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Levi Strauss Revamps Value-Channel Supply Chain to Keep Pace With Outlet Shoppers

As off-price stores moved upscale in recent years with the creation of attractive, shopper-friendly outlet malls, the demands of consumers and value retailers changed. Low prices were still expected, but shoppers also wanted a better selection of style and colors. To meet this need, Levi Strauss revamped its value-channel logistics.
Consumer attitudes toward outlet-stores have changed dramatically in recent years, increasing the importance of this sales channel to vendors. Watching this trend, managers at apparel-maker Levi Strauss & Co. saw the need to upgrade supply-chain systems and processes feeding their outlet retailers. Their solution: Isolate these activities in a new distribution center with a singular focus and outsource the operation to an experienced third party. Now overstocks, irregular merchandise and returns no longer clog the arteries of the company's primary distribution centers. Instead, these items - as well as new product samples destined for Levi Strauss sales and marketing teams - flow smoothly through the company's dedicated facility, a new 246,000-square-foot distribution center known as RISE, an acronym for returns, irregulars, samples and exit strategy products. The facility, located in McDonough, Ga., on the outskirts of Atlanta, is operated by GENCO. "We launched the RISE project to better fulfill consumers' expectations for shopping in the outlets, to provide a way for the outlet operators to better manage their inventory investment, and to enhance the value of our products," explains Bud Smith, director of asset recovery for Levi Strauss. "As a result, we became a better supplier to our business partners and we have our costs and processes under control. We feel confident at this early point that the RISE operation gives us a competitive advantage." Headquartered in San Francisco, Levi Strauss is a privately held company owned by descendants of Levi Strauss, who created the first pair of blue jeans in 1873. Levi Strauss today stands as one of the world's leading branded apparel companies. In addition to its line of jeans, the company also markets Dockers, targeted at the business-casual market, and the dressier Slates brand. With sales operations in more than 80 countries, it reported net sales of $4.6bn in 2000.In the U.S., Levi Strauss sells its products both in "first quality" and value, or off-price, channels. Four customer-service centers receive and distribute merchandise for first-quality merchants, while value-channel merchandise is moved through RISE to a network of nearly 160 Levi Strauss & Co. outlet stores, as well as a mix of discount retailers including Marshalls, Ross, T.J. Maxx, A.J. Wright and Value City. Levi Strauss owns eight of the outlet stores. Designs Inc. of Boston operates the rest of the outlet stores east of the Mississippi River, and the Miller's Outpost group of stores of Los Angeles operates the western outlets. All together, the value channel group provides an additional 2,000 stores for Levi Strauss products. As with many U.S. apparel makers, Levi Strauss initially embraced the outlet store concept as a vehicle to move irregular items, clothing returned by customers, overstock/overrun merchandise and exit-strategy products - slow-movers or last year's models. But as customers developed greater expectations for outlet shopping, the company's supply-chain strategists faced some hard decisions. "Ten years ago the outlets truly were manufacturing-driven. A company making product would establish an outlet store, usually at the end of one of their manufacturing facilities, to sell their overruns or irregulars," says Smith. But in the last decade, the outlet concept morphed from a single-store entity into a shopping mall structure with a predictable commercial environment. "The American consumer learned that they could find a wide variety of off-price products in these outlet malls, and the manufacturers, for the most part, realized they could generate revenue by feeding these stores. They evolved them from true irregular houses into pleasant shopping experiences where name-brand companies like Levi, Ann Klein, Polo, The Gap and Nautica combined to provide a great shopping experience for consumers looking for value." In order to fulfill higher customer expectations and to stimulate outlet-mall business, the stores needed to provide a greater variety of product. "That doesn't necessarily mean providing all of the product in every size, but we had to provide some product in every size," says Smith.

For Levi Strauss, this was a big change. The company used to distribute products to the outlets and other off-price merchants in a manner that best suited its interests, paying little attention to the needs and interests of the value-channel merchants. The modus operandi was to ship large batches of mixed products. If an outlet store needed more 501 jeans in the best-selling "heart sizes" of 32-, 34- and 36-inch waists, they had to accept an assortment that included items less in demand by consumers. The information technology systems, such as they were, allowed for no variance.

