Report prepared for the AWOHi Corporation

1. Americas Women-Owned Hardware International (AWHOi): Capacity Plan of Logistics and Distribution Centers Report prepared for the AWOHi Corporation by Orange Advanced Logistics Consulting, S.A., Santiago, Chile August 16, 2013

2. Expanding boutique hardware and concierge services for the modern home and garden Shop more AWHOistores now in the USand Mexico! Utilizing premium artisan materials in the traditions of centuries of american and european design and quality.

3. “…hooks, bobs, gadgets, hinges, rivets, racks, pins, polishes, and the rest. Elegant boutique hardware accessorizing the modern home and garden.”

4. Presentation Outline • Background • Purpose and scope • Methods and results • Recommendations

5. Background

6. Background

7. Purpose and Scope

8. Purpose and Scope Revise an existing capacity plan for the network of AWOHi distribution centers in each of the US region, Mexico region, and US-Mexico combined region: • Locations and capacities of existing and new DCs • Implications for existing and new DCs in throughput, inventories, storage, and service regions • Transit times • Costs • Network inventories • Returns on investment from capacity expansions

9. Methods

10. How Can We Improve the Supply Chain Management? Goal: To deliver the right product to the right place at the right time for the right price, while minimizing system-wide costs and satisfying service requirements. (Source: Ron Askin, PASI, 2013)

11. Can the US Dist. Network Handle Growth? • Capacity: 6,190 Stores • 2012 Store Count: 4,617 • 2018 Store Count: 5,661 YES!

12. Tested Scenarios

13. Methodology • A Optimization/Heuristic Algorithm to allocate DCs to Stores and determine tour lengths • Assign stores to DCs • Assignment Optimization Problem (solved with CPLEX) • Generate vehicle routing tours • 4 Stops/Tour • Nearest neighbor heuristic • Local search algorithm • Use dual values of Assignment Problem

14. Assignment/Tour Results 11 DCs 10 DCs Euclidean Results Rectilinear Results 9 DCs

15. Store Assignments • Opening DCs in Oregon & Florida

16. Store Assignments • Opening Oregon, Florida, North Carolina and closing Georgia

17. DC Distance to Store Distribution Average Distance: 197.02 miles St. Dev: 167.81 miles

18. DC-to-Store Distances Average Distance: 197 miles Standard Deviation: 167 miles Upon Initial Analysis: Open DCs in Oregon & Florida by 2018

19. How Should Imports be Handled? • 2012 • Each DC receives ~371 import truckloads per year in full FEUs • 2018 • Number of stores expected to increase by 22% • Fraction of imports will increase from 5% to 12% • Each DC will receive ~1,085 import truckloads per year in full FEUs Almost 3-fold increase in volume of imports by 2018 Should we add one or more Import DCs?

20. Import DCs • Operations • Unload shipping containers • Often re-palletize products • Ship pallets to DCs • Location • Usually near container ports or inland ports • “Lumpy” demand • Shipments are large and relatively infrequent • Layout/Design • Large pallet storage areas • Large drop yards for container storage • One Import DC may serve many DCs • Can be combined with order fulfillment in one facility (current situation in case study)

21. Sq. Ft. 1,000,000 380,000 600,000 748,000 155,000 800,000 250,000 600,000 165,000 600,000 1,700,000 2,200,000 600,000 1,250,000 150,000 105,000 500,000 115,000 783,000 2,100,000 1,400,000 250,000 3,300,000 Academy Sports Advance Auto Parts Bass Pro Shops Best Buy Citi Trends Fashion Dollar Tree Farmer’s Furniture Fred’s Hugo Boss Icon H & F IKEA Kmart-Sears Kohl’s Lowe’s Midwest Air Technologies Noritake Oneida Paper Tigers Pier 1 Imports Target The Home Depot Tire Rack Wal-Mart (2) Importers Serviced by Port of Savannah 20+ Savannah-area import DCs, 200+ more within 5 hours Source: Georgia Port Authority Presentation, Curtis Foltz, Oct 1, 2007

22. Large Retail Distribution Network

23. Should we have Import DCs? • Advantages • Reduced overseas transportation costs • More efficient management of inventory and product flow • Lower overall inventory levels • Reduced operating costs, space usage at DCs • Disadvantages • Capital investment and fixed costs of opening a new facility • Increased transportation/handling cost to supply DCs

24. Should we have Import DCs? • Do we have sufficient volume to justify a dedicated facility? • Almost 3-fold increase in import volume, avg = 3 containers/day • 10 DCs • Benchmarking • Target: 1,788 US stores, ~30 DCs, 4 Import DCs* • Walmart: 4,500+ stores, 158 DCs (42 regional DCs), 5 Import DCs** • How many Import DCs? • One: West Coast • Two: West and East Coast • Four: West, Gulf and East Coasts, Mexico • Impact of multiple Import DCs • Reduced transportation costs to supply DCs • Reduced risk from natural disasters, labor strikes, etc.

