American Eagle Outfitters flying high on digitization

American Eagle Outfitters (AEO) has soared above its competitors thanks to its digitized distribution network and optimization engine for order fulfillment. AEO has a bird’s-eye view on its inventory across distribution centers and retail stores and has translated efficiencies into convenience for customers.

American Eagle Outfitters (AEO) serves a demanding and evolving customer segment: 15-25 year-old consumers with high expectations of apparel selection and convenience.  Founded in 1977, AEO has approximately 1,000 stores internationally, with the majority in the US and Canada [1].  Over the past decade, AEO has had to adapt to changes in consumer behavior and trends in the retail apparel industry, such as declining foot traffic in malls, a more mobile-centric consumer, and demands for better and faster customer service.  By digitizing its distribution centers and adding cross-channel visibility into its inventory, AEO has achieved a connected ecosystem to deliver orders faster and to give customers a more convenient shopping experience [2].

Distribution Center Management

American Eagle Outfitters has deployed a software system and optimization engine (called warehouse execution system, or WES) that it uses in its two main distribution centers in the US.  At the receiving area of the warehouse, incoming packs of merchandise are immediately scanned and put on an 850-foot conveyor system, and the WES makes a real-time decision about how the product should be routed through the distribution center [3].  The WES decides where the product is most urgently needed, based on the pending pool of orders across retail replenishment requests and direct-to-consumer orders.  There’s no needless division of storage along product, retail brand (American Eagle and aerie), or sales channel lines, and as a result, the optimization engine has reduced labor costs because less picking is needed [4].

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Customer Order Fulfillment and Preferences

Given the visibility into inventory across distribution centers and in retail stores, customers are now provided with more selection when viewing AEO’s apparel online.  Batches of customers’ online orders are processed approximately every 8 minutes within AEO’s distributed order management system, and automated decisions are made about how and from where a customer’s order will be fulfilled.  A customer’s online order can be fulfilled from a distribution center, via “ship from store,” or, in the case of multi-item orders, using a combination of fulfillment methods [4].  As a result, AEO has managed to improve delivery times on customer orders, and more than 90% of customer orders have delivery times of two business days or less, which is a two- to four-day improvement over the previous system [4, 5].

AEO has also rolled out shopping alternatives to better serve their customers like the “Reserve, Try, Buy” program, in which mobile app customers request that up to 5 pieces of clothing are held for them at a nearby retail store [6].  The Reserve, Try, Buy and ship-from-store options maximize each retail store’s inventory exposure to customers who are shopping online, which helps with shedding products that are about to go out-of-season [6].  Although the process is seamless from the customer point-of-view, the Reserve, Try, Buy process could still become more automated, as the employee at the store must physically set aside the items and kick off an email process to let the customer know the items have been successfully reserved.

What’s next?

At the distribution centers, AEO has a short-term goal to better automate equipment maintenance.  Currently, there is some limited digitization in place to track performed maintenance, as technicians scan a bar code with their iPads to feed into a computerized maintenance management system (CMMS) each time they work on a piece of equipment.  However, technicians still roam the 1.6-million-square-foot distribution center in Pennsylvania looking for the “tell tale squeaks, noises, [and] leaks” of the equipment [7], instead of using more automated and predictive maintenance technology.  Given that AEO’s business is highly seasonal around back-to-school and year-end holiday periods [8], even a small breakdown during a peak time could jeopardize their ability to meet strict customer service-level agreements [7].

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AEO is also experimenting with leveraging beacon technology in its retail stores to send messages to customers’ smartphones.  So far, AEO has prompted customers to try an item on in the fitting room to earn a reward [10].  AEO could consider personalizing these messages based on past purchase and online browsing history to highlight specific items that the customer might like that are currently available in the store.  However, this would likely be a longer-term project, as AEO’s SVP Mark Rose admits that “the company is sitting on more data than it knows what to do with” [11].  The company should invest time in understanding their data to better interpret customers’ signals and maximize message effectiveness.

While AEO is ahead of some of its direct apparel competitors, there’s still much opportunity for digitization, from predictive shipping to 3D printing of replacement parts for its distribution center conveyor systems.  How might AEO improve its responsiveness to customer demands?  Could AEO surge ahead to become a fast-fashion brand by leveraging its digitized distribution network, i.e. by holding less inventory and adapting quickly to changing fashion preferences among its teenager target demographic?

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Citations

[1] “American Eagle Outfitters: Who We Are,” American Eagle Outfitters, https://aeo.jobs/info/page1, accessed November 2017.

[2] American Eagle Outfitters, 2016 Annual Report, p. 6, http://s1.q4cdn.com/457120574/files/doc_financials/2017/Annual/Annual-Report-2016.pdf, accessed November 2017.

[3] Bob Trebilcock, “Transforming into a true omni-channel retailer,” Logistics Management, September 1, 2016, http://www.logisticsmgmt.com/article/transforming_into_a_true_omni_channel_retailer, accessed November 2017.

[4] Bob Trebilcock, “American Eagle Outfitters’ omni-channel journey,” Supply Chain 24/7, September 1, 2016, http://www.supplychain247.com/article/american_eagle_outfitters_omni_channel_journey/vargo, accessed November 2017.

