Even before the COVID-19 pandemic, companies — particularly those involved in the omnichannel space, such as American Eagle Outfitters (AEO) — faced capacity constraints and rising costs. As its e-commerce demand continued to steadily increase toward 50% in 2019, the retailer knew it needed to innovate its supply chain in a way not yet achieved in the retail industry.

AEO felt that the notion of supply chain as a competitive advantage is a myth — it’s supply chain at hyperscale that is a competitive advantage. All retailers face the same 1,300-mile problem with one solution: proximity. That means getting inventory close to the end consumer.

When considering the many options in terms of which of a vast set of shared problems to address first, AEO opted to solve for those critical final miles to the end consumer.

The company’s supply chain team developed a five-year strategy to reduce overall supply chain expenses while increasing speed to customers through focusing on AEO’s most costly and valuable asset: inventory.

In 2020 AEO began a network transformation that emphasized improving operational efficiency in the critical final miles to the end consumer. The company decided to decentralize its operations by moving from two distribution centers to a seven-facility model with five “edge-fulfillment” locations, while also making a shift from a push-based to a pull-based inventory management model. This involved onboarding eight regional delivery providers to complement AEO’s existing national carrier network. AEO also reduced its buy-online ship-from-store (BOSS) program from 900 brick and mortar locations to a select, critical few, selected on the basis of geographical demand.

On the technology side, AEO built IT tools to augment existing systems, introduced scientific planning methods, and implemented new inventory policies to drive increased profitability and markdown reductions.

After already diversifying by positioning facilities at the edge, giving AEO a greater than ten-day advantage over others in the industry through localized inventory, AEO strengthened the network by leveraging more regional carriers and optimizing the flow of goods to deliver better performance.

In order to mitigate lead-time variability, as delays in bringing product into the country mounted, the team developed a machine learning (ML)-based model, utilizing inbound data to better estimate lead times for assortment planners and diversified inbound providers.
Within the distribution center four walls, AEO brought in more automation to increase productivity, built a digital twin to simulate potential outcomes prior to actual implementation

Further, to capitalize on the regionality of a node-based network, AEO set out to prioritize the proper positioning of products as close as possible to consumers. AEO developed calculations to optimize in-store display quantities, and removed forward weeks of inventory coverage from store back rooms. The company reduced inventory in low-grade stores and distributed the available inventory to stores with higher sales. AEO built algorithms and applications to continuously monitor, manage and balance inventory levels across the network, by location, in support of demand.

Amid all of this, AEO made the decision to acquire two supply chain companies and began offering its new capabilities to 50 other brands, turning its supply chain from a cost center to a profit center. AEO’s supply chain team say it was no easy feat to convince others in the company that it would make sense for a traditional retail company to invest in supply chain as a business. But they were able to convincingly demonstrate that supply chain is no longer a back-office function, but is instead a front-office function critical for the future.

The success of the program was dependent upon reducing operational costs, boosting customer satisfaction, smoothing inventory flow, driving faster delivery options, balancing inventory levels (within both our fulfillment centers and store locations), and preventing stock-outs and overstocking.

The results include doubling the company’s profitability, saving several hundred million dollars in freight and markdowns, and improving inventory turnover productivity. Using 10% less resources, AEO reduced transit days to the end consumer by 35%, saved on more than 2 million additional packages by decreasing split shipments by more than 10%, and decreased miles traveled per package by more than 15%.

It took AEO 15 years to transition its network from multi-channel to omnichannel with store fulfillment included, but the company managed to activate its omnichannel network with regional nodes in 18 months.

With the right network in place in 2021, AEO doubled down on its efforts to optimize and innovate, taking the next step of its journey by narrowing in on three distinct components: inventory, edge fulfillment and transportation. In short, the company says, they’re getting product to the consumer faster, cheaper and better — and with a better customer experience.