January 6, 2014, 2:56 PM

The pick of the lot

Warehouse technology helps e-retailers get orders picked and out the door faster and at lower cost.

Lead Photo

It would be an understatement to say that iHerb Inc., a web-only retailer of vitamin and protein supplements, is a business on a health kick. Sales have been growing at an annual rate of 50% or more for the past few years, with many of its orders shipped to customers in dozens of countries outside of North America.

IHerb is a privately held company and doesn't report its financial numbers, but director of operations Troy VanWormer says it's on course to rank this year well within the top 200 e-retailers among Internet Retailer's Top 500 Guide, which would mean its revenue is north of $100 million. (It currently ranks No. 204, as Internet Retailer estimated its web sales at $99.51 million in 2012.) IHerb processes and ships several hundred thousand orders daily from two distribution centers. One center is in Hebron, Ky., and the second is at iHerb's headquarters in Los Angeles.

VanWormer says he and his team have strived to perfect its fulfillment technology and processes to get orders out the door faster and more cost-effectively. IHerb today uses technology developed and deployed by a team including in-house information technology experts, outside software vendors and a systems integrator to make sure it all works together. The e-retailer organizes its warehouses to minimize operating costs that otherwise would have to be passed onto customers in shipping fees. "We can't play in Asia if shipping is cost-prohibitive," VanWormer says. "A buyer is not going to pay $50 for shipping to get a $50 product."

Warehouses and distribution centers may not get the glory awarded to the consumer-facing side of retail, but it's just as important to a retailer's overall health. And it's not easy to do it well. In a survey of 137 e-commerce executives in fall 2013, research and advisory firm Retail Systems Research LLC found that the largest percentage of them, 51%, cited cost-efficient order fulfillment and shipping as their top operational challenge.

That's why iHerb and other retailers are fine-tuning their warehouse operations to move the most products in the quickest way, while also keeping operating costs—including for personnel and technology—to a minimum. It's a challenge that involves figuring out the right mix of technologies and processes for receiving and stocking inventory from suppliers, and organizing what can be many thousands of SKUs in a way that enables lean teams of workers to pick, pack and ship orders to meet the demands of consumers who expect deliveries quickly.

Yet lowering fulfillment operating costs doesn't have to mean cutting back the range of products warehoused and fulfilled. Ozbo.com, a web-only mass merchant, has ambitious plans to expand the number of products it offers online shoppers by more than 56% by the second quarter of 2014, going from 160,000 today to some 250,000, co-founder Joshua Wood says. Key to Ozbo's SKU expansion plan is maintaining its already cost-efficient fulfillment system.

Ozbo, based about 100 miles north of Philadelphia, operates a single fulfillment center that is within a three-hour drive of more than 100 of its suppliers. The location allows it to run with lean inventory while still shipping all its own orders. Ozbo uses a homegrown warehouse management software and radio-frequency technology, which updates inventory records by scanning bar codes on products, to manage fulfillment. It ships many orders the same day they're received if the items are in its warehouse; for items that aren't on hand, it arranges for suppliers to deliver products to its 65,000-square-foot warehouse within a day.

To manage that quick turnaround, Ozbo operates its warehouse as a cross-dock facility, which means it receives products from suppliers and immediately moves them to fulfill outgoing customer orders. As inventory arrives, Ozbo employees scan product bar codes with radio frequency bar code scanners to check merchandise into the retailer's inventory management system and place them on warehouse shelves. Products already assigned to customer orders are placed in temporary locations in the warehouse, where another team is ready to pick them for shipping. Products not already assigned to customer orders are placed in more permanent areas to hold for new orders. Workers scan the products as they're picked and shipped to record how they've been processed in the warehouse management system.

"Our number of shipments per hour is pretty amazing," Wood says. "With 10 workers on a 10-hour shift, we can ship from 2,000 to 3,000 orders," or about 20 to 30 per employee per hour, he says. That keeps its warehouse operating costs to under 35 cents per package, helping Ozbo to maintain targeted profit margins, Wood says.

Other retailers use multiple Types of warehouse management and material handling systems for receiving and stocking merchandise, then picking and packing items to fulfill orders. In addition to radio frequency, other systems include pick-to-light, robotics and voice-driven applications that give picking instructions through headsets, with each offering advantages for particular types of inventory management, says Ian Hobkirk, founder and managing director of Commonwealth Supply Chain Advisors.

IHerb.com uses several types of systems to pick merchandise in the quickest and most cost-efficient way, depending on an order's destination and how SKUs are arranged in the warehouse. At its Los Angeles distribution center, which fulfills international orders to customers in Asia and other markets, workers wear headsets and hear directions about where to find SKUs in the warehouse to pick. Vocollect, a unit of Honeywell International Inc., provides the system.

The L.A. facility also uses pick-to-light technology manufactured by Dematic Group that uses a series of colored lights to indicate to warehouse employees which warehouse racks contain the right items for multiple orders prepared simultaneously for batched shipments, such as groups of orders going to China or to a single large customer like a retail chain, VanWormer says. The pick-to-light system is designed to help workers pick large numbers of items from multiple racks in a designated section of the warehouse.

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