A supply chain redesign for omnichannel success
London-based retailer The John Lewis Partnership fared exceptionally well during last year’s Christmas selling season. For the five weeks leading up to December 28, 2013, its total sales, in stores and online, amounted to £734 million—a 7.2-percent increase from the same period the previous year. Although in-store sales rose only slightly, online sales jumped by 22.6 percent compared to the same period in 2012.
As the December sales results show, John Lewis has been very successful with its omnichannel strategy. To maintain its leadership in omnichannel retailing—which allows consumers to buy, take delivery, and make returns when and where they choose—the company has been redesigning its supply chain. As part of that initiative, John Lewis has begun restructuring its distribution center (DC) network to support a shift to an in-store replenishment strategy that will require major changes in the way it picks, delivers, and stores the products it sells.
A need to simplify
John Lewis has been a familiar name to London shoppers since the days of Charles Dickens. The retailer opened its first store in 1864, during England’s Victorian period. Today John Lewis has 41 shops in England, Scotland, and Wales. The company also owns the grocery chain Waitrose, which has more than 300 stores throughout Great Britain, most of them located around greater London. The company’s full name, John Lewis Partnership, reflects its ownership by its 91,000 employees, who are called “partners.”
John Lewis is a department store that offers three main lines of merchandise: fashion, home goods, and electronics. It first began selling products online about 10 years ago. In 2009 it pioneered a service, called “Click & Collect,” that allows consumers to order online and, in most cases, pick up the merchandise in John Lewis retail stores as well as at some Waitrose supermarkets.
Early on, an expansion of the company’s online product portfolio—more items were available online than in the stores—drove e-commerce sales growth. The expansion of the Click & Collect program into all John Lewis branch stores as well as consumers’ appreciation of its convenience further increased online sales, says Terry Murphy, director of national distribution center operations.
But the company struggled with some aspects of e-commerce fulfillment. When John Lewis first entered the realm of online retailing, it operated separate distribution centers for the online and physical store sales channels. That led to a somewhat convoluted and inefficient fulfillment process.
Back then, the retailer would receive products into the store distribution centers, and then send batches from those DCs to third-party-operated fulfillment centers. Some suppliers shipped products directly to the fulfillment centers as well. The fulfillment centers would put away those products and then pick and ship online orders for home delivery. If the online orders were intended for the Click & Collect program, however, the third-party fulfillment center would have to send those items back to the distribution centers so they could be loaded on trucks for delivery to the stores. “Trying to explain that was a little bit loopy,” Murphy says.
Concerned about the complexity of the process for handling Click & Collect items, John Lewis in 2010 decided to redesign both its order fulfillment process and its supporting infrastructure. The retailer elected to shrink its network of 12 distribution centers to either five or six “hybrid” facilities that would handle fulfillment for both online orders and store replenishment. (The company has not yet made a final decision on the number of DCs.) “As our online sales grew, what we wanted to do was be able to replenish the shops and fulfill the online sales from the same inventory,” Murphy says.
The changeover to a network of hybrid DCs will benefit the retailer in several ways. First, it simplifies the order fulfillment process, reducing time, touches, and costs. It also will allow John Lewis to carry less inventory overall. In addition, because the hybrid facilities are designed to pick individual items, or “eaches,” they support the retailer’s shift to a replenishment strategy that requires picking an item for each one sold and shipping individual items rather than full cases to the department stores. Without the need to store full cases at retail locations, John Lewis will be able to convert stockroom space into sales space, thus expanding the breadth of available store inventory.
Open some, close some
As of this writing, John Lewis is still in the process of determining the final shape of its network of hybrid facilities; the company expects to complete its network restructuring by 2016. According to Murphy, the retailer chose to make the conversion in phases due to leases on current buildings and the resources involved in carrying out the project.
At present, John Lewis has seven distribution centers—two dedicated to online sales, two for store replenishment, and three hybrid DCs up and running. Another hybrid facility is set to open later this year. All of the DCs ship to customers throughout Great Britain. “It is more cost-effective to have a national inventory rather than regional,” Murphy says. “We hold one single stock of each SKU (stock-keeping unit) rather than regional holdings of duplicate SKUs. This is because the United Kingdom is not too large to access each store each day.” It would also be expensive to replicate its inventory of 250,000 to 300,000 products in more than one DC, he adds.
As the DC network is now configured, the retailer still operates a West London facility for fashion apparel that only does store replenishment. A separate DC in Oilerton, England, handles fashion for online sales. Plans call for the gradual closing of the West London facility when the revamped network is completed; Murphy says his company is still “working through options” for the Oilerton site.
The other store-replenishment DC, in Northampton, England, handles products that move in rollable cages. That facility also stocks and ships “two-man” products, such as furniture and appliances, that typically are delivered by two partners to a customer’s home. John Lewis is in the process of shifting responsibility for its caged and two-man products to a facility in the city of Milton Keynes that will handle both store replenishment and online sales.
