The apparel retailer is heavily investing in its distribution centers to make them more efficient, more automated and less dependent on labor. Gap is generating a 20% return on its investment, the retailer said at the Manhattan Momentum conference this week.

Consumers’ ongoing shift to shopping online has led Gap Inc. to rethink its supply chain operations, Kevin Kuntz, senior vice president, global logistics fulfillment, told attendees at the Manhattan Associates Momentum conference in Florida this week.

For instance, Gap has spent the past three years overhauling its distribution centers to better serve online orders with more automation for two reasons: more consumers are shopping online and the labor needed to fulfill an online order is six- to seven-times that of the labor needed to replenish store inventory, Kuntz said. 

The changes were necessary because the process of shipping an e-commerce order, which may have six or seven garments delivered directly to a customer’s door, is different than delivering 6,000 or 7,000 garments to replenish a store, he said. And so the retailer needs more labor to pack many small orders for online, whereas store replenishment requires fewer employees. In the past few years, the retailer introduced more machinery, such as machine-learning arms for sorting, that reduced or cut out manual work.

The apparel retailer also reduced its number of distribution centers to 14 facilities in 10 locations from 19 facilities in 19 locations, which means each center had to increase its output. The goal was to have the centers be more automated and use less labor, Kuntz said.

Gap, which has 8,000 global supply chain employees, delivers more than 60 million e-commerce packages a year and makes 260,000 deliveries to its 3,200 stores across its five brands: Gap, Banana Republic, Old Navy, Athleta and Intermix.

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After a rough 2015 and needing to open “pop-up” distribution centers in order to support the holiday peak demand, Gap made a “significant investment” in one of its distribution centers in Fishkill, New York. The warehouse was up and running as of August 2016, and Gap felt good going into the fourth quarter that it could keep up with demand and would not have to work its supply chain employees seven days a week.

Unfortunately, that facility caught fire soon after it opened, which impacted inventory for its Gap, Gap Outlet, Banana Republic and Banana Republic Factory brands. Gap had to execute a plan, starting the day after the fire, to reroute more than 100 million units. 2016 was no longer going to be the “cake walk” Gap thought it would be, Kuntz said.

“The unexpected does happen and you better be ready for it,” Kuntz said.

The retailer survived; however, service levels are still not where they used to be, Kuntz said. For example, stores are used to getting five to six shipments a week of inventory replenishment and now the stores only receive around two deliveries a week, Kuntz said.

Still, this allowed Gap to start with a clean canvas and install several automated processes that are decreasing its labor costs and increasing efficiency. Gap has invested “tens of millions of dollars” in warehousing equipment, such as cranes that retrieve and put away inventory, which has decreased the number of times a human has to touch the product from seven touches to one. Gap invested in two mechanical arms that use machine learning to sort 250,000 products a day in total from both arms. Plus, Gap now has a conveyor belt that automatically bags, labels and packages online orders. This machine alone replaced 28 workers, he said.

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“The expense is coming with great payback,” Kuntz said. “It is reducing our dependence on labor, and these projects are having a return on investment of 20%.”

Plus, Kuntz added, the investment is paying itself back in less than two years. For example, for one Old Navy location, Gap reduced the fulfillment cost to 8 cents from 12 cents per unit.

Gap is No. 20 the Internet Retailer 2018 Top 500.

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