"We distributed products to our value-channel stores based on what we owned and wanted to get rid of," says Smith. "A particular outlet may have had several years worth of small-waist sizes, but we made them take more of the 28s and 29s in order to get the 32s and 34s they needed. The prices were cheap enough that the buyers were willing to take large assortments that included a little bit of everything in order to get the heart sizes - they could make it work if the price was right."

But as businesses and their increasingly sophisticated IT systems began assigning accurate inventory carrying costs and identifying the value of lost sales opportunities, it became obvious to Levi Strauss that change was needed. Another internal driver for change stemmed from the practice of using all four first-quality customer-service centers (CSCs) to handle products for the value-channel stores - a costly, complex process that tended to gum up the CSC's primary function.
The fragmented nature of the operation undermined efforts to introduce consistency and accountability in the process. "In general, the processes used for handling returns and distributing irregulars were disjointed and outdated," says Smith. "No investment had been made in improving our handling of off-price products for more than 10 years, and our new CSCs intentionally were not designed to handle this merchandise." As a result, returns processing was a slow, manual process lacking in accuracy. There was no consistent returns authorization procedure, and managing the claims and credits was a nightmare, says Smith. Senior management in1998 asked Smith, whose background was in marketing, to take a hard look at the existing situation and develop an outline of business requirements for a new supply-chain strategy to service the value channel. Smith brought his initial findings to the company's distribution/logistics leadership, and together they formed a cross-functional team with additional representatives from asset recovery, information technology, planning and performance, internal audit/accounting and treasury to analyze how Levi Strauss could best fulfill the business requirements. A key question was whether it would make fundamental economic sense to take on this task internally. "We found out what a lot of other companies discovered," says Smith. "Could we do it? Yes, we could. Did it make sense to take resources currently deployed elsewhere and re-focus them on this project? That became a critical issue."

