Vitamin Shoppe gets in shape for omnichannel

The fast-growing retailer revamped fulfillment and got firm control of its inventory to develop near seamless service for its health-conscious customers.

By Peter Bradley

Here's the vision that Vitamin Shoppe has for its omnichannel strategy: A customer can buy merchandise online or at a store, can buy in person or via any number of mobile devices or computers, can obtain a view into inventory in the warehouse and the local retail outlet, and can get goods delivered from a DC to his or her home or local store—or even have goods delivered from the local store's inventory.

Rich Tannenbaum, the company's senior vice president, supply chain and information technology, sums up the ultimate omnichannel goal for Vitamin Shoppe this way: "When shopping experiences are equally seamless and excellent, only then have we achieved omnichannel. That's where we're headed, one step at a time."

That journey has been more of a marathon than a sprint—one the company has been engaged in over the past four or five years. And it is one that continues. "Our omnichannel story is still being written," says Tannenbaum. "It continues to evolve for us."

For Vitamin Shoppe, the decision to move toward implementing a broad omnichannel strategy grew out of several factors. It had experienced robust organic growth—the retailer of vitamins, minerals, sports nutritional supplements, and such now operates more than 675 stores—and had made a major commitment to direct-to-consumer sales. That growth created constraints for its existing fulfillment operations and its inventory management process.

Before the company began to focus on omnichannel, it already had successful store and e-commerce businesses. "What we lacked was a precise and frictionless way to serve our customers seamlessly across all our channels," Tannenbaum explains.

What the company did have, and which proved to be a major asset, was abundant data on its customers. Nearly 90 percent of the company's sales are from customers that take part in its loyalty programs. As a result, the retailer has a substantial amount of information on how its customers reach the company and shop, and what they purchase. "The data began to tell us that customers are going to want to purchase anywhere, meaning they might want to buy in a store, on a desktop, on a tablet, through our call center, you name it," Tannenbaum says. "The question for us was whether we needed to be able to fulfill orders with the same flexibility and speed. We arrived at the answer that we do. We want to be able to provide the best possible service at a reasonable cost."

A FOCUS ON THE DETAILS
But Vitamin Shoppe would have to overcome a number of challenges to get there. Its legacy catalog system could not provide the seamless service required. Supply chain visibility and inventory decision-making capabilities needed to improve.

"Our performance metrics were good, but they weren't great," says Tannenbaum. "They were not good enough for the speed and unprecedented merchandise availability we needed. We lacked the basic business processes to serve our customers wherever and however they wanted. We had high variability and inconsistent execution at nodes across the supply chain."

All of that has changed dramatically for the better. But getting there required a large number of critical steps.

At the outset, Tannenbaum says, the company decided it would focus its omnichannel development on three specific areas: inventory planning and forecasting, distribution and fulfillment, and business processes and the supporting IT systems.

Tackling the inventory issue was perhaps the top item on the agenda, with the twin goals of offering customers "unprecedented merchandise availability" while reducing total inventory networkwide. The company offers 22,000 stock-keeping units (SKUs) overall, and about 8,000 in each store. So it was also crucial to develop tools to ensure that customers, even those in the stores, had easy access to the full array of products.

As a result of steps taken over the past couple of years, the company has come a long way, sharply reducing inventory throughout its network, increasing inventory turns, and, at the same time, improving in-stock availability across its businesses. Five years ago, Tannenbaum says, store in-stocks ran at about 90 percent, nearly 20 percent of online orders were back-ordered, and inventory was turning about three times a year—while performance was good, there was room for improvement.

Further, Tannenbaum says, the company identified specific supply chain areas ripe for improvement. For example, store replenishment could have been faster, and with the company's rapid growth, it was not achieving the economies of scale that should have resulted. "We kept adding headcount in our back-office functions, but not enough was focused on the right value-added activities."

The problems, he says, came from taking an overly broad view of inventory, managing to averages, and looking at inventory in large "buckets." "We needed to get to a more granular level to manage inventory. We needed to think about inventory at the intersection of SKU, channel, and fulfillment method."

That was a capability the company decided not to develop internally, Tannenbaum says. Instead, Vitamin Shoppe outsourced its inventory forecasting and planning to 4R Systems, a software-as-a-service provider that specializes in omnichannel inventory management for retailers. "Implementing a profit-optimized system that looked at inventory at the SKU/channel/fulfillment-method level allowed us to make purchasing decisions and deploy inventory with the laser-like focus we wanted."

It also freed up professionals in the Vitamin Shoppe supply chain organization to concentrate on areas such as vendor performance, process improvements, speed, and the customer experience. Inventory ordering and allocation tasks that had taken six to eight hours of each person's day now took 15 minutes.

The changes included a greater focus on vendor performance, with vendors scored on metrics such as leadtimes, on-time shipments, and fill rates. "We really worked with our vendor community on speed," Tannenbaum reports. As a result of those efforts, leadtimes on purchase orders have been cut in half. As part of the process, select vendors, such as some handling refrigerated goods, began shipping direct to stores.

The Vitamin Shoppe also changed the way it worked with carriers. The company took control of inbound transportation to the DCs. "Gaining control and access has served us really well, as we have achieved more visibility into goods in transit," Tannenbaum says. On the outbound side, the company built tools to gain that same kind of visibility by "scanning products in and out of every hub in our carrier network."

EFFORT YIELDS SUBSTANTIAL GAINS
The result of all that work was a major improvement in inventory management throughout the supply chain. "It took a couple of years, but we went from 90 percent in-stock in our stores to 97 percent, and we simultaneously decreased inventory in each of our stores by 25 percent," Tannenbaum says. "We reduced back-orders in our e-commerce business by 75 percent, and we increased our inventory turns by 35 percent. Our fill rates on our purchase orders have improved by 40 percent. And we have doubled the number of on-time shipments into our distribution centers."

