Lennox turns up the heat

Lennox is perhaps one of the best known names in both residential and commercial heating and air conditioning. In business since 1895, the Texas-based company today sells a wide range of products for both homeowners and businesses. Its residential air conditioning business alone offers more than 60 heating and cooling products, all made in North America.

Not long ago, that consumer goods unit filled equipment orders from a single national finished-goods distribution center in Marshalltown, Iowa, near the company's first factory. The DC fed product to 65 small distribution locations around the country that, in turn, served Lennox's 6,000 dealers and contractors. At the same time, the company operated a DC in Des Moines, Iowa, about 40 miles away, that handled parts and supplies.

But over the past three years, it has changed that model significantly, abandoning the national model and developing a network of eight regional DCs.

What started Lennox down that road was a search for distribution improvements as well as a broader strategic change in the company's operations. In a bid to reach more of the nation's HVAC (heating, ventilation, and air conditioning) contractors, Lennox had decided to open new storefronts around the country. It now operates some 130 stores nationwide—a significant increase in the number of outlets served. "We doubled the number of touch points with customers," says Keith Nash, Lennox's vice president of supply chain logistics.

But serving all of those stores from the existing DC would have been far too expensive. "We needed economical distribution to the store locations," Nash says. "We needed [to move to] the hub-and-spoke model to adequately serve those stores."

In addition, the company was looking to reduce order cycle times and the amount of inventory in transit—goals that a shift to a regional DC network would allow it to achieve. Today, 95 percent of customers are within reach of overnight shipments, either from the storefronts or directly from the regional DCs.

A LONG JOURNEY
The shift to the regional model won't be completed until the first quarter of 2013, but the process began more than three years ago, starting at the finished-goods DC in Marshalltown.

One of the topics that had to be addressed early on was technology. From the start, it was apparent that the technology that worked for the small warehouses wouldn't be sufficient for new DCs ranging from 350,000 to 400,000 square feet in size and an order volume that reaches 2.2 million lines a year. The company decided it would have to to invest in new technology, specifically a warehouse management system (WMS) and a transportation management system (TMS).

"If we were going to do distribution effectively, we had to up our game," Nash says. "We had a lot to gain in cost per transaction, cost per carton, and accuracy."

Since Lennox was already using SAP's enterprise resource planning (ERP) system, the company first considered installing that vendor's WMS. In the end, however, it chose Manhattan Associates' warehouse and transportation management suite with Manhattan's Supply Chain Process Platform as the architecture. Lennox chose the Manhattan solutions in large part because the two systems were designed to work together. "We thought that would be one less set of integrations that would have to be managed," Nash explains.

The new technology offers a number of operational advantages. For instance, the integrated system produces a shipping label at the same time it sends an order through the WMS. "We can touch it once and put it down," says Nash. "You have to have integrated warehousing and transportation systems to do that."

CUTTING THROUGH THE COMPLEXITY
Under the current system, orders drop at the Lennox DCs several times a day. "It's real time enough," Nash says. Most orders can go directly to an outbound door, but there are some exceptions. For instance, Lennox knows enough about its customers to anticipate when a particular customer may order several times during the day. "We know the probability that there will be other orders, so we don't pick early in the morning," Nash says. Instead, all of the orders from the customer are consolidated into a single shipment later in the day but early enough to meet next-day delivery commitments.

The system also splits direct-to-customer deliveries from shipments to the Lennox stores. Lennox can comingle those shipments on its trucks, a dedicated fleet operated by third parties. Some outbound shipments also move via less-than-truckload and truckload carriers.

"There is a lot of complexity in the background," Nash says. For instance, cutoff times vary based on the type of business, and routing can vary based on the day's orders. The system also gives Lennox the flexibility to bump emergency orders to the top of the list.

The DCs themselves use little in the way of automation and are lightly staffed, with 20 to 30 employees each. Lennox's products are heavy and bulky, and 70 percent are stored on the floor. Most goods are handled by lift trucks with a specialized attachment—a flat blade that slides under the boxed products. Parts and supplies are stored in bins or broken-case storage. (Slow-moving service parts for older equipment are handled out of a separate warehouse near Chicago.)

SWIFT ORDER TURNAROUND
As for the results, Nash says the DCs have seen marked improvements in productivity since installing the new systems and adopting what he calls "good lean distribution practices." "We are literally able to drop an order and pick, pack, and ship in less than half an hour," he says.

Where hard measures are available, the numbers are impressive. For example, inventory accuracy now stands at 99.985 percent. "This company has never seen that before," Nash says. He adds that outbound accuracy is also very high, which, in turn, reduces the total cost to serve. Productivity measured in cartons per person handled has improved 10 to 15 percent each year during the transition.

The transportation-related benefits are harder to quantify because of the wide variations in transportation costs over the past three years, Nash says. "It is hard to get an apples-to-apples comparison, but there is less total cost," he says. "Next year, we'll see more because we are finally finishing the network change. We will have a lower total cost of distribution then."