For today’s retailer, competing in the demanding world of the omnichannel carries a high price. But it’s one that U.K.-based Argos was willing to pay.

Argos is a general merchandise retailer with more than 840 stores in the U.K. (And soon to rise to 1,000.) It’s a market leader in homeware, electrical products and toys, to name just three major categories. Total sales are approximately $7.5bn.

Throughout much of its 45-year history, Argos has been a catalog-centric business. But that model was no longer sufficient for the internet age – especially in light of the dominance of e-commerce giant Amazon.com.

Argos is hardly a stranger to the internet. More than half of its total sales are sourced online. And it was the first U.K. company to generate £1bn ($1.3bn) in sales through mobile devices.

But the nature of the retailer’s fulfillment network didn’t lend itself to the demands of modern-day e-commerce. Argos was printing more than 20 million paper catalogs each year and fulfilling through a paper-and-pen ordering system, with no visibility of what was in stock, according to distribution director Phil Hull.

That had to change. Having conducted research on customers’ expectations, the company was determined to position itself as a leading digital retailer.

The journey would take five years.

What Argos learned at the outset was no surprise. Today’s online shopper wants fast, convenient and consistently reliable home delivery; the ability to choose between home and other points of pickup; a seamless link between e-commerce, mobile commerce and physical stores, and a simple means of returning any product.

Early on, Argos knew it couldn’t succeed by aping the fulfillment network of Amazon. Instead, it would draw on the one advantage that Amazon lacked: an extensive network of physical stores. From the standpoint of e-commerce, the trick was to envision them as a collection of nationally distributed warehouses.

Other retailers have sought to fulfill online orders from their stores. Indeed, that capability is becoming essential to the success of many brick-and-mortar operations. But the solution for Argos would prove to be more than a matter of picking product from the store that’s nearest to the customer.

The problem was that Argos’s stores varied considerably in size and product range. Hundreds of smaller stores were likely to lack key items ordered online. Even those that stocked the desired product would be subject to inconsistent and lengthy lead times. No customer was willing to wait several days for an order, which could show up anytime during the day of delivery.

Need to Reengineer

Argos would need to reengineer its entire supply-chain operating model. The key lay in identifying those stores that could effectively serve as hubs, and those that would be designated as “spokes” in support of the “mini-warehouses.”

Foremost in Argos’s plan was the need to meet customers’ demand for same-day pickup or home delivery of essential items – up to 20,000 SKUs.

Argos devised a new hub-and-spoke fulfillment model with the help of the Supply Chain Guru software from LLamasoft, Inc. The design would have to account for the administrative costs of running a hub, along with the delivery costs associated with each configuration. And, of course, it would have to yield the desired rapid fulfillment and tight delivery windows.

LLamasoft consultants used the vendor’s software to build models and run optimizations based on multiple scenarios. The exercise included a series of complex delivery-cost tradeoffs that took into account density ratings, distance from the hub and the cost of spoke-store replenishment. Preliminary design was followed by regional trials and an updating of the Supply Chain Guru models to reflect current conditions.

The “mini-warehouse” concept was the winner among several options, which included boosting the frequency of shipments from the distribution center to stores, increasing stocks within the stores, and increasing the number of distribution locations.

Factors to be taken into consideration for the hub-and-spoke model included each store’s geographic coverage, backroom storage area, and space for parking and loading of vans. To make possible same-day delivery, each shipping point could be no more than an hour’s drive time from the customer. And each hub would have to operate around the clock, 365 days a year, at least for online fulfillment purposes.

Argos and LLamasoft also assessed the possibility of running “dark hubs” – fulfillment locations that don’t double as retail stores. They could fill in gaps where pockets of demand weren’t feasibly met through shipping from stores. In the end, such sites turned out to be necessary – in fact, Argos had to speed up their modeling and construction in order to take pressure off the stores, said Phil Gibbs, LLamasoft’s executive director for Europe, the Middle East and Africa.

The parties started off with a “blank canvas,” Gibbs said. They knew from the start that 31 stores could potentially serve as hubs but not spokes; 152 could be either, and 15 could be hubs but lacked delivery operations. The rest were up for grabs. However, it was determined that each hub could effectively support no more than five or six spoke locations.

Blanketing the Country

The final model had to cover 11,000 sectors as defined by U.K. postal codes. Millions of deliveries would have to conform to actual customer orders, order cutoffs and delivery time windows. In addition, Argos wanted to launch same-day delivery on Sunday, a service that no other U.K. retailer was providing at the time.

Like many projects of such broad scope, this one began with a trial, in October of 2013. It involved five designated hub locations. Lasting a year, it was intended to answer a number of key questions, including the optimal size and layout of trucks, shift patterns, time windows, and overall system design. The locations were subjected to stress tests to gauge their effectiveness during periods of peak demand.

In October of 2014, Argos and LLamasoft rolled out the full hub-and-spoke network, recruiting drivers and hiring trucks. A year later, it put into place its “hub-to-home” service. The dark hubs were added in 2017.

In the midst of the transformation, in September of 2016, Argos was acquired by Sainsbury’s, the U.K.’s second-largest supermarket chain. That deal necessitated further tweaking of the model, to reflect an even wider network of stores.

In the end, with the aid of the Supply Chain Guru software, Argos created 173 hub stores, supported by approximately 500 fleet vans and 2,500 drivers. (At the same time, said Hull, it removed some $126m in inventory from the spoke stores.)

The transformation allowed Argos to provide same-day delivery for 20,000 items. It operates with four three-hour delivery slots throughout the day, and three “in-day” cutoff times for same-day delivery, the last at 6 p.m. The result is same-day service, seven days a week, to 95 percent of U.K. households, for a delivery charge of £3.95 (around $5.23). At the same time, Argos has achieved a single view of stock across the network, according to Jeff Metersky, vice president of solutions strategy with LLamasoft.

Argos intends to expand the number of products that qualify for same-day delivery. But the system as it stands today represents a huge transformation for the big retailer – one that it considers well worth the effort. “If we hadn’t done this,” said Hull, “I’m not sure we would have been here today.”

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