Resource Allocation

With two of its four CSCs having recently been constructed and one completely redesigned, the company's attention was focused on perfecting process flows and maximizing efficiencies in these facilities, explains John Serlin, director of operations for Levi Strauss and Smith's logistics counterpart for the RISE project. One reason for the new facilities was to meet increasing demands from first-quality retailers, and many new processes were introduced along with the CSCs. "Value-added services such as price ticketing, folding and providing garments on hangers were becoming predominant in the retail environment," says Serlin. In the old distribution centers, which were standard pick/pack operations, "we had to physically remove the merchandise from the line in order to perform the value-added work. We wanted to be able to merge those value-added opportunities within the process flow in our new distribution centers." This project also involved a complete overhaul of warehouse management and workflow systems, so the demands on resources were great. Moreover, the new centers complicated the task of feeding merchandise into the value channel, a task that interrupted first-quality product and process flows and constituted an unwanted distraction for distribution center managers. The RISE project team developed multiple scenarios: to continue handling value-channel products within the four CSCs; to consolidate RISE merchandise in one of the four CSCs; or to outsource the RISE operation. The latter option kept looking better, considering the burden already on the distribution/logistics managers and the fact that the skill set required to properly administer the RISE project fell outside of Levi Strauss's core competencies. A detailed RFP (request for proposal) was developed and submitted to a handful of carefully selected companies. "We wanted a company that had done this before and had the experience to provide us with a perspective that we didn't already have, and we tried to think outside of the box," says Smith. Levi Strauss sent the RFP to a select group of 3PLs, several retailers that operate large warehouses, the largest wholesaler of Levi Strauss products, and three companies that already were performing work for Levis in different distribution capacities. After researching the responses, conducting interviews and making site visits, Levi Strauss in mid-1999 selected Pittsburgh-based GENCO to operate a new RISE facility. GENCO proceeded to take the lead on site selection and building design and assigned a project manager and several IT and operations specialists to the Levi Strauss project team. In December 1999, a full year before freight hit the RISE receiving docks, GENCO selected one of its top operations managers, Austin Martin, to oversee the new facility. "That was part of our commitment to Levi Strauss," explains Glenn Mauney, senior vice president for business development at GENCO and manager of the RISE project. "We wanted to be able to hit the ground running when the doors opened." The project team evaluated sites in seven different states. "We wanted to locate the facility where it made sense from an outbound shipping perspective, since freight cost was a major concern," says Smith. An assessment by zip code showed that the center of the off-price channel universe was in Tennessee, just a bit east of Nashville. However, concerns about the labor market, site availability and other issues pushed the project team south and east, toward Atlanta. The state of Georgia was aggressive in going after the business. "One of the things that tipped the scales - both in our eyes and in the eyes of the Levi managers - was the package that Henry County and the state of Georgia put together in terms of tax breaks, tax incentives, job training assistance and investment by the state," says Mauney. "One of the great things about Georgia was that they looked us in the eye and said 'however you want it to happen, we will work with you to make it happen that way,'" says Smith. "Initially we couldn't find an existing facility that fulfilled all of our requirements when we were looking in the Atlanta region, but we found a builder in McDonough who had a cotton field. He told us he could raise a warehouse for us in 90 days. Representatives from the state of Georgia and Henry County stood shoulder to shoulder with the builder and told us that if we chose that builder and that site, the governments would work with the developer to make sure that all the permits and inspections were structured in a way that allowed for a 24/7 project. "The state's pledge also included inventory tax relief, employee selection and job training assistance, and additional tax relief incentives predicated on shifting inbound freight shipments either to the Port of Brunswick or the Port of Savannah. The company earns corporate income tax credits for its use of state ports and the company can apply those credits against its corporate income tax liability to the state. "This program can provide a significant savings for a manufacturer like Levi Straus & Co., which supplies many retail operations and enjoys a pretty good income from these establishments in Georgia," says Tim Evans of the Georgia Department of Industry, Trade and Tourism. Ninety-four days after groundbreaking - four days were lost to a rain delay - the building was occupied. Inbound merchandise receipt began in January, and outbound shipping commenced in February.

How it Works

Here's how the facility works. First-quality merchandise gets returned by customers to retail outlets, which accumulate returns until they reach pre-determined levels. At that point, they contact Levi Strauss, which issues a return authorization and notifies trucking company ABF, based in Ft. Smith, Ark., of the pick-up. Irregular merchandise from off-shore manufacturers enters the U.S. in the same shipment as first-quality apparel. Generally, Levi Strauss anticipates a 4 percent irregular rate in manufacturing, due to issues such as uneven color or snags in the fabric. Consequently, if 100,000 first-quality merchandise units are required of a production run, production managers make 104,000 units. The 104,000 enter U.S. Customs together, and the irregulars are separated from the first-quality units by a consolidator on the U.S. side of the border. The first-quality units move onwards to the appropriate CSC, while the 4,000 irregulars are shipped to RISE.

Exit strategy items - slow-selling, out-of-season or last year's merchandise - also are returned to RISE via ABF once a return authorization is issued. At the RISE facility, GENCO's M-Log (for returns processing) and D-Log (for distribution operations) IT systems are merged on a Unix-based Sun mini-processor mainframe. RISE receives from the Levi Strauss mainframe regular data feeds that include all the return authorizations and other inbound shipment information, which RISE uses as advanced shipping notices (ASN). Levi Strauss and GENCO designed 23 different interfaces between their respective information systems, and Levi Strauss has full, real-time visibility into the RISE data." We receive against those advance shipping notices," explains Mauney. "As product arrives at the dock doors, it's scanned into the system, compared to the ASN and then moved using the M-Log system." M-Log also transfers the data to Levi Strauss, automatically triggering a credit issue to the appropriate merchant. "The timeliness of the function gives us the opportunity to account for any discrepancies between what the store thinks they sent us and what RISE actually received," says Smith. "If there's a dispute, we can, within a matter of days, research the claim and hopefully adjudicate it before the information becomes old. The longer you wait to adjudicate a claim, the harder it is to piece everything back together."