25. Consolidate Import Routes

26. How to Improve Warehouse Operations? • “SKU proliferation causing issues within the DC in terms of slotting and inventory carrying” • Investigation needed • Review of inventory management system to eliminate wasted storage capacity and obsolete SKUs • Address WH layout and operations – particularly for new DCs • DC-to-Store • Pallets • Cases • Pieces

27. Warehouse Layout and Operations • Reserve area • High storage density • Forward area • Fast-moving items (0, 1 or all rule) • Picking activities • Pick-to-light • Pick-to-voice • Bucket-brigades • Technology exploration • Person-to-goods • Goods-to-person

28. How to Respond to Growth in Mexico? • 330 retail stores • US and imported products enter Mexico through Laredo, TX • DC in Monterrey, with capacity of 360 stores • Crossdocks located in Mexicali, Mexico City (transfer operation) and serviced from Monterrey

29. Expected Growth in Mexico • Growth of 196 stores • 150 in Mexico (113 in Mexico City) • 46 in Central America

30. Estimated Increase in Transp Costs Assuming $1.23/kilometer and current network

31. Is Current Capacity Sufficient? • No! • Either increase capacity of current system or add DC

32. Is Current Capacity Sufficient? • Currently the crossdock has very limited storage capacity • Locating a DC in Mexico City seems desirable +113 Stores +46 Stores

33. Recommendations • Open a DC in Mexico City • Increase responsiveness to stores • Closer to Central America to service 46 new stores • Reallocate Southern Mexican stores from Monterrey to DC in Mexico City

34. Changes to Monterrey DC • Continue to serve 40 stores via Mexicali crossdock • Re-evaluate the stores served directly and allocate to Mexico City DC • Incur a net reduction in capacity and size

35. Integration of US/Mexico Supply Chains? • Slow-downs at border crossings • Although there are 3PL companies who provide distribution services for cross-border replenishment • http://www.joc.com/exel-builds-new-distribution-center-support-usmexico-cross-border-supply-chains-laredo-texas • http://www.inboundlogistics.com/cms/article/us-mexico-trade-two-way-traffic/

36. What is the Return on Investment for Adding DCs

37. Return on Investment (cont.) Bottom-Line for Expansion Plan: An investment of $11 million over one year in an additional DC would deliver net present value of over $29 million in cumulative net benefits, an ROI (calculated as net benefits/total costs) of 280% (for every dollar spent on the new DC, the AWOHi will receive their original $1 back, and an additional $2.80 in incremental benefits), with five-year horizon (including 12 months of development, construction, systems integration and deployment). Payback period is approximately one year after the 12-month construction phase.

38. Risk Management What are the effects of uncertainties on the performance objectives of the DCs network, and what can be done?

39. Risk Management …

40. Risk Management (cont.) …

41. Recommendations

42. Recommendations • Proceed with the construction of a new Florida DC in one year with 400,000 sf • Proceed with construction of a new pacific northwest DC in two years with 300,000 sf • Monitor to assure DC-to-store travel times by 5% overall • Re-integrate the import DCs to realize 20% savings on transoceanic transportation • Reconfigure the DC-to-store network including to double the tour lengths from four to eight stores and gain 10% savings in transportation • Continue to realize DC network efficiency gains through advanced technologies including RFID and warehouse-science efficiencies, “shrinking the distribution chain”

43. Recommendations (cont.) • Adapt the DC network continuously with attention to reducing transportation, inventory, labor, and facility costs toward growing customer value and ROI on incremental investments • Track the actual growths, throughputs, inventories, etc., relative to the forecasts of 22% growth to 2018 • Realize additional savings through lease agreements and labor-sharing agreements with other shippers • Continue to emphasize a quality metrics program for the DC-to-store network to identify anomalies and reduce variance through adjusting tour lengths, DC-to-store relationships, etc. • Continue to realize efficiencies through integrating the Mexico and US networks in vendor-to-DC transportation with import DCs, freight forwarders etc. • Add 50% capacity to the existing Mexico DC to address the new 46 stores, and monitor the situation for additional DCs into the future past the 2018 horizon

44. Acknowledgments • Dave Wheeler, Principal, Supply Chain Strategy, St. Onge Company, York, PA • Participants of the Pan-American Advanced Studies Institute on Logistics on Simulation and Optimization of Globalized Physical Distribution Systems • Pontificia Universidad Catolica, Santiago, Chile

45. Orange Advanced Logistics Team Pres. Osvaldo de la Fuenteof1969@gmail.com Ing. Brittany Green brg73@pitt.edu Ing. James Lambertlambert@virginia.edu Ing. Tish Pohl lpohl@uark.edu Ing. Christopher Wishoncwishon@asu.edu

46. AWOHi gets bigger-- Network of distribution centers addresses 22% growth to 2018 i H W O A

47. Questions?

48. Issues we need to address • Growth in number of stores, allocation of stores to DCs • SKU proliferation causing issues within the DC in terms of slotting and inventory carrying • Address with WH layout and operations • Highly skewed demand implies a need for both reserve and forward areas • Technology be employed to increase throughput • Growth in imported products • “Competition migrating to highly responsive supply chain” • Implies more DCs, not fewer? • More frequent trips to retail stores? Investigate routes with > 4 stores per route, but more frequent? How would this impact configuration of network? • Develop online sales and start doing order fulfillment at DCs? • Increasing fuel costs

49. Make sure these issues are addressed… • Given the migration to incremental import product • How will inventory be impacted if current direct to DC approach is continued • What alternative import methodologies should be considered • For each methodology considered, determine the: • impact to inventory • impact to facility costs • impact to freight • impact to store service

50. Make sure these issues are addressed… • Determine if the current DC network is appropriate given the future store growth, DC capacities, increasing fuel costs • If additional DCs are needed, determine the: • appropriate location and relative size of each additional DC • impact on the current DCs throughput, inventory, and service area • impact to DC to store freight • impact to transit time to stores • impact to DC costs (fixed and variable) • the impact to network inventory • if the changes to the network financially justified based on a reasonable return-on-investment (ROI)