In-House Retail E-Commerce Order Fulfillment Distribution Center

When does a fast-growing e-tailer cut the strings with its 3PL partner and bring its distribution processes in-house?

How does a distribution center operate when its inventory is gone in a flash?

What’s more, how do processes differ if the most important metric is the perfect order rather than the lowest cost per unit handled?

Those three questions confronted Chris Halkyard during the design of Gilt Groupe’s 303,000-square-foot distribution center in Shepherdsville, Kentucky.

A high-profile, fast-growing e-tailer, Gilt has built a business around a new and unique retail model: the flash sale. The Web site has more than 7 million members who are given the opportunity to buy luxury and designer goods at inside prices. Gilt sales generally last 36 hours and quantity is limited so when an item is gone, it’s gone. New merchandise goes on sale every day at noon ET, and 60% to 70% of the merchandise will be ordered and shipped within 24 hours. It’s gone in a flash.

Before building the new facility, Gilt relied on two third-party logistics providers (3PL). Order fulfillment was handled in several facilities. The new building not only optimized distribution processes, it also brought them in-house and under one roof.

Working with a systems integrator (ABCO Automation), Halkyard, who is Gilt’s chief supply chain officer, oversaw the development of a distribution system that speeds orders through the facility in a flash. “Orders that go through our mobile robotic picking area are on a truck within 30 minutes,” says Halkyard. “It is possible to have an item picked from one of the other areas and on an outbound parcel carrier in as little as 4 minutes.”

The new facility includes:

• • A 45,000-square-foot area devoted to a goods-to-person mobile robotic picking solution. Newly arrived merchandise about to go on sale is stored on carriers that are delivered by mobile robots to picking stations. Approximately 60% of the overall product mix, including the fastest-movers, are stored in this area.
  • A multi-level pick mezzanine for slower-moving merchandise. Product left over from the previous day’s flash sales moves from the mobile robotic pick area to the pick mezzanine.
  • A bulk storage area where non-conveyables are stored in pallet rack. This area is also set aside for a limited selection of seasonal items that may be stored in reserve.
  • A designated area for processing shoes.
  • While speed is important, the system was also designed to deliver the perfect order. For that reason, a two-step packing and quality assurance process was designed to ensure that Gilt meets the all-important perfect order metric. “Our goal is to get the right items out on time and in perfect condition,” Halkyard says.

The facility is not only efficient, it’s a case study in how distribution supports a new business model in an emerging area of retail.

A new retail model
Gilt didn’t invent the flash sale. According to the Harvard Business Review, that honor goes to Vente-Privee, a European e-tailer. But by all accounts, Gilt founder Kevin Ryan brought the concept to the U.S. market in the spring of 2007.

The idea was to offer private, curated sales of designer brands and luxury goods in limited quantities on a member’s only Web site. The e-tailer assembled a team of buyers who purchase product from high-end brands of men’s, women’s and children’s clothing and home goods.

Quantities are limited: Gilt may receive 1,000 pairs of shoes or it may receive just 100 pairs of shoes. The product is received, processed and ready for sale in a matter of days. New products are launched every day at noon ET; most offers remain on the site for just 36 hours. “Typically, we sell through 60% to 80% of a new item on that first day,” says Halkyard. The speed with which a typical product sells out is a reason the emphasis is on short-term rather than reserve storage in the facility.

In just five years, the company has grown from a start-up to more than $500 million a year in sales. The Gilt team is focused on creating what it describes as “the fastest, most exciting shopping experience online ... all at insider pricing.” “Everything we do is about the customer experience,” Halkyard adds.

To 3PL or not to 3PL
As a fast-growing start-up, Gilt focused on purchasing, marketing and customer acquisition. Distribution was outsourced to a 3PL with one facility in Brooklyn. When the e-tailer outgrew that building, it partnered with Quiet Logistics, a 3PL in Andover, Mass., to fill orders from a second building. That facility was one of the early, high-profile adopters of Kiva Systems’ mobile robots.

With exponential growth, order demands outstripped the ability to distribute efficiently. In June of 2010, Halkyard and his team looked at the sales projected for the holiday season and decided they needed to make a change in a hurry. “We decided we had to be in a new building that was somewhat operational in the next three to four months,” Halkyard says. He also felt the company had matured to the point where it could bring distribution in-house rather than rely on a third party.

