SUPPLY CHAIN

Going the Extra Mile Cuts Costs

BY Connie Robbins Gentry

The company best known for its brown trucks is going the extra mile on order fulfillment and cutting transportation costs at the same time. It all starts with an ideal location.

If Santa wanted to expand his distribution network to a centrally located transportation hub for quick, efficient reindeer access to as many U.S. cities as possible, he would likely consider the small but strategically positioned town of Hebron, Ky. That’s what “Brown” did when it located the company’s key logistics operation for serving the retail industry on the outskirts of Cincinnati, minutes from the Northern Kentucky Airport.

From the UPS Supply Chain Solutions Distribution and Logistics Campus in Hebron, 62.5% of the U.S. population can be reached with UPS’s standard two-day ground service. The campus has convenient access to Interstates 275, 71/75 and 65, as well as to the UPS small-package operations in downtown Cincinnati. Worldport, the company’s main global air hub located in Louisville, Ky., is less than 100 miles from the Hebron campus and provides a conduit for next-day air service.

The Hebron campus includes seven UPS distribution centers (DCs), comprising approximately 2.2 million sq. ft. A number of other companies, including Amazon.com and Gap Outlet, also operate DCs in the same logistics park. At the UPS campus, employment fluctuates from about 900 to 1,500 people during peak season and many operations run multiple shifts, some on a 24/7 schedule. The campus setting allows considerable flexibility for optimum utilization of resources.

Apart from its central location, the most amazing aspects of the UPS operations are the value-added services being performed for retailers and consumer-product manufacturers. Recently, UPS and several of its customers—Easton Sports, SmartBargains.com, Birkenstock USA, Nautilus, Honeywell Consumer Automotive Products Group and Becton Dickenson—allowed Chain Store Age to tour the Hebron DCs.

Smart moves: In April 2004, off-price Internet retailer SmartBargains.com outsourced order fulfillment to a UPS Supply Chain Solutions DC in Hebron. UPS received 300 trailer loads of merchandise in three days and by the following month UPS was receiving, processing and confirming orders on an hourly basis.

UPS invested in a Zone pick-and-pass conveyor system that packages multiple items located throughout the 300,000-sq.-ft. facility into a single carton. The system reduces both shipping costs and labor costs, since employees don’t have to walk to various sections of the warehouse to locate different products, and it provides flexibility to expand new product lines without increasing the amount of time it takes to prepare a shipment.

“We saw where SmartBargains.com could effectively manage transportation costs and increase customer satisfaction by consolidating orders into fewer cartons,” said Mike Fallon, senior distribution manager for UPS Supply Chain Solutions. “After we began consolidating orders, the average units per carton doubled, and SmartBargains.com’s transportation spend dropped significantly. It also became more cost-efficient for them to maintain the reduced-cost shipping incentives [that they offer to consumers].”

Eager to add apparel to its product offering, SmartBargains.com partnered with an off-price bricks-and-mortar retailer of upscale fashion apparel in 2004. UPS provided the necessary infrastructure and expertise to make the transition from bricks-and-mortar retailing to Internet sales a huge success for both retailers.

Integrating the new line of fashion apparel required another rapid rollout for the Hebron DC, which received and processed 10,000 units of garment on hangers (GOH) within a week. Subsequently, UPS developed a unique approach to picking GOH utilizing a wheeled hanging rack that has made the process considerably more efficient.

Another challenge for Smart Bargains.com was dealing with demand spikes. UPS stages hot-selling merchandise in a designated picking area for faster processing and color-codes orders by the days of the week. Orders received over the weekend are processed first on Monday morning and air-freight orders are given priority attention.

During the peak holiday season, UPS escalates the SmartBargains fulfillment to a 24/7 operation. Typically, the DC has about 84 employees dedicated to the SmartBargains area, but in the last holiday season the number of employees increased to 300.

Among the value-added services UPS provides for SmartBargains is an automated new-customer incentive program, which is embedded into the warehouse-management system. It identifies orders from new customers and triggers a “welcome” insert complete with a coupon for the customer’s next order. The DC also operates an onsite photo lab where artwork is created for posting items online. Live models are hired to enhance the product images, and product descriptions are written onsite.

In addition to processing inbound freight and fulfillment of consumer orders, UPS handles returns for Smart Bargains.com. Every order ships with a return-service label (RSL) to simplify the process for the consumer, who can apply the label to the box the order arrived in and either call for a pick-up or drop it at a UPS store.

Adding retail value to suppliers’ products: The UPS campus in Hebron also performs value-added services for consumer-product manufacturers that enable them to better serve their retail customers.

For Franklin Lakes, N.J.-based Becton Dickinson, an international manufacturer of medical products including basic over-the-counter supplies sold through drug stores and mass merchandisers as well as surgical supplies for health-care facilities, UPS manages the supply chain from order-taking on the front end to financial reconciliation on the back end.

“The requirements for retailers are very different than for health care,” acknowledged David Kidd, director of business development, retail and consumer products for UPS Supply Chain Solutions.