[5] Trefis Team, “American Eagle Outfitters Is Getting Back On Track,” Forbes, December 4, 2015, https://www.forbes.com/sites/greatspeculations/2015/12/04/american-eagle-outfitters-is-getting-back-on-track/#744c8aec50bb, accessed November 2017.

[6] Natasha D. Smith, “Omnichannel Marketing Innovation: American Eagle Outfitters,” Direct Marketing News, March 10, 2016, http://www.dmnews.com/marketing-strategy/omnichannel-marketing-innovation-american-eagle-outfitters/article/481864, accessed November 2017.

[7] Bob Trebilcock, “Maintenance at American Eagle Outfitters,” Supply Chain Management Review, December 15, 2016, http://www.scmr.com/article/maintenance_at_american_eagle_outfitters, accessed November 2017.

[8] American Eagle Outfitters, 2016 Annual Report, p. 9, http://s1.q4cdn.com/457120574/files/doc_financials/2017/Annual/Annual-Report-2016.pdf, accessed November 2017.

[9] BeaconStac, “5 Best Beacon Projects and What They Could Have Done Better,” https://blog.beaconstac.com/2015/10/5-best-beacon-projects-and-what-they-could-have-done-better, accessed November 2017.

[10] Matt McFarland, “American Eagle Outfitters lures customers into fitting rooms with help of beacons,” The Washington Post, October 15, 2014, https://www.washingtonpost.com/news/innovations/wp/2014/10/15/american-eagle-outfitters-lures-customers-into-fitting-rooms-with-help-of-beacons, accessed November 2017.

[11] Tara Donaldson, “Next Step for Sourcing? Go Where No Supply Chain Has Gone Before,” Sourcing Journal, October 27, 2017, https://sourcingjournalonline.com/next-step-for-sourcing-go-where-no-supply-chain-has-gone-before-td/, accessed November 2017.

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6 thoughts on “American Eagle Outfitters flying high on digitization

  1. This nicely summarized some of the recent developments in apparel retail tech and logistics. I’d also be curious to find out what consideration AEO has given to integrating social media with their other digitization efforts. Seems that since their target market is a very social media-savvy consumer, there could be a lot of opportunity in linking the fitting room trial reward program or data on browsing and buying history, etc., with social media platforms like Snapchat or Instagram. On the other hand, there could be risks/downsides as far as privacy and control of messaging (potential for it to backfire, e.g. cyberbullying).

  2. AEO is clearly using digitization well to enhance the customer experience (reduced delivery times, enhanced availability, reserved items to try on etc). Do you know if they are effectively leveraging digitization with their suppliers to reduce inventory holding costs and waste?You could imagine a world where using interactions with customers (e.g. via social media and by tracking in store/ online behaivor) and data from across the supply chain, AEO could significantly reduce inventories and move to near JIT production (recognizing the need for end customer inventory in store); refilling sizes/ colours/ designs depending on how well they are selling.

  3. I think you raise a very interesting point of how customers can better perceive the supply situation of clothing at American Eagle and how that leads to more selection and shorter deliver times. However I would approach the digitization of the supply chain also from the demand perspective. In order to cut waste in inventory and better adjust production in line with consumer demand, American Eagle should think about introducing RFID tags in the safety alarms of their clothes in their stores. For example Inditex (parent company of e.g. Zara and Massimo Dutti) has been doing this for a few years now and this has allowed them to adjust production and inventory based on the latest demand from consumers.

  4. I really enjoyed reading this. It shows very clearly how an old-school retail brand is making big moves to combine the brick & mortar and online presences to stay relevant. You asked whether AEO could surge ahead based on its supply chain tech, and essentially use that as a source of competitive advantage. I think it definitely can better serve its customers through its supply chain , and should work to achieve that. My concern here is that what is leading edge today may be ‘old-school’ tomorrow and I’m worried about AEO’s capacity for continuous innovation. That will determine whether AEO’s supply chain becomes a lasting advantage. How is AEO attracting and empowering the talent needed to drive innovation moving forward? How effectively are new ideas being tested? AEO may need to channel its inner Amazon and invest in long-term capabilities.

    Another sidenote on talent: I wonder how the increase in automation actually leads to increases in demand for skilled (and highly scarce) technical specialist to fix/maintain the hardware. It seems to me that retaining and attracting skilled technical talent could be a major issue in the future as competitors catch up and automate their supply chains.

  5. Interesting article! For me, what jumps out most is the changing purpose of a retail store. From AEO’s point of view, their stores are now serving a different purpose: they’re at once distribution centers as well as dressing rooms via their “Reserve, Try, Buy” program. Given that, I think they can redesign their stores with the same mindset as they designed their distribution centers as you mentioned. Perhaps that means less space for displaying inventory, more space for “experiences”, and larger backrooms to serve as a mini warehouse.

  6. Thanks for the commentary! I was interested to see the question that you posed around whether AEO could leverage its limited inventory and digitized platform to move toward a more Zara-like platform of expediently delivering on market trends. In my hometown, AEO had a concept store in which it displayed its next season’s apparel lines to determine what items were and weren’t selling well – thoughts on whether this is an antiquated model that AEO should move away from going forward? Additionally, toward the goal of limiting inventory, I wonder if AEO could utilize its deep data resources to create a Watson-like AI that assisted with in-store shopping decisions both around what a particular customer may be interested in and appropriate sizing (tracked through the loyalty program).

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