How Outsourcing Saved Christmas

Oct. 1, 2008
After a disastrous season in 1999 when it tried to break into on-line sales, Toys R Us was determined not to disappoint families during another holiday season

For a kid at Christmas, the only thing worse than getting a bad gift (remember the pink bunny pajamas in “Christmas Story?”) is getting no gift. After a disastrous season in 1999 when it tried to break into on-line sales, Toys R Us was determined not to disappoint families during another holiday season.

The mass toy retailer found a good fit with fledgling Amazon was gaining skill in building electronic storefronts and providing fulfillment for an ever widening array of products. From its founding in 1994 and launch in 1995, Amazon had taken a steady approach to evolving its capabilities in marketing, promotion and, unlike many of the firms that didn't survive after the dot-com bubble burst, fulfillment.

Building on its success with published materials (books, video cassettes, compact discs, etc.) Amazon had begun evolving merchant relationships in other retail sectors, just as Toys R Us was looking for a solution to its on-line retail woes. The two struck a 10-year agreement. Amazon continued to grow and prosper, turning a profit for the first time in the fourth quarter of 2001 and Toys R Us gained a robust, working electronic storefront and no complaints from disappointed children.

Toys R Us is the brainchild of Chuck Lazarus who launched a baby furniture store in the post-war baby boom era of 1948. He soon found customers were asking for toys and, as the requests continued to expand that portion of the business, toys overtook baby furniture. Toys R Us currently claims over 1,500 freestanding destination toy and baby specialty stores worldwide (including its sister brand Babies R Us). These include over 680 international stores in 33 countries.

Mirroring its early entrepreneurial spirit, the company formed in 1998 (and later Unfortunately for Toys R Us, the 1999 season was disastrous for the retailer as many on-line orders didn't arrive in time for Christmas. It turned to Amazon, which had demonstrated success with on-line fulfillment, and signed a long term contract to outsource its electronic storefront and on-line fulfillment.

By all accounts, the situation turned around and both Amazon and Toys R Us prospered. Toys R Us had become the second largest toy retailer after Wal-Mart and at least one estimate suggests Toys R Us was the most popular of Amazon's on-line markets and had added $100 million in sales for Amazon.

When Amazon's merchant agreements started including competing toy retailers, Toys R Us pointed to the exclusivity guaranteed in its contract with Amazon and that was the beginning of the end of their relationship.

When the end of the on-line agreement came, Toys R Us had roughly 90 days to transition to a new on-line fulfillment model. It took back its domain and came to Exel for help with fulfillment.

Exel was doing some work for Toys R Us managing some backroom functions at its Manhattan facility. Now it would have to help Toys R Us establish an on-line fulfillment system that would be fully functional by the beginning of the peak holiday selling period just 90 days away. Exel had a 300,000-square-foot facility available in Columbus, OH and it started taking deliveries from the Amazon distribution center that had been handling Toys R Us orders.

Though the Toys R Us headquarters is located in New Jersey (and Exel has facilities in that area), Columbus was selected because it offered good access to a large portion of the US population. The Chamber of Commerce estimates 65% of the US population is within a 500-mile radius of Columbus or well within a two-day range by ground transportation.

The trucks from Amazon were coming thick and fast (each carrying as many as 500 to 1,000 SKUs), and Exel opened a temporary site to sort and process the receipts so it could get them into the larger distribution center that would handle the current holiday peak season and serve until a larger, more permanent site was completed. That facility is a 547,000 square-foot distribution center with three automated towers.

The core warehouse management systems from Manhattan were able to communicate with the Toys R Us on-line provider and with the SAP system operating at Toys R Us.

Exel was able to bring in all of the product from Amazon and have over 10,000 SKUs available for allocation through the Toys R Us Web site in time for the holiday season. That first season required a tremendous effort from Exel, with three operations going at once and working through the Thanksgiving holiday. The season was a success, netting Exel an award from Toys R Us as logistics partner of the year.

