and organize, optimize, sequence and synchronize everything across the work process.

The system is typically installed between the warehouse management system and the various resources that perform work; main functions and benefits include dynamic labor balancing, sorting machine optimization, next order optimization, revolving batch picking and reporting and management tools.

 All inventory at the Hazleton facility is loaded directly onto conveyors in the receiving mezzanine and sent to two sorters with automatic variable-speed controls that adjust the throughput demands and can automatically detect surges or declines in flows and adjust speed to more efficiently accommodate activity.

Inventory is then routed to pick modules in a four-level, 400-foot-long picking structure in a 288,000-square-foot section of the facility. Operators pull product from the conveyors using a radio frequency picking process. Along the entire route, conveyors are controlled by photo eyes that sense totes, so the conveyor remains off when a product doesn’t need to move anywhere.

Sections of motorized roller conveyor are divided into small zones which can be independently powered and operated, creating an on-demand system that increases energy savings and decreases noise. Miller says the system also saves space and is easier to work with.

“There’s not a big motor hanging from the conveyors every 10 feet,” she says. “We were able to lower them and there’s a big ergonomic benefit for the workers. There’s also less maintenance, and they’re efficient because they only run when they need to.”

When products reach the packing and shipping area, picked totes are run through a pre-sorter and discharged into 60 stations where items are matched together with orders. Orders are then packed, labeled and routed through another cross-belt sorter in the shipping area where they are segmented for different destinations. The cross-belt sorter maintains a utilization rate of more than 98 percent because the continuous batch pick eliminates the need for the start-and-stop wave transitions.

With the new distribution center, 90 percent of direct orders are fulfilled in two to three days.

Increased efficiency, faster fulfillment

The new facility and system has produced significant efficiencies and savings for AEO. The center was constructed to environment and energy standards in what Miller calls a “very environmentally and cost-conscious design” with energy efficient features. Ysasi says the system also facilitates better utilization of pickers because their jobs are the same whether it’s for direct-to-consumer or store replenishment.

Bringing the distribution center closer to customers has paid off; now 90 percent of direct orders are fulfilled in two to three days. A new internal system also allows the company to turn orders in 24 hours or less. All back stock inventory is in active unit pick locations with one case per location, meaning there are no pallet locations in the back stock area and no flow locations.

“We don’t have to stop the picking process just because one location is on hold or frozen. In [the Kansas location], we had full pallet locations and had to stop the unit,” says Miller. “There’s not continuous [movement] throughout the facility.”

Miller says whereas the Kansas facility had 70 forklifts with 70 drivers across two buildings, the Hazleton facility uses only two forklifts with six drivers. “You still have to put product away but you don’t nearly have the equipment and maintenance costs,” she says. “And from a safety point of view, there’s less risk.”

AEO has expanded the use of Vargo’s continuous order fulfillment enterprise system in Hazleton to improve equipment utilization, increase efficiency and reduce complexity.

Vargo’s patented system also communicates with AEO’s Manhattan warehouse management system, which is integrated with the company’s IBM Sterling enterprise resource planning system. This allows visibility into the company’s entire inventory with location and quantity of every item in the company’s distribution centers and 800 stores.

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