For instance, retailers such as Dick’s Sporting Goods, AAFES and Kmart that receive Becton Dickinson products from the UPS logistics hub may require specialized labels or packaging for their merchandise. UPS provides the fulfillment to each retailer’s unique requirements. Promotional displays may also be unique to each chain, some want the product to hang vertically, others require horizontal positioning and some want it in bins.

“We’ve created a model that lets our customers comply with the needs of their retail customers. The advantage, for both the retailer and manufacturer, is that they can push decisions to the end of the supply chain and place orders one week out,” noted Kidd. “We also process returns for Becton Dickinson. In many cases, the package is damaged but the product is not. We inspect the inventory to determine what is acceptable for repackaging. Our return-to-inventory rate is very high, and we maintain a report to identify reasons for returns so Becton Dickinson can correct any [adverse] trends.”

In another DC on the UPS campus, 715,000 sq. ft. is dedicated to Honeywell automotive products for retailers such as Wal-Mart, AutoZone, Advance Auto Parts, Kmart, Jiffy Lube and O’Reilly Auto Parts.

On average, UPS ships 45,000 to 50,000 sorter cases per day and 90,000 to 95,000 full cases per day from the Honeywell facility. The two largest retail accounts receive 10 to 15 truckloads daily. Recently, the DC implemented RFID for a small number of Wal-Mart SKUs, representing less than 10% of the order volume.

“Prior to using the Hebron DC, Honeywell had six to eight plants that were shipping product to stores and it was a logistics challenge,” noted Bob Alexander, senior operations manager for UPS Supply Chain Solutions. “In the first year, UPS reduced Honeywell’s transportation costs by $3.2 million and increased service levels from days to hours.”

“We also process returns for Honeywell, which has a generous policy where, once a year, retailers can return anything that is over-stocked,” he added.

Manufacturers Easton Sports and Birkenstock USA had never outsourced to a third-party logistics provider prior to partnering with UPS Supply Chain Solutions. For Easton, the value extends beyond shipping and receiving sporting goods. For instance, UPS evaluates returned hockey sticks and records the break points so the manufacturer can identify recurring errors.

Birkenstock USA, which needed additional infrastructure to support the growth of Internet sales it was experiencing through sites such as Zappos.com and 6pm.com, turned to UPS to manage fulfillment. UPS, which began shipping product for Birkenstock in January 2007, maintains an inventory of 5,000 SKUs. Orders ship to retail stores as well as direct to consumers.

“It was very costly to ship from Germany to the West Coast, so establishing an East Coast presence through the Hebron DC reduced the company’s transportation spend,” noted Fallon. “One of Birkenstock’s first business requirements, however, was to ‘Be Green.’ We recycle pallets for them and we re-use all the boxes from inbound shipments for outbound orders.”

In another distribution area, UPS periodically handles athletic-equipment parts assembly for Nautilus, such as running boards on treadmills or decals applied to equipment.

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CompUSA may get a new look

BY CSA STAFF

ADDISON, Tx. After opening a new format store last month, CompUSA may be changing the format of its other stores, depending on customer demand and product interest.

According to reports, the elements found in the prototype store, located in Texas, will be incorporated into other CompUSA locations across the United States.

The nearly 7,700 square-ft. relocation site includes an Apple shop featuring Mac computers, iPods and Apple accessories, and a full-length LCD TV wall.

Additional expansions include extended gaming, which includes an entire wall devoted to the Nintendo Wii, PlayStation3 and Xbox 360 gaming platforms, plus a PC gaming setup to test equipment and play new titles.

While businesses can get their share of support with a specialized services section, all consumers can visit the store’s redesigned IT support area.

“This new store aligns CompUSA’s vision to better serve its three core customers, the technology enthusiast, educated professional and small and medium businesses,” said Gabriela Villalobos, the retailer’s sales and operations evp.

CompUSA announced in April that it would narrow its focus to three core customer groups rather than try to serve a mass audience.

The move was part of a comprehensive restructuring, initiated last February, that included an overhaul of senior management and the closure of half its store base as the privately held chain looked to improve sales and profitability.

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Walgreens withdraws from CVS provider plans

BY CSA STAFF

DEERFIELD, Ill. After many months of talks over low and below-market payment rates by CVS Caremark for four prescription plans, Walgreens has withdrawn as a pharmacy provider from the plans.

Patients affected include members of prescription benefit plans managed by CVS Caremark for ArcelorMittal, Johnson Controls, Progressive Casualty Insurance and Wisconsin Education Association Trust.

Most of the affected members live in Illinois, Indiana, Michigan, Ohio and Wisconsin.

Trent Taylor, president of Walgreens Health Services, the managed care division of Walgreens, released the following statement:

“This is not where we wanted negotiations to lead,” he said. “We’re sorry that our pharmacy patients and CVS Caremark’s clients are caught in the middle, and we’ll do all we can to ensure a smooth transition for our patients to another pharmacy. Meanwhile, we’ll continue to work on resolving this issue with CVS Caremark.

“Leaving a benefits plan is an extraordinary step for us, but it demonstrates how extraordinarily low our payments were from CVS Caremark. We can’t continue accepting reimbursement rates that are drastically below market, while offering patients needed special services such as 24-hour pharmacy access and drive-thru pharmacies.”

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