When Dave Schneider, director of logistics, joined Pep Boys in 1996 he saw the best opportunity to improve earnings would be by reducing labor costs. He did not, however, want to simply re-engineer the company's distribution centers. He decided his focus would be on implementing changes in the business plan to reduce labor requirements across the enterprise—retail stores and distribution centers. In other words, he focused on things like better slotting of products rather than reducing headcount.

"Optimized slotting," says Schneider, "continually contributes to our ability to keep our labor costs low."

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Pep Boys DC may deal with 36,000 SKUs and 70,000 order lines per day. Before bringing in Manhattan Associates (Atlanta, www.manhattanassociates.com) to create a new slotting program, Pep Boys slotted its distribution centers by department, while stores were merchandized by category. The result was that when a shipment from the distribution center arrived at a store, employees had to lug totes from aisle to aisle to put the merchandise onto the shelves or hang items on the pegboards.

Where to start
The new slotting plan for the distribution centers began at Pep Boys' retail pegboard hooks. Since products live together in categories in store aisles, creating family groups, why not apply this strategy in the distribution centers as well?

"You have to look at a variety of factors in establishing the program in a distribution center," says Peter Schnorbach, senior director of product management, Manhattan Associates. "You might have pick-line balance questions if there's a lot of conveyor; like-item separation can reduce mispicks; or kitted items might be placed together."

In the case of Pep Boys, new groupings were created to ensure that store shipments consisted of reusable totes packed with aisle-specific, family groups of SKUs. By changing to this slotting strategy, store-stocking time was reduced, on average, about 30%, from 18 hours to 12 hours per delivery.

"We know labor and slotting are directly related," says Schneider. "Each time we fine-tune our slotting, we watch our productivity rates climb."

Some slotting strategies call for getting all of the fast movers to the front of the racks to reduce travel time for employees. "The fact of the matter," says Schnorbach, "is that strategy only works in a simple warehouse. You have to take into consideration physical attributes of the product, mix of SKUs and the type of racking available."

Schnorbach calls it doing a "haves/needs analysis." This is a matter of looking at the product moving through the distribution center and noting what kinds of racking are in place. It might be that there is too much pallet rack and not enough push-back rack. It's all about finding the proper balance.

The solution to the Pep Boys' challenge was the creation of logical pick zones within each of its five distribution centers, which range in size from 400,000 sq. ft. to 600,000 sq. ft. Within an active pick zone, product is slotted according to its physical attributes, pick frequency and location in the company stores. Aisles are set up in a perpendicular fashion and items with the greatest pick frequency are stocked in carton flow racks on the right side of the aisle and in end caps at the end of aisles. Slow movers are located in bin shelving on the left side of the aisle.

This layout helps shorten picking travel time and distance as order selectors can easily pick the bulk of products from the carton flow rack and end cap locations, with an occasional need to walk down the aisle to complete an order with slower-moving goods.

Working the plan
"Historical knowledge, particularly where you have seasonal items, is critical," says Schnorbach. "We can load in a forecast [into the software] of what someone thinks is going to happen, or we can load in a plan someone predicts if the season or product mix is different from previous years." Seasonal merchandise and shortened product lifecycles require constant vigilance of the slotting strategy.

At Pep Boys, an analyst in each of its five distribution centers makes sure the facilities are reacting to changes in product seasonality, new product introductions and variations in sales demands. Each facility completes a major reset every six to nine months as product mix changes and stores are remodeled or re-merchandised.

Slotting can benefit the upstream and downstream players in the supply chain, says Schnorbach. Replenishment at Pep Boys has been a particular beneficiary. Products can now be slotted into the right sized locations. In general, for repack products, a three-week demand capacity is maintained for products in the carton flow area and a six-week demand capacity is stocked for goods in bin shelving. This configuration has helped to minimize replenishments and increase pick lines per replenishment trip. In addition, using calculated capacity values within the slotting optimization software to set replenishment levels in the warehouse management system (WMS) ensures a high average cube per replenishment trip.

"There are three separate, yet related processes going on in a warehouse," says Schnorbach. "Managing inventory is accomplished through the WMS; managing labor is done through a labor-management program; and managing the space and capacity is what slotting solves."

A company will install a new WMS and see a 20% bump in productivity, he adds, thinking it's solved its labor or slotting problems. In time, as product gets lost or not put into the right spot, the need for a slotting program becomes more obvious. Schnorbach says a warehouse with a WMS, but lacking a slotting or labor management program, is probably running at only about 65% efficiency. And that is why a slotting program can quickly show 25% improvements in efficiency and a payback in less than a year.

Pep Boys originally calculated that its slotting program would yield a potential annual savings of more than $2.2 million. In truth, the savings have been even higher because of less tangible items. Among the savings have been things like reduced shipment damage, improved inventory control, reduced employee injury rates and improved capital asset utilization.

The slotting optimization plan has also made the company more responsive to business changes. It has been able to reconfigure its distribution centers to support remodeling and re-merchandising of its retail stores in record time.