In another part of Milton Keynes, the retailer is developing a campus that will include two hybrid facilities connected by a 98-foot bridge. One building, dubbed “Magna Park I,” handles products stored in bins; the other, “Magna Park II,” will handle hanging garments.
Locating the two buildings side-by-side gives John Lewis the ability to consolidate different types of products for direct-to-consumer or Click & Collect orders. Say a customer orders a pair of shoes and a suit. The shoes would be picked in the Magna Park I facility and then married up with the suit picked in Magna Park II before the order goes out the door. The “binnable” facility is up and running now; Magna Park II will be completed and automated material handling equipment installed by the end of this year. At that time, John Lewis will close older facilities dedicated to hanging fashion. According to Murphy, the Magna Park facilities are expected to process 65 to 70 percent of the retailer’s online sales.
In addition, the company has a separate facility in Birmingham, England, that fills online orders of fragile items. Because those items could get damaged while traveling in bins on a conveyor line, they are handled and processed manually. As part of its network redesign, John Lewis plans to integrate the handling of fragile products into other DCs.
Traveling tote bins
As previously noted, the new hybrid facilities will support John Lewis’ shift to “eaches” fulfillment. The example of Magna Park I illustrates how that process will work.
When inbound products arrive at Magna Park I, partners take the individual items out of their cardboard cases and place them in tote bins, which move on automated conveyors to storage areas for putaway. The tote bins generally hold similar stock-keeping units. Recently, John Lewis introduced compartmentalized bins that can hold up to eight different SKUs in a single tote. These totes are designed to hold slow-moving SKUs that typically move in small quantities, Murphy explains.
When the company needs to replenish items for a store, tote bins holding the appropriate stock come out of storage and travel to a packing station. There, the computer system instructs a partner to remove one item—a pair of socks, say—from the stock bin and place the item in a second bin, which is destined for a particular store. The second bin could then travel on a conveyor to another station, where a partner adds another item destined for the same store. When the bins are complete, they go to the loading dock that has been assigned for deliveries to a particular store. This system not only makes order fulfillment more efficient by keeping items for a specific retail location together, it also facilitates restocking at those stores. That’s because the computer system “knows” the retail stores’ layouts and groups items in the shipping bins to reduce walk time for partners when they set out merchandise for sale, Murphy explains.
Because Magna Park I was designed as a hybrid facility, partners can also fill direct-to-consumer orders. For those orders, a partner takes the item ordered online out of the stock bin, scans it, and places it in a cardboard shipping carton. The carton then travels down a conveyor to an automated packaging machine, which places a note to the customer in the carton. The packaging system then automatically measures the product inside the carton and folds the box to the proper height.
If the consumer requests home delivery, the order is shipped to the customer’s door by one of two parcel carriers, Hermes or City Link. If the order is intended for customer pickup at a retail outlet, then it travels on the same truck as store replenishment orders to a John Lewis branch location. John Lewis’ own fleet of trucks with multideck trailers transports about 85 to 90 percent of store-delivered items, with the remainder delivered by local for-hire carriers.
For home delivery of large items like furniture or appliances, John Lewis uses its own specialized delivery vans. Customers may select a two-hour delivery window online, and the retailer uses software from Descartes Systems Group to optimize truck routing. The Descartes application also lets customers book delivery appointments on the website or at the point of sale in the store.
A demand-driven future
In concert with its omnichannel strategy, John Lewis is moving in the direction of a demand-driven supply chain. Murphy is confident in the retailer’s ability to achieve that objective. “Given the geography of the U.K., we can deliver to every one of our stores within 12 hours, so a demand-driven operation is eminently feasible,” he says.
However, since the retailer has adopted the sell-one-replenish-one strategy that has allowed it to reduce the size of the backrooms in its stores, it now holds less buffer inventory at its retail outlets. That requires the company to have a better handle on demand fluctuations. Toward that end, John Lewis will be upgrading its software. At present, sales orders from the shops are fed into a proprietary system that determines replenishment requests to be sent to the DCs. But John Lewis will soon adopt Oracle software as its platform, which the retailer expects will enable it to take better advantage of demand data to create a more responsive supply chain. For example, the new software could provide advance notification of spikes in customer orders.
The ability to quickly respond to demand could become even more crucial as online sales continue to grow and more customers demand faster deliveries of their orders. Murphy notes that four years ago, 26 percent of the retailer’s online orders required next-day delivery; so far this year, 65 percent fit that profile.
John Lewis is looking at further raising the bar for consumer deliveries. A trial program now under way provides same-day delivery at its Birmingham store, which is located above a major railway station. Commuters who place an order by 9:30 a.m. will be able to pick up their items in that store on their way home from work, after 5:00 p.m.
The new network design will help John Lewis provide faster fulfillment and delivery of online orders, and it will enable implementation of demand-driven replenishment for its stores. The hybrid distribution network, Murphy sums up, “allows us to concentrate our inventory in one, purpose-built location, with the ability to switch stock, immediately and virtually, between shop and online.” With all those capabilities in place and working smoothly, John Lewis aims to maintain its position as a leader in omnichannel commerce.