American Eagle Outfitters Inc. supply chain chief Shekar Natarajan drew laughs at Sourcing Journal’s annual Fall Summit when he said distribution and fulfillment inefficiencies are heading toward an “a-parcel-lypse.” But there was truth to the sentiment, all kidding aside.
Natarajan delivered a firm reality check for shippers and carriers alike when he spoke last week about the need for the industry to band together moving forward to share resources when it comes to fulfilling and shipping orders.
“For everyone who thinks they can build a supply chain, an elastic supply chain, I’ve got some bad news for you,” he told attendees. “American Eagle does 225 million units a year. Walmart does 50 billion units a year. So what Walmart does in a day-and-a-half, American Eagle does in a year. And what Amazon does in a half a day is what American Eagle does in a year. So it doesn’t matter how much you throw at the resources, you’re surely not going to be elastic.”
Available resources to fulfill current and expected demand of online orders are limited. The macroeconomic environment is only exacerbating that shortage, Natarajan said.
He pointed to the example of gas prices and the amount it would take for warehouse workers to fill up a tank of gas to come to work. If he paid someone $20 an hour, but it takes them $80 to fill up their vehicle’s tank in California, the math to incentivize that worker doesn’t pencil out, he went on to say.
Geopolitical uncertainty in Europe and China are adding to further instability.
“I feel that we’re going to continue to live in this world of uncertainty,” he said. “I think we’ve seen the costs come down slightly on the inbound side, but the challenges are still in front of us cost-wise, SLA [service level agreement]-wise, time-wise and the cost of capital is also very expensive these days…. It’s going to be a tough year ahead of us.”
Making supply chains and logistics networks more nimble to fickle consumer trends or macroeconomic headwinds is key, going back to Natarajan’s point on elasticity as he called for greater connectivity across companies’ supply chains.
“We [at American Eagle] have taken the journey to make our supply chain elastic. And so the nature of elastic supply chains is that when the demand goes up, you’re able to get more access to resources and when the demand goes down, you’re able to use fewer resources without having to overcommit or under-commit. And that’s the problem we have,” he said.
Edge fulfillment was a move American Eagle adopted to decentralize its network, situate product closer to the customer and, ultimately, get it to doorsteps faster and cheaper.
“Shipping a product from the center of the country is not the right answer,” Natarajan said. “So we decentralized our operations completely. And so if you look at the financial performance, we are proud of our financial performance.”
The company saw cost savings in the range of about $50 million when it first began testing the concept of decentralized warehousing back in 2020. At the same time, in the case of reverse logistics, restocking an item now averages about three days compared to the 14 days it took in the past.
Natarajan likened the signpost guiding American Eagle’s philosophy to a supply chain FICO score that’s helped keep the retailer on track when it comes to buying, fulfillment and delivery.
Ultimately, the idea is not for every company to build its own fulfillment network, but to share on the backend so that when demand contracts or expands, the hubs can adjust accordingly and pricing power doesn’t remain in the hands of just a few market players.
Quiet Platforms, to that end, is rapidly adding to its roster of customers with more than 60 that include American Eagle, Aerie, Outdoor Voices, Birdies, Mack Weldon, Baggu, Summersalt and Boll & Branch.
The third-party logistics firm currently touts a nearly 100 percent inventory accuracy rate, with 137,000 units shipped daily on average. Its services portfolio includes everything from e-commerce and omnichannel fulfillment to reverse logistics, freight and a brand incubator for digital start-ups.
The executive estimated that if brands continue to go it alone when building out their supply chains, it would cost about $1.6 trillion to pay for the 5,000 distribution centers and 15 million people working in warehouses necessary to meet that demand. At the same time, those companies will lack the scale of, going back to Natarajan’s earlier point, a Walmart or Amazon that’s necessary to keep costs down and efficiencies up.
“The challenge is how do you get out of this?” Natarajan said. “And what we have done is basically we said ‘Let’s convert our cost center for supply chain and make it a profit center.’ Let’s start with basically democratizing our supply chain because someone else’s scale actually lowers our cost and it lowers their cost, too. It’s like creating an open cloud pretty much, and that’s the answer to the problem.”