Office Depot’s hybrid, omni-channel supply chain balances demand cues, logistics factors.
By Eric Kulisch
Office supply stores are at the forefront of the omni-channel trend in retail to create a single inventory and customer view of products across all sales channels because they have a long history of direct fulfillment through mail-order catalogs and telephone sales predating e-commerce, according to analysts and industry insiders.
Office Depot, by many accounts, is further along than most retailers in servicing customers through their preferred buying methods.
The company has three primary ways to process sales: stores, business-to-consumer via the Web and a large business-to-business contract segment that supplies large companies, state and local governments, universities and hospitals. It has the world’s sixth largest Website by sales. Based in Boca Raton, Fla., Office Depot also has a large international division that sells to customers in 60 countries.
Last December, the retailer introduced a service allowing customers to make store pickups within an hour for orders made at Officedepot.com.
“We’re pretty far down the path of using the same inventory for all three channels we support. A lot of times we run out of the same buildings, with the same inventory and the same trucks and the same delivery company for the last mile to the customer’s doorstep and some of our stores,” Brent R. Beabout, the company’s vice president of supply chain, said during a mid-June panel discussion in Washington on the state of the logistics industry.
Supply chain efficiency, he said, is critical in an era of hyper-competitive pricing by online retailers.
“If you can’t influence the price too much, you have to be a good supply chain to make money,” Beabout said.
Since 2010, the company has trimmed its distribution costs (shipping plus warehouse handling) by $35 million to $711.5 million, according to its annual report.
Office Depot faces increased competition from wholesale clubs, discount stores, grocery stores computer and electronics superstores and other types of retailers that have increased their assortment of home office merchandise. The company’s revenues have dropped from $14.5 billion in 2008 to $10.7 billion last year. Same store sales have been on the decline since the recession, as have sales in its other domestic and international businesses. One problem is that people are buying less paper and file storage products because digital technology allows them to manage their documents.
The company, which suffered a 7 percent decline in revenue and a $75 million pre-tax loss in 2012, began to integrate order processing for its multiple channels about five years ago.
For starters, Office Depot put goods for its separate supply chains under one roof instead of having distribution centers for each and combined all inventory for the three business lines, which streamlined purchasing and preserved cash, Beabout elaborated in an interview.
The retailer has 15 distribution facilities in the United States, 10 of which process inventory for all channels and two that are pure cross-docks. Four bulk merchandise cross-docks were closed in the past three years as part of a supply chain consolidation.
Then, it merged its line-haul transportation using dedicated fleets so merchandise moves to market on the same truck. Several carriers are used, each serving separate markets. Dedicated contract carriage gives the retailer more control of its shipping route and schedule, and helps reduce empty miles because the regular routes enable the carrier to find backhaul cargo from other customers, or carry back merchandise returns and recyclable materials, he said.
Now, the office supply giant is moving towards use of a single third-party logistics provider or carrier to handle last-mile delivery, whether it’s to a store or a customer’s doorstep. Instead of shipping from its Minneapolis DC to two 3PL warehouses in another city — one for retail deliveries and another for household deliveries — the company has one destination.
Comingling orders may not work in all markets if there is no 3PL with line-haul, home and store delivery capability, but that’s the goal, Beabout said.
Office Depot utilizes different delivery methods depending on the market density, Beabout told American Shipper. In more remote areas, such as Montana, the company uses a common national parcel carrier such as UPS or FedEx, and shares the delivery van with other shippers. But in New York and other large cities the company hires regional express delivery companies, such as Courier Express, Laser Ship, and East Coast Connection, and often buys dedicated services because it has enough volume to fill trucks itself.
The new delivery strategy evolved in conjunction with Office Depot’s transition in 2011 to a smaller store format and limiting inventory to the best-selling products, Beabout said. The retailer plans within five years to downsize more than 500 of its 1,110-plus stores in the United States and Canada to between 5,000 and 15,000 square feet from the current average of about 20,000 square feet to better match demand as many customers migrate to its online channel, according to the annual report. As leases expire, the company will either convert the stores or relocate to new locations. About 50 stores will be closed on top of the net reduction of 35 stores since 2010.
