A dozen years ago, Michaels had 400 stores selling arts, crafts, framing and related items. Such was then the state of purchasing and inventory management that Michaels did not know with any certainty which of its outlets was selling what.

In the years since, Michaels has moved to become a leader in supply chain execution, an accomplishment that has done much to support its growth to industry leadership in the field, with over 900 stores now operating in the U.S. and Canada. This is the result of concerted step-by-step efforts that modernized in-store management and vendor collaboration, established a network of modern distribution centers and adopted a wholly new approach to transporting products.

Supply chain is important across the marketplace; in Michaels’ segment, it’s crucial. Its average 18,000 square-foot outlet carries over 40,000 SKUs. With a product list that extensive, the supply chain work of ordering, shipping and inventory management become make or break tasks. 

A dozen years ago, it would be hard to say these tasks were being well executed, acknowledges Tom DeCaro, the company’s executive vice president for supply chain. Michaels “had a very unsophisticated vendor community”—a fair number of products arrived from their manufacturer without UPC coding. Commonly, each store paid each individual vendor directly. With each store doing its own purchasing, there was no clear enterprise-wide picture of what the company was selling. Reordering was “a huge task,” one that absorbed 40 to 50 hours a week in each store. 

Michaels was aware of its circumstance, and of it needs. “We recognized very early that whoever has the strongest supply chain has the best chance to win in this industry,” said DeCaro. Further, Michaels was fortunate. “We were the biggest player in our industry; we didn’t have a lot of competitors breathing down our neck. That let us focus attention on building a very strong supply chain.” 

In fact, things were already moving when DeCaro joined Michaels in 2000. “At conferences, they always have those sessions on ‘How to sell your CEO.’ I never had that problem; I was on a treadmill trying to keep up with his ideas of what we needed to do with supply chain.” The chain, DeCaro reports, identified some basic principals—make each store’s tasks as simple as possible; control inventory; build collaboration with its vendors.

Early steps underscore how far Michaels has come. In 1996, it introduced point-of-sale cash registers; the following year, the first basic store ordering system was installed. Shelf space-planning software came next, for the first time giving Michaels reasonable centralized knowledge of what it was selling. In 1999, a new ordering system was installed that permitted individual stores to review four-week sales periods in order to better stock.

In 2000, the company established a vendor relations team, put together a requirements manual for vendors, and started to bring groups of vendors to company headquarters in Irving, Texas, for two-day educational sessions on what Michaels needed, and why. 

“We could not really become professional about inventory without addressing our vendors’ needs.” In 2003, Michaels rolled out Perpetual Inventory, allowing it to track inventory store by store. The following year, it established automatic replenishment at the store level and centralized all buying into corporate headquarters. The results, DeCaro said, were significant—‘in-stocks’ went from the low-80s to the mid-90s in the six months after the system was up and running.

In tandem with inventory control, Michaels moved to establish a distribution center network—its first came in Ft. Worth, Texas in 1996; its sixth and most recent, a 650,000 square-foot state-of-the-art facility opened in Centralia, Washington in 2007.

By 2005, these efforts had given Michaels a state-of-the-art distribution system and a state-of-the-art management system. This, in turn, allowed Michaels to focus on the tasks of marketing, merchandising and consumer-focused activities. Before that date, DeCaro candidly acknowledges, “We didn’t do a lot of marketing and new product development.” 

Now, DeCaro adds, the supply chain works to support whatever marketing events go on around the country. When Michaels launched Martha Stewart’s Crafts last year, the rollout included Stewart’s television and radio shows and print ads. Supply chain, DeCaro said, “worked step by step with marketing to make sure we could support that marketing effort with the right merchandise in the store.”  

Next up: transportation. Until 2006, Michaels simply bid out its transportation needs, giving a contract to whoever turned in the low bid. At one point, it was working with over 50 different domestic trucking companies. In consequence, DeCaro noted, “we were really not that important to any of them; when we hit peak season and needed extra capacity, none of them were willing to come to the table.” 

Now, Michaels has a short list of key transportation partners, principally Con-way Truckload, and the Seattle-based Interstate Distributors. DeCaro says, “It’s been a tremendous payback. They get a lot of business from us during the non-peak season; and they are committed to supply increased capacity during peak need.” Because of that commitment, he added, Michaels has in the past two years had it best peak season on-time performance.

The move was more than a consolidation; Michaels used its new distribution system to completely reorganize who was carrying what to whom. Previously, over half the Michaels’ products were being shipped from individual vendor to individual store; now, the bulk goes from vendor to distribution center, and then on to the retailers. Vendors, in fact, generally ship to the distribution center nearest to them, with products then dispersed to the distribution centers for local delivery.

The result—Michaels is sending out a lot more truckloads, but more than saving that cost by needing a great many fewer parcel deliveries. It is, DeCaro observes, a boost both for vendors and for individual stores. The effort, DeCaro says, has seen Michaels turn its freight suppliers into key partners: “We provide them with our forecasts; I spend a day with them each year to make sure I’m aware of what the issues are with them.” That sense of partnership is extended further. DeCaro notes the pending shortage of truck drivers: “A key thing over the next few years is to keep drivers happy; when we have to change drivers, there is an impact on the store. We want drivers to feel they are a part of our operation.”

“We have a great foundation of processes, systems and infrastructure. Our focus is now on how to optimize that.” Here, DeCaro has an advantage—he has responsibility for both logistics and inventory management. Many retailers are creating that combined responsibility, for reasons made evident in an example DeCaro offers. 

If, he says, one focuses solely on inventory management, then the goals are to have minimal central inventory and fully stocked shelves in each store. That could be achieved with frequent deliveries of small quantities of goods to every outlet. That approach, however, would make for higher transportation costs—small parcels are the costliest way to move anything. “Transportation costs are a huge number in this day and age; and will remain so. The question becomes: how do we minimize the amount of truckload movement that we need and still maximize the in-stock in our stores?”  

Other steps await. Currently, Michaels sources one-fourth of its purchases internationally, largely from Asia. DeCaro expects this to grow to half in the next five years. The biggest impact, DeCaro says, “will be on freight and inventory: with longer lead times, you’re going to have to carry additional inventory.” How, he asks, do you minimize addition investment, “but still ensure that things are in stock when you have those long lead times?” wt