The “whatever it takes” attitude had pulled them through with what was undoubtedly a disproportionate amount of resources on the Exel project management team, information technology and the workers themselves. From there, 2007 was a year to reexamine and essentially revamp the operation. Exel and Toys R Us held a three-day, off-site collaboration event which yielded 170 “takeaways” for 2007. One was the implementation of a third tower in the new facility that was now going to house the Toys R Us operation. But Exel also dug deep and rewrote many of the operating procedures based on what it had learned in that first year. It replaced some less efficient, ad hoc process and formalized best practices to improve the operation.

Design and engineering as well as operations planning are only part of the resource challenge Exel had to meet. Its size and scope were an advantage in bringing resources to bear on an issue or a problem and moving forward with the initial ramp up. A more conventional team took over once the critical first season had successfully passed. The facility handles an estimated 4 million cartons per year with a steady-state work force of about 200 employees. For a retail operation like Toys R Us, the ratio of management to worker is very high. But that's during the non-peak season. When peak season approaches, Exel will ramp up to over 1,600 employees, starting in mid September.

Planning for the peak season starts in mid March. The heaviest volumes flow through the facility in about a six-week period, and for that the facility goes from a five-day to a 24/7 operation.

Recruiting seasonal workers is a challenge in a region that is rapidly developing as a distribution hub. Other retail and non-retail distribution operations handled by Exel and other logistics providers create a strong demand and with companies like Limited Brands (The Limited, Victoria's Secret, etc.) having a significant presence in the region, distribution center workers are in high demand.

Exel is clear with its seasonal workers that the role is, in fact, seasonal. But at the end of the period, Exel takes the time to evaluate its seasonal workers and sort out the best talent. It offers incentives for those seasonal workers to return for the next seasonal peak, including increased pay each season they return. A few are able to work their way into permanent positions, but the majority continue as seasonal workers.

The core workforce is important in the seasonal ramp up. Exel is able to hire a number of new graduates from university logistics programs and offer them an opportunity to develop their skills in this intensive environment. In addition, the facility houses customer service teams and information technology, an in-house project team and engineering. Those new graduates and other Exel workers have an opportunity to transition into the roles they want to take on and advance within Exel either locally or in its global network.

The Exel facility recruits heavily from the area and had outsourced the process to an agency, but it found when it did its own recruiting, the quality and retention rate were higher. It is building a recruiting center at the distribution facility which will help introduce the workers to their work environment during the interview process. In addition to getting a feel for the commute to the location when the candidates come out for an interview, a large window in the recruiting center looks out on the distribution center operation and will let them see the environment where they will be working.

The Exel campus is located in an industrial development that is along a bypass highway that encircles the city of Columbus. The Columbus Chamber of Commerce helped support mass transit service to the area so that workers would have an alternative to driving. This helps address some of the concerns raised when the workforce swells by 1,000 to 1,400 for the peak (a phenomenon which is being repeated at other distribution centers in the area).

Exel's core workers are heavily trained to work with the temporary workers in a more cooperative and supporting role. The regular workers get to work as trainers or in an expanded supervisory role that offers them some variety and could lead to growth opportunities in their own careers.

The back office support also ramps up for the season because, with so many additional workers, keeping labor scheduling, hours and wages straight is important for worker satisfaction and helps with retention. During off-peak periods, Exel stays in contact with its temporary workforce. It has regular communications with them and also hosts events involving them.

The core group of Exel workers is cross trained and flexible in where it works, so those individuals are able to float during the season. Temporary workers are trained in one area and spend their entire six-week season in that job. Part of the recruiting center Exel is adding to the facility is set up for training. It has mock-ups of work stations and actual equipment the workers will use.

Active recruiting, careful screening and selection, training and familiarization with the job, competitive wages and good incentives and a sense of community with its temporary workers are clearly helpful tools to meet the heavy surge for the holiday season, but the Toys R Us operation offers another benefit Exel promotes to those workers — the opportunity to help put a smile on a child's face at Christmas.

Steve Nissen, director of operations, and Scott Montoya, general manager, CHRA Retail Americas for Exel were interviewed for this story.

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