Gaffney: Over the last two-and-a-half years, return on that asset has been a very important part of our economic success story. As a retailer, one of our largest assets is inventory, so investments in other assets that help us reduce investments in inventory can easily get a good payback. The frontier of automation are these 100 percent fully automated warehouses. We’re not there, but we’re also not empty shells with everything moving around on hand trucks. On a scale from 1 to 10, with 10 being the most automated, we’re at 6 or 7. Part of that is driven by where we think we can get returns. A large portion of our business is direct delivery to customers rather than to our retail stores. In some of our newer facilities that service that business, we have some of the more recent advances in material handling. These include zone-divert technology in our pick modules, and we’re in production in a couple facilities with automated box construction, induction and checkweighing. That hasn’t necessarily demonstrated a returns case for us at scale, but it’s something we’re looking at.
MHM: Which technology represents the biggest chunk of your material handling investment?
Gaffney: In the vast majority of our retail and delivery fulfillment operations, the single largest piece of material handling automation is a heavy emphasis on pick-to-light in our break-pack operations. That has produced great returns for us in terms of increasing productivity and allowing us to have more consistency out of engineered standards and increases in quality. This has allowed us to be more flexible in our break-pack workforce so you can use more temporary labor to deal with peaks. Pick-to-light replaced picking to a manual ticket. It allows someone to be more productive and easily trained at that part of the operation.
MHM: When did you make this change?
Gaffney: In our retail distribution centers we installed pick-to-light in 2002. In our fulfillment center operations, which do direct-to-customer shipments, we’re in the process of putting that into our existing base. We built new facilities with pick-to-light in the modules and we’re in the process of putting it in the others that have sufficient picking volume to justify the investment.
MHM: Is your approach to automation off-the-shelf or customized?
Gaffney: We do buy off-the-shelf, and then rely on the folks we partner with to help us integrate those solutions into our core software. Our core warehouse management software, EXE, is used in our retail operations, which are largely case environments. In our delivery operations, we use Manhattan’s Pkms. We’ve integrated the conveyor system and the pick-to-light systems with that WMS.
MHM: Was there a challenge in going from the manual operations to automated material handling and managing that transition with your WMS?
Gaffney: On the software and technology side, that was a relatively straightforward project. That’s a credit to all f the providers. They’ve done a good job working on those integrations. We did go through an extensive and phased rollout process to change the way we operated in our distribution centers. It probably took us a year in total to move through three phases of migration. But most of that involved change management for our folks, not systems integration issues.
MHM: Describe your logistics workforce.
Gaffney: Most of our workforce is high school educated, and we pay them slightly above average wage rates — $12-$14. For those who demonstrate leadership, we do have a culture of promotion from within. We like to take promising folks on the pick lines and look for lead candidates, and from those, look for good supervisory candidates.
MHM: In direct-to-customer facilities, who are the customers you serve?
Gaffney: The vast majority are small to medium businesses. We also serve large enterprises, and that’s the fastest-growing part of our business. It runs the gamut from Fortune 1000 to small businesses. We’ve been in the delivery business since 1991. This year the retail business will be about $8 billion of the $14 billion total. The rest is delivery.
MHM: It sounds like the more automated approach to material handling is fairly recent.
Gaffney: That’s true. Most of those facilities have grown up as traditional manual ticket pick-and-pass operations. The highest level of automation was a conveyor. The more recent versions of those buildings have moved from pick and pass to automated zone divert, from manual ticket to pick-to-light. We’ve always had automated merge sortation in all these facilities.
MHM: Were your customers driving you to the more automated approach?
Gaffney: Our higher-end customers want us to be a low-cost, high-quality operation. Our automation investments have been targeted at places where we could be more efficient and drive up quality.
MHM: Many small retailers and their suppliers seem to fear investing in technology. Did Staples suffer from that as well?
Gaffney: Any time you look at automation and these kinds of material handling investments, you’re looking at what’s going to happen over a five-year time horizon. Your assumptions about returns are often driven by what you think volume will be in a period of time that’s sufficiently far out that it’s difficult to convince yourself that your crystal ball is right. That’s the No. 1 thing that puts pressure on a business case for a material handling investment: How much of the volume case that makes the investment return is something people feel confident about?
MHM: Does part of the buy-in process involve the CEO?
Gaffney: Our chief executive level and top executive level are knowledgeable in material handling. Our CEO will often describe Staples as a distribution company, not a retailer. We hold monthly operating reviews in field locations and our last one was in our delivery facility in Dallas, Texas.
MHM: Is what you do in one facility done throughout your distribution network?
Gaffney: The ideal is to have everything the same, but that rarely happens because you rarely start from nothing. We have four, close to a million-square-foot warehouses to support our retail operations. They are in Rialto, California; Terre Haute, Indiana; Hagerstown, Maryland, and in Killingly, Connecticut. They are similar, and to a somewhat informed observer they may look like the same operations. We’re attempting to drive them to be even more consistent.
MHM: Do you share learnings among those facilities?
Gaffney: One of the things we’ve focused on in the last year is rapid adoption of best practices across similar operations. We piloted pick-to-light in one of those facilities and quickly rolled it out to all four. In our delivery business where we have 24 facilities, those are in different stages of their evolution. Some are smaller and were acquired, while others are brand-new greenfield facilities. There’s more consistency in our newer facilities.
MHM: Are supply chain initiatives driven from the top down?
Gaffney: Almost all our initiatives are driven by the functional executive or the line executive who is either trying to meet a customer need or an efficiency need.
MHM: Where are you in that continuum?
Gaffney: I’m in a newly created position here at Staples that brings together all our distribution, transportation and inventory management functions. That happened at the beginning of this year.
MHM: What drove that change?
Gaffney: It’s almost a natural outcome of a strategic process we started engaging in at the beginning of 2003 — our Summit supply chain improvement program. As with many good companies that aspire to be great companies, we looked at where we were doing a good job but thought we could do better. Supply chain was one of them. We made a concerted effort to improve the way we looked at supply chain from end to end.
MHM: Did you look outside your industry for examples?
Gaffney: We’re constantly looking at what others accomplish, including our competition. Outside the retail industry, Dell has done some wonderful things with the economics of its business through supply chain operations.
MHM: Where do you stand with RFID?
Gaffney: We’re paying very close attention to it. We’ve done a fairly comprehensive study to look at all the places in Staples where it could create immediate value. Right now we’re waiting for more adoption to drive down some of the prices. There’s not a sufficient returns case for us on just case and pallet labeling, so we don’t see value in paying an early adopter premium. Unlike some of the other folks who see some return, our processes for store receiving are pretty accurate, so there’s not a lot of opportunity to dramatically improve accuracy. We’re confident that at some point, as the case and pallet tags become more prevalent through broader industry adoption, we’ll move our bar code-based practices to RFID. But it’s not clear that the tags will ever become cheap enough that you can expect item-level tagging for the vast majority of items that we sell. That’s the big question mark.