At the end of last year, the retailer had 31 small format stores and 48 midsized ones.
Office Depot is not alone in opening more customer-friendly stores with a smaller footprint. Best Buy, Walmart, Kohl’s, Target, rival Staples and OfficeMax, which is merging with Office Depot, are also building smaller stores to reduce cost, gain access to urban markets and better compete with Internet retailers.
In April, OfficeMax launched a smaller version of its stores in Milwaukee geared to small businesses. The 5,000-square-foot business center offers services, including Web hosting, customized Websites and cloud storage computer services. Communal business space within the store lets customers hold informal meetings, network or work on their laptops using free Wi-Fi. The store features products small businesses find useful, such as convertible laptops, smart phones and accessories, business-quality printers and shredders.
Last year, OfficeMax closed 46 stores and opened one in the United States. It plans to have a net reduction in retail space this year with the scheduled closing of five to 10 stores, offset by several openings, according to the company’s fourth quarter earnings report on Feb. 20. From 2005 to 2015, the Chicago-based company plans to slash about 8 million gross square feet of store space through closing unprofitable locations, relocating stores and downsizing to a smaller footprint, officials said on a conference call with analysts.
OfficeMax began same-day store pick-up for online orders in November and recently introduced in-store kiosks to make more products available to customers than are in stores.
The smaller Office Depot stores need to be replenished five days a week. The smaller shipment sizes resemble deliveries Office Depot already makes to its business customers. And many small-format stores, such as those in a mall or an airport, don’t have a receiving dock, which complicates logistics and means that over time the company will use fewer 53-foot tractor trailers and more box trucks to make front-door deliveries, Beabout explained.
Smaller trucks and more frequent deliveries also make sense for bigger stores as Office Depot becomes more disciplined in not overstocking items that take longer to sell or become obsolete.
Greater use of intermodal transport, primarily for Asian imports headed from ports to distribution centers, is another way Office Depot is modifying its approach to logistics. The rail-truck mode for inbound goods and dedicated motor carrier service for outbound loads help take stress off Office Depot’s truck network, Beabout said.
Dedicated carriage moves more than half of the company’s shipment volume to market, while the percentage of shipments from suppliers via intermodal is still relatively small.
Beabout describes Office Depot as a “hybrid omni-channel, push-pull supply chain.”
In other words, officials constantly analyze real-time data about consumer and transportation trends to make sophisticated decisions about how, when and where to transport products.
The company has five Ph.Ds. who run complicated algorithms comparing optimal routes, truck size, inventory levels and cost, the price of fuel, truck capacity and other factors to determine how to distribute goods from warehouses to the end-user based on the total landed cost for each product and the cost to serve each store.
Pencils, for example, are an inexpensive commodity with a small margin that are flowed through cross-docks to stores when they arrive from the manufacturer to minimize the cost of extra handling, while more expensive items such as printers are stored in a distribution center and picked as needed.
The home-grown systems were adapted to accommodate the omni-channel business model. Calculations and distribution methods are frequently updated to ensure stock-keeping units are handled in the most efficient manner.
“I don’t think many, if any, retailers are doing that,” Beabout said.
About 10 percent of Office Depot’s 120 U.S. markets are live with omni-channel logistics, including execution by a single 3PL, and the company is moving quickly to expand its capability, he said.
Office Depot isn’t widely set up yet to receive online orders and ship from stores, as retailers like Nordstrom, Macy’s and Walmart have experimented with, Beabout said. Achieving that level of logistics synergy requires extensive changes to information technology and training of store personnel. The company, however, is delivering from a number of stores in remote locations such as Hawaii, Alaska and West Texas.
The office retailer is also experimenting with same-day pick, pack and delivery from a select few distribution centers, especially for things like furniture, Beabout said.
The OfficeMax merger is expected to close by the end of the year. The companies estimate approximate annual savings within three years of $70 million to $100 million from supply chain network optimization and reducing transportation and delivery redundancies as a result of combining their respective North American supply chains.