“Using a 3PL allowed us to get up and running, but in my view, a proprietary DC is more effective in the long run,” he says. And, Halkyard believed distribution needed to be a Gilt core competency since the e-tailer puts so much of an emphasis on the customer experience, the perfect order metric and the appearance of the order when it was delivered. However, he didn’t want to cut the cord with its distribution partners all at one time.

“I didn’t have the time to hire and train my own management team and they understood our business,” Halkyard says. “What’s more, they had developed our warehouse management system (WMS) and had significant experience in warehouse. That was their value-add.”

Halkyard negotiated a short contract where the 3PL would operate the new facility for two years and then hand it over to Gilt.

Building the perfect order
Once the decision was made to establish an independent facility, Gilt began meeting with a systems integrator to design the building. “We did not start with a product or technology,” says Halkyard. “The business model drove the solution.”

As an example, Halkyard originally considered implementing a pick mezzanine with a conveyor and sortation system for the first wave of products that will be sold the next day. It could be done, he was told, but it would be an expensive solution.

Instead, Gilt implemented the mobile robotic order fulfillment solution it was already using in the 3PL facility. A significant amount of time was spent profiling the SKUs by velocity to ensure that only the fastest-moving items were stored in the mobile robotic area. “We were able to use half the robots and pods as were recommended,” Halkyard says.

The mobile robotic area required about 45,000 square feet. A similar amount of square feet was devoted to a multi-level pick mezzanine to manage slower moving items, such as those that didn’t sell in the first day of a sale. Pallet rack was erected in a third area for non-conveyables, such as strollers, or seasonal items that may not go on sale for a few months. A separate area was designated to process shoes.

Processes were designed to strike a balance between speed and accuracy. “It seems as if more and more e-tailers are talking about their speed of delivery,” Halkyard says. “Speed, however, is not the most important thing to us, because of our business model.”

There were a couple of reasons for that. One is that the facility has a 6 p.m. cutoff time for parcel pickups and orders don’t start rolling into the system until around 1 p.m. “Since we don’t start taking orders for a new sale until noon, we start off the day behind the eight ball,” Halkyard says. “Anything that gets picked after 6 p.m. isn’t going out until the next day anyway.”

Instead, the focus was on the perfect order as defined by Gilt. That includes the right product in the right size, quantity, style and configuration, packed correctly and delivered according to the promise date. Halkyard believes that most customers aren’t concerned whether they get an order in 2, 3 or 5 days as long as its delivered on the day Gilt promises when it acknowledges the order. “I measure everything that is under our control,” Halkyard says. “The only thing I don’t ding us for is if a customer asks for a size 4, we send a size 4 and they return it because it doesn’t fit.”

To deliver the perfect order, Gilt designed a two-step packing process. In the first step, order totes are sorted to a packing station. There, a packer builds a shipping box, prints the packing slip, confirms the item or items for the order and then adds any literature, transport packaging or dunnage. The ready-to-ship package is then conveyed to a quality assurance area. There, the contents of the package are reconfirmed before the package is weighed, taped, labeled and conveyed into the back of a parcel carrier’s truck.

While the process includes extra handling, it leads to a better customer experience.

Up and running
Gilt met its ambitious timeline by implementing the project in phases and continuing to work with its 3PL partners. For instance, the mobile robots were up, running and processing home goods by August. Men’s fashions were up and running in October. Construction resumed in January following a holiday break. During that period, the 3PL in Brooklyn continued to manage the women’s, kids and jewelry divisions.

By March 2011, the rack, pick mezzanine and conveyor system was operational. By July, most of the business had been transitioned to the new facility, with the exception of the jewelry and fine dress business. Those were kept in Brooklyn to be close to the buyers.

“During the 2011 holiday season, we were able to get 90% of our orders out the door within 24 hours,” says Halkyard. “In the spring of 2012, we moved all of our costume jewelry and fashion items into the new facility.” Last March, Gilt also took over management of the facility.

Now that all of the automated materials handling systems are live, Halkyard plans to go live with a labor management system and implement an employee incentive program in 2013. The goal is to reduce the handling costs associated with an order.

While Halkyard is proud of his perfect order metric—hitting 97% across all of the metrics he tracks on his scorecard—the real measure of the facility is how Gilt’s management views the DC.

“One of the biggest compliments I’ve received is from the president of the company,” Halkyard says. “He told me that in the early days, our focus was on top line growth. This facility now gives us the competitive advantage in the marketplace and is considered a strategic asset.”

Be sure to read our Gilt Groupe System Report: Gilt’s new distribution center delivers the perfect order