It was our first Holiday season working in Retail. From a Supply Chain perspective the pressure was intense. Despite massive investments the previous year and repeated assurances of Holiday readiness from the incumbent staff the entire experience was disastrous.
First the Distribution Centre (DC) ran out of storage space. Delays by the planning team in releasing orders to the DC resulted in a mad scramble to get goods to the stores and fill their empty shelves. And a never-ending slew of stock-outs and productivity issues made the next few months an absolute nightmare. Potentially blowing the Holiday season was a constant reality which would undermine the very survivability of the company.
The entire team was on the verge of being fired. What on earth happened to Holiday readiness and how could be prevent this from ever happening again?
This was a case for the Supply Chain Detective™.
Back to the Beginning of Holiday Readiness
To understand what happened later on we need to go back to the beginning. We had just begun our new role at the beginning of the calendar year working in Retail operating the Supply Chain operation.
Looking forward from January the main challenge appeared to be the cutover to a brand new Warehouse Management System (WMS) in the Distribution Centre. This was coupled with an entirely new operating infrastructure including a massive, multi-million dollar investment in a new Pick-to-Light (PTL) system and the associated conveyor system moving goods throughout the Distribution Centre.
The team in Supply Chain and I/T managing this conversion to a new system seemed highly competent. They had all worked in Retail for a long time. And the cutover to the new system was scheduled for April 1st (seriously), far in advance of the pending Holiday season. This should have given ample time to work out any bugs.
The first sign of trouble happened a couple of weeks before the system cutover. The head of the Distribution Centre, and the overall leader of the new system design and investment, resigned from the company. For the leader of this project that was four years in the making it was, to say the least, curious that she would leave so close to the cutover. Was there something that she knew, or was afraid of, once we went live with the new system?
The day for cutover arrived. The planning team had assumed that it would take a few weeks for the Distribution Centre (DC) to get back to a normal, if not higher than normal, level of output. Orders to stores had been fulfilled and replenished in advance to overstock them during this time, and as their stock levels depleted the DC would get back to shipping the volumes that they needed.
On the first day of cutover virtually nothing shipped out of the DC. There were system problems all over the place. On day two a tiny amount of goods, through manual intervention, trundled along the new conveyor system. And the rest of the first week, and then the second week, continued in much the same manner, with minor progress along the way.
Despite the planning that had been done the system issues were innumerable. We were far behind the level of output that was expected at that point. Stores were starting to complain about their diminished inventory levels and that lack of product coming in from the DC. The pressure was intense.
We had to call the CEO of the WMS company to get all of their best and brightest minds on deck. We needed patchwork solutions to overcome many of the issues and we needed them now. We had to be in a position of Holiday readiness and the time was approaching fast.
The Wheels Start Coming Off with Holiday Around the Corner
The next couple of months continued in much the same way. We fixed problems until eventually we had worked out most of the bugs. Maybe the former DC leader had an expectation that the cutover would be disastrous. But everyone else who was involved in the planning, execution and Holiday readiness surely had the intelligence to know what was going on and what needed to be done.
As we worked through summer I got continued reassurances from the Supply Chain, I/T, and DC teams that we were ready for the imminent Holiday season rush. Having never worked in Retail during Holiday the assurance of our experts, who had been through this many times before, was essential as to our Holiday readiness. Then again these same experts had failed to foresee the incredible cutover issues we would have with the new system.
The massive influx of goods for the Holiday season would hit the DC first, by the end of the summer, before the goods were redistributed to the stores. As most of the inbound goods were coming from overseas they were already in transit.
By the end of August the unending convoy of trailers arriving at the DC had begun. Within a couple of weeks the DC management team was already complaining about the amount of product coming in and where to put it all. Within a week or two after that I got a fateful call from the new DC manager.
“We are out of storage space. The warehouse is full. The receiving docks are jammed. And there’s a line up of trucks outside. We’re in BIG trouble.”
I couldn’t believe it. What the hell was going on. Where were the so-called experts again? We had only received a small fraction of the goods that were coming our way. This was the opposite of Holiday readiness. The planning team and the DC team had been confident only a month before that they were ready to handle the load.
Now we were on the verge of shutting down the entire Supply Chain. If we couldn’t receive and store the goods we needed for Holiday we would compromise the Holiday season for the entire company, risking the very survival of the company.
On top of that the new multi-million dollar system was limping along in terms of throughput. The enormous year to year increase in volume throughput expectations would be impossible to achieve.
This was a monumental catastrophe.
Clinging on for Dear Life
There would be a time to unleash our Detective skills and figure out what the hell had happened to cause us to be in this mess, but that time was not now.
Our immediate task was to find more storage space. If we could figure out where to store the immense influx of goods then we would buy ourselves time to figure out how to get the goods back out and redistributed to the stores. In fairly short order we found a local company with lots of extra warehouse capacity. We quickly determined what goods would be most efficiently moved off site so that we could expeditiously get them back when needed without too much delay.