Transit times from the DCs to stores were cut by about four days even as adding stores in locations like Puerto Rico and Hawaii increased the average number of miles. In fact, fulfillment has become so fast and reliable that more than 50 percent of SKUs in stores have on-hand inventory rates of one or two units.

The retailer's success at trimming its inventory, however, revealed an unexpected problem: inventory accuracy in the stores was not where it needed to be to provide reliable information to customers. Accuracy at some stores was as low as 60 percent. "A big piece of omnichannel capabilities, we believe, is about inventory visibility," Tannenbaum says. "Part and parcel of that is having correct inventory numbers." Accurate inventory was crucial to making store inventory visible to customers on their desktop or mobile device so they could determine which channel they wanted to use.

The company put significant effort into changing processes to sharply improve store inventory accuracy. The changes involved shifts in scanning policy, physical inventory and cycle counting, receiving processes, and reporting tools for store managers. As a result, store inventory accuracy now stands at more than 90 percent. That allowed Vitamin Shoppe to make store inventory visible on its website, a critical part of its omnichannel goals.

FULFILLMENT INFRASTRUCTURE REVAMPED
Closely connected with improving the inventory process was revamping distribution and fulfillment. The company knew it had problems with both processes and network design. "We needed to get faster and get more accurate," Tannenbaum says. "And we needed to be able to scale our supply chain network in a flexible kind of way."

Four years ago, all distribution was handled from a single DC in North Bergen, N.J. That had worked well when the company was smaller. But now, with a larger store base, cycle times were slower than desired, and inventory accuracy and productivity were low. The DC also experienced high turnover. Additionally, the growing number of stores, increased same-store sales, and SKU growth in the direct-to-consumer channel had strained DC capacity and slowed throughput.

"We knew we needed to do two things," Tannenbaum says. "We needed to dramatically improve execution in our one and only DC. And we needed to build a fulfillment infrastructure so we didn't just have one DC."

The Vitamin Shoppe turned to Fortna, a supply chain consultancy, for help with a network design project. That included a 10-year model that evaluated transportation, capital costs, fixed and variable distribution costs, and service standards.

Addressing the existing DC fulfillment process was one of the first and highest orders of business. To fix the issues, Vitamin Shoppe took a number of steps to address internal processes, shifting from large batch operations to smaller units of work; examining slotting and days of supply in forward pick faces; focusing employee measurement tools on accuracy, productivity, safety, and attendance; making changes to its warehouse management system (WMS); and introducing wave management in the DC.

Today, as a result of those changes, Vitamin Shoppe is able to guarantee customers that orders received by 6 p.m. will ship the same day. Inventory accuracy has skyrocketed to 98.5 percent from 91 percent.

Changes also needed to be made to the distribution network. One of the key steps was to introduce a West Coast distribution center, an operation that Vitamin Shoppe outsourced to Weber Logistics, a warehousing and transportation management company based in southern California.

"We wanted to start that quickly and found a great partner in Weber Logistics," Tannenbaum says. He says Weber was able to quickly accommodate Vitamin Shoppe's needs with respect to its piece-picking processes, could handle the high SKU count, provided strong visibility, and met its client's requirements for speed and service to customers. Weber handles store replenishment and direct-to-consumer fulfillment for the Western U.S. out of a 50,000-square-foot section of a large multiclient DC in Fontana, Calif. The operations allow for same-day shipping of orders received by 3 p.m. Pacific time. Harry Drajpuch, Weber's CEO, says both store and direct-to-consumer shipments are handled through the same pick and pack system.

Those changes were crucial, but Vitamin Shoppe also needed additional fulfillment capacity to accommodate its growing business, and expansion of the New Jersey facility was not possible. Working with Fortna, the retailer chose a greenfield site in Ashland, Va. There, Fortna oversaw the design and implementation of a new 311,000-square-foot distribution center, including the procurement and integration of all material handling equipment.

"Getting the network design right was the initial critical step," says John Giangrande, a senior account executive for Fortna. "We looked at factors such as cost-to-serve and transportation costs to arrive at the best solution for Vitamin Shoppe. Then, we custom-designed a distribution center that would support its aggressive omnichannel customer service goals and growth projections, while achieving expected results."

To develop the requirements for the new DC, Fortna and Vitamin Shoppe took close looks at order profiles and growth, cycle times, SKU dynamics, and the benefits of inventory sharing across channels. Then, they designed picking methodologies, storage media, and processing flows that could be modified and expanded as Vitamin Shoppe's retail and online businesses grew and evolved. One more thing: "We felt it strategically important to keep our retail and direct-to-consumer inventory together in the same operation," Tannenbaum says.

The new DC opened in June 2013 and began shipping to stores in September. It is still rolling out its processes. Currently, the new DC ships to approximately 200 stores; it will add the direct-to-consumer fulfillment component in the next 12 to 18 months.

A FOCUS ON PROCESS
The final piece of the omnichannel strategy development project is new business processes.

As for what the retailer hopes to achieve, Tannenbaum summarizes it this way: "We need to be able to meet the customer wherever, whenever, and however they want, by building capabilities around buy online, pick up in store; buy online, ship to store; buy online, ship from store; and being able to manage store special orders and every permutation of those."

The goal is to make the customer experience as seamless as possible, he says. "It is a multiphased approach. We've turned on inventory visibility and in-store tools for special orders for shipping to stores or the customer's home. Next year, customers will be able to shop online and pick up at the store. Eventually, we believe some e-commerce customers could be fastest served if we have the capability to use the stores as fulfillment nodes. That's a later part of the journey for us."

But with much of the marathon complete, it's a journey for which Vitamin Shoppe has the legs.