How does a traditional brick-and-mortar store fight off the challenge of Amazon.com and other online merchandisers? By turning what looks like a weakness into a strength.

Sears Holdings Corp. encompasses two of the most familiar names in old-line retailing: Sears, Roebuck & Co. and Kmart Corporation. Both have struggled in recent years to compete with e-commerce powerhouses such as Amazon. Nowadays, they’re expected to fulfill customer demand across all channels. And while Amazon supports a broad network of giant distribution centers nationwide, it doesn’t incur the expense of operating thousands of retail stores.

The growing dominance of the omnichannel can’t be denied. Eighty-seven percent of consumers today shop online before buying in stores, 70 percent use a smartphone for shopping in the store, and 80 percent research new products on social media.

Traditional retailers have to keep up. “If your price point is wrong, if your value proposition isn’t there, you won’t get the customer,” says Bill Hutchinson, senior vice president and president of supply chain with Sears Holdings.

The challenge for the company was to match the one- to two-day delivery service that has become a key offering by e-commerce retailers. It needed to assuage the frustration of online buyers who had previously been given imprecise commitments as to when their orders would arrive. Sears Holdings looked to implement an “order-by, get-by” regime, in order to cure the problem and keep pace with the heightened expectations of internet shoppers.

Sears Holdings was up against some significant built-in pressures, including capital constraints, service expectations, limited D.C. capacity for processing dotcom orders, and the need to take an omnichannel approach to fulfillment. “If we continued to grow at 25-percent CAGR [compound annual growth rate], e-commerce would run into capacity problems,” says vice president of logistics services Jeff Starecheski.

The answer lay in the very thing that appeared to be Sears Holdings’ biggest burden: its physical stores. But not every one of those 2,350-plus locations across the country was a candidate for efficient online fulfillment. Sears Holdings decided to carve out a subset of its store network, with locations based on geographical coverage and how each one lined up with the UPS delivery network.

The Cheetah Network

Dubbed “Cheetah” stores, these carefully selected sites allow Sears Holdings to draw on its existing footprint, along with inventory that’s already on the shelves. There was no need to build additional distribution centers as in the Amazon model. In the process, store workers at a given location can fulfill hundreds of orders each day.

Creation of the Cheetah network allowed the retailer to service more than 99 percent of the U.S. population with two-day ground transit, and more than 80 percent with one-day delivery. “That’s a considerable uptick in conversion,” says Starecheski.

Packages shipped by Sears Holdings to customers from its stores, online D.C.s and retail D.C.s number in the millions each year. To make sense of that complex operation, the company needed an optimization engine that would calculate the lowest total fulfillment cost, based on location of the request inventory. In addition, it embraced sophisticated visibility tools and promoted collaborative business processes across the network.

By consolidating distribution at a select number of stores, Sears Holdings could better focus its training efforts on those associates who would be doing the picking and shipping. Each Cheetah store has a designated processing area, where orders picked from the floor are packed and scanned for delivery. The company has integrated its I.T. systems so that online fulfillment teams are communicating with the stores throughout the day, confirming order receipt, picking, packing and the completion of fulfillment. Each location works to a designated pickup time for UPS, to ensure that packages make the sort deadline at the parcel carrier’s hub.

The arrangement meant that some store associates were being asked to perform tasks unrelated to – and possibility in direct conflict with – the needs of customers on the floor. One can imagine a scenario whereby an online order picker snatches away an item that a shopper traveled to the store to buy. But a near-real-time visibility system allows Sears Holdings to update shelf inventory reports every 15 minutes, and make adjustments accordingly.

At the same time, the company takes care to ship more product to Cheetah stores to reduce the risk of stockouts. And it withholds some inventory from online sales to ensure the availability of items on the sales floor that are slated for “Door Buster” promotions, according to Hutchinson.

In any case, the stores get credit for any online sale fulfilled from their stock – a clear incentive to participate in the program. “If you incur the cost,” says Starecheski, “you incur the profit.”

Fine-Tuning the Program

The program has grown in complexity since it was launched. In addition to fulfilling online orders from the Cheetah stores, Sears Holdings has repurposed portions of its existing distribution centers. They operate in the same manner as the Cheetah backrooms, picking and shipping according to UPS cutoff times. The D.C.s play an especially valuable role as supplementary shipping points during times of peak demand. Through the use of a weighting factor, the retailer can temporarily adjust the network to account for periodic shifts in activity.

The flexibility to handle peak activity was high on the company’s list of priorities. During the most recent Christmas shopping season, Sears Holdings’ stores and retail D.C.s together were able to fulfill more than twice as many orders as in the same period a year earlier.

Key to the success of the initiative was an emphasis on collaboration across business functions. The Cheetah network was created by individuals from logistics, online sales, inventory management, engineering, information technology and retail services. They worked closely together on the development of processes, I.T. requirements and the fulfillment logic system.

An algorithm devised by the cross-functional team takes into account all possible fulfillment locations, then selects the best one according to total cost. If a given facility can’t fulfill the order, then the system initiates a “retry” to come up with the next-best option. A dashboard maintained by Sears Holdings’ online business unit enables visibility across the network, and lets the retail services team spot capacity constraints and opportunities for rapid fulfillment.

The project yielded rapid benefits. Collaboration among the various disciplines helped the company to expand its store-fulfillment network by 60 percent. Sears Holdings is now achieving fill rates of 99 percent, versus 60 percent to 70 percent previously. Stores are processing between 750 and 1,000 orders per day during peak periods. Average time in transit during peak is 2.08 days, down from three days or more just two years ago.

Sears intends to make further adjustments to the network, to promote its “Shop Your Way Rewards” platform for omnichannel fulfillment. The emphasis, say Hutchinson and Starecheski, is on achieving “the perfect order,” in tandem with maximizing labor productivity. Both are considered crucial to keeping traditional retailers in the e-commerce game.

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Sears Holdings Corp.