We started using this space within a few days. As the DC manager told me later without this solution we were literally only a day away from actually shutting down the company.
Next we worked to move a lot of records storage, maintenance and other non-production type items out of the warehouse and into storage trailers on site. This freed up even more space.
One of the complications that we were dealing with was a very unique change in product merchandising. The company was diversifying its offering away from just being a retailer of books and adding a highly complex portfolio of department store type items. Gift products, electronics, toys, household goods and more were completely new types of products that the DC had never handled historically. As you can appreciate handling this diverse set of items is significantly different than just handling different sizes of rectangular books.
Fast moving books could be handled in bulk whereas the majority of book skus were handled, fulfilled and replenished in individual quantities. Given that this was the history of the company the Supply Chain team had perpetuated this model in the design of their new multi-million dollar system meant to handle this newly expanded product offering.
This lack of foresight further exacerbated the problems with throughput in the warehouse. All skus would be routed through the conveyor and PTL systems were goods would be picked and packed in different boxes destined for individual stores. The result was that any box slated for a store would literally contain a piñata-like combination of innumerable skus put there by DC personnel only to later be unpacked by store personnel.
Merchants and Supply Chain had not taken the time to optimize case sizes to allow for full case fulfillment and replenishment. Virtually every case was broken down and emptied piece by piece causing an incredible amount of duplicate handling of the same skus and cases. All of this extra handling further slowed down the already snail-like system.
Our immediate step was to add personnel, add shifts, and add overtime to just throw resource at the problem. There was not enough time to change the fundamental system design and merchandising decisions which had caused the mess.
Slowly but surely we prioritized the goods we needed to ship and to which stores. The team certainly became more productive the more used to the new system they became. Concurrently the I/T team continued to work on fixing the little bugs that invariably arose.
By early December we had shipped out to the stores all of the goods we had for the Holiday season. The warehouse racking was largely empty. The system was adequately handling a “normal” and sustainable volume.
From a Supply Chain perspective our immediate job was done and it was now up to the stores to sell the goods they had on hand.
Now it was time to figure out what the heck had gone wrong so that we would never go through this nightmare again. We now had to ensure Holiday readiness for next year.
The Supply Chain Detective™ at Work
Certainly one of the first clues that something was wrong with Holiday readiness was when the DC manager, the architect of this new system, resigned right before the new system cutover. In our dealings with her up to that point it was apparent that her real depth of experience was overrated. She was in over her head. That the CEO had allowed a $20 million plus investment to be made showed that the CEO didn’t know what was going on either. It was like the blind leading the blind.
In fact no one had any real leadership experience outside the company. Their entire paradigm set as to what was possible was limited to what they knew, and they took no time to think outside of the box as to what was possible. They embraced the sacred cows instead of challenging them.
The never ending productivity problems with the new system revealed the core issue to be the dramatic change in merchandising coupled with the extensive lack of knowledge and expertise as to what this really meant.
Since the company historically handled only books all of their systems, processes and experiences were built on handling books. They fulfilled and replenished full cases of high moving books but there were a very small number of skus in this category. The vast majority of skus were handled as individual items sent to stores as such. Given this paradigm the Supply Chain team perpetuated this approach in the design of the new system.
The problem was that all of the new merchandise did not fit the simple form factor of a book. Toys, books, apparel and gift items came in every conceivable shape and size. Handling every single piece of every single sku may have made sense for books but for all of these other items it resulted in a disaster. Even the hot selling new merchandise was not of a volume comparable to book best sellers.
As a result every single case was stored, moved to PTL, opened, some items were removed, and the rest of the case was routed back to a storage shelf. This process was repeated over and over and over again for the exact same case. The fundamental, and early, decision to handle all of these goods with an expensive PTL system, the same way books were handled, doomed the system from the very beginning. The extra handling, costs, and productivity impacts were overwhelming, crippling, and almost killed the company.
The Supply Chain and Merchandising teams did not think to reduce case sizes to levels allowing for full case fulfillment and replenishment. They didn’t think about drop shipping goods from vendors directly to stores, especially bulky items, to minimize handling and DC storage requirements. And they didn’t accurately estimate the physical size, inclusive of packaging and volumes that the DC was meant to handle.
The lack of vision and leadership in designing a new system, and accompanying business processes, to handle a dramatically different product line resulted in tens of millions of dollars of investment being virtually wasted. The team automated and perpetuated the exact same process and assumed it would be good enough to handle anything. They were wrong. You should never automate a bad process.
They should have first created a Merchandising and Supply Chain strategy with the core principles of minimizing handling and what we call a “Don’t Touch” strategy. Handling individual items of any given sku should have been the exception not the rule.
Handling, storing, fulfilling and replenishing in full case quantities only would have required a significantly smaller investment. Further the operating cost, response time, and speed of delivery would have improved dramatically.
Unfortunately they were stuck with the white elephant that they bought and would end up spending many years trying to make a bad system work better in their search for improved Holiday readiness.
The Supply Chain Detective™ had solved another case.