M-Log uses business rules pre-established by Levi to determine product disposition. A file transfer follows between M-Log and GENCO's D-Log system, which directs put-away. RISE uses a process where particular product categories are grouped together, and the put-away is random within those given zones.

A critical function of D-Log is to collapse the number of SKUs represented by incoming merchandise, reducing the 115,000 identifications used by Levi Strauss to 6,000 recognized by the RISE operation. The standard is to receive shipment, change product codes, and sort by size within 48 hours of arrival at the dock door.

The IT systems give value-channel merchants an opportunity to transmit electronic purchase orders based on visible inventory levels and to essentially run replenishment programs by size, an uncommon practice in the outlet business. The ship process is based on label generation. Outbound orders are picked, labels are scanned, and the D-Log system uses an automated process to sort and divert outbound packages to the appropriate ship lane, where individual cartons are aggregated to a pallet. A license plate is attached, and all the product on the skid is scanned to the specific license plate so the system then displays a single palletized unit. Those individual units are scanned as they move through the dock door and onto the trailer. Despite the technology, there are still some old-fashion aspects to the operation, at least on the outbound side. Once outbound shipments from RISE are ready, Martin's staff calls the receiver, asks for a carrier preference, and follows up that phone call with a FAX request for routing, which the merchant must sign and return.

Why all the phone calls and FAXes in an electronic age? Martin explains that it's an industry practice that dates back decades. "In the apparel industry, no one really wants to give you that routing automatically," he explains. "Apparel buyers often use that flexibility to manage their 'open to buy' money." A buyer gets so many dollars a month to spend, and as deliveries hit the receiver's dock, money gets pulled from the buyer's account. "Money gets tight at times, so by making the distribution center call the buyer for routing instructions, it gives the buyer an opportunity to push out that shipment so it doesn't arrive until after the first, which runs into the next month's purchasing power."

It's still early in the process, and like many privately held companies, Levi Strauss isn't overly eager to share a lot of specifics regarding metrics. "Outbound shipping from RISE began in late February, so it's pretty early to start doing a lot of significant analysis," says Smith. "We do know that approximately four million units have flowed into the building, and about three million have flowed out, which is a pretty good start when it comes to turning inventory in a new distribution center." The company's business year began in December, and although the RISE facility only has been open for four of the seven months in the 2001 business year, outbound shipments already are 14 percent ahead of last year's numbers.

Considerable savings continue to accrue on the inbound transportation side of the ledger as well, Smith adds. "It used to be that every retailer sent returned product to us freight-collect, based on transport rates that the retailer negotiated with carriers of their choice. Now, all authorized returns are picked up and delivered to RISE on a prepaid basis by a single motor carrier." The savings from controlling and pre-paying the inbound freight charges alone amount to several hundred thousand dollars annually, he says. And while there are no concrete dollar amounts to point to yet, the efficiencies are obvious to the project planners. "We set about making RISE as capable from a systems perspective as our new customer service centers," he adds. "The evening data feeds from RISE to the Levi computers provide the basis for generating invoices for goods that have been shipped and/or credits for the returns that have been received and processed.
"We control our inventories better and receive goods faster, which enables us to benefit from a quicker sale of off-price products. Together, this makes our off-price business more predictable."

The RISE facility continues to ramp up the volume, says Mauney. "We're using our IT systems and a select set of metrics to measure productivity, then we use that real-time feedback to layer on constant process improvement," he says. "The efficiencies we have been getting out of each process has been increasing significantly, based on our ability to measure and monitor and then flex the labor and processes to accommodate the growing volumes."

In May, RISE shipped approximately 480,000 units through the facility; in June that number jumped to 862,000. "That's a quantum leap, but we've planned for it and have built in the capability to do it," says Mauney. He credits an excellent working relationship with Rhandstad, an Atlanta-based firm, for providing qualified temporary labor to help manage the peaks of demand. "The 862,000 may be a spike, but the numbers are going to keep growing," he adds. "How high is high? That I don't know, but we'll be ready."