Northwestern MSiA Practicum ProjectE-Commerce Hub & Spoke Analysis Shawna Baskin | Sam Hillis | Eunhee Ko | Joonhyung LimProprietary & Confidential, Property of Walgreen Co.

#Staffs and Research Team Proposed Staffs:Tim Engstrom DVP Supply Chain & E-CommerceWalgreen Co. Russell WalkerClinical Associate Professor of Managerial Economics & Decision Sciences Associate Director of the Zell Center of Risk Management Northwestern UniversityManagerial Economics & Decision Sciences Michael WatsonAdjunct ProfessorMccormick School of Engineering, Master in Engineering Management Program, Master of Science in Analytics, Kellogg School of ManagementNorthwestern University Diego KlabjanProfessor of Industrial Engineering and Management Sciences

Director of Master of Science in Analytics ProgramNorthwestern University

Research Team:Samuel James Hills

Masters StudentMS in Analytics / Northwestern University Eunhee Emily Ko

Masters StudentMS in Analytics / Northwestern University Joon Lim

Masters StudentMS in Analytics / Northwestern University Shawna Baskin

Masters StudentMS in Analytics / Northwestern University

##TABLE OF CONTENTS1. Walgreens Project Overview2. E-Commerce Market & Competitor AnalysisMarket Study & Benchmarking Study SummaryE-Commerce StudyCompetitor Analysis & Supply Chain Trend3. Key Customer InsightsCustomer Satisfaction SummaryCustomer Satisfaction ScoreCustomer Expectation Toward Shipping4. SKU Classification Walgreens.com & Drugstore.comMethodologyWalgreens.com SKU ClassificationDrugstore.com SKU Classification5. Network Optimization ObjectiveMethodologyDelivery Analysis

Proprietary & Confidential, Property of Walgreen Co.

#Walgreens Supply Chain Project OverviewProprietary & Confidential, Property of Walgreen Co.

##Project OverviewOne key element is the ability to increase next day and 2 day delivery coverage. We can achieve this goal by minimizing sub-optimal routing problems.

Benchmark Study Analysis.Customer Satisfaction AnalysisCompetitor AnalysisA-B-C SKU classification.DrugStores.com / Beauty.comWalgreens.comNetwork Optimization.Situational assessment/ problem statement: Project Logistics: Impact to the Business:Increase the ability to service customers next day and 2nd day will give Walgreens competitiveness in ecommerce industry.How can we improve DC to Customer shipping?

##Sub-optimal Routing Problem

ILNJNVDC LocationSub-optimal Routing Probleminefficient delivery time and cost##Walgreens Ecommerce Market and Competitors AnalysisProprietary & Confidential, Property of Walgreen Co.

##Every year, more than 100 million Americans purchase goods from online retail market place.

Industry revenue will increase at an average annual rate of 8.8% to total $334.3 billion.

Online Retail Market Background##8

Lack of Trust and Delivery Issues Top of Mind For E-Commerce Holdouts. Low Perceived Security.

Shipping Cost and Delivery Risks

Return Hassles.

Lack of Proper Customer servicesE-Commerce & Consumers##WalgreensWalgreens.comDrugstore.comBeauty.comIndustry Defined - Internet Mail Order Retail (Gartner)

Competitors Analysis##Walgreens Customer Insights Proprietary & Confidential, Property of Walgreen Co.

##Overall delivery satisfaction remained stable in 2012Source: Forsee Customer Satisfaction Survey Time Period: Jan 2012- Dec 2012Drugstore.com customers reported directionally stronger satisfaction with delivery Customer Satisfaction ScoreWalgreens customers felt adequately informed about their order arrival.

Which best describes how you received your order?Were you given advance notification that you would receive only part of your order?##Source: Forsee Customer Satisfaction Survey Time Period: Oct/Nov/Dec 2012Very ImportantSomewhat ImportantNot Important/Dont KnowHow important is shipping or delivery time to your purchase decision?On average, what do you think is a reasonable delivery time for a Walgreens.com purchase?Customer Expectation Toward ShippingHow many days did it take you to receive your order?##13Walgreens Supply Chain SKU Classification

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##SKU Classification - MethodologyRevenue: A-B-CSince many items are discounted by the manufacturer, we used revenue instead of profit margin for the the classificationDemand: 1-2-3To account for seasonality in the the data (as well as more transient SKUs), we first ran the sub category breakdown classification two different ways.

The network analysis will group A & B SKUs together in the scenario optimization. Fast moving nature of the CPG business with high turnover.

Reference:Kampen, Akkerman, Donk, SKU classification: A literature review and conceptual framework. International Journal of Operations and Production Management. Volume 32, Issue 7, July 2012, pp. 850-87##ABC classification is only as useful as the results achieved from further analysis using this classification system. Therefore it is important to keep in mind how this classification will be used when developing class rules, our reasoning for this was two fold.Looking at both revenue and demand will satisfy different users needs within the Walgreens organization

15Class% of class DemandA180%A315%A35%B180%B215%B35%C180%C215%C35%

RevenueDemandLowHighLowHighWalgreens.com SKU Classification by Revenue and DemandABC123123123Class% of class RevenueA80%B15%C5%##We project all items onto 2 dimensional space that are demand on x-axis and revenue on y-axis.This plot shows how we performed the SKU classification. Purple 16Department Breakdown: % of Products per Class##A Category Breakdown: % of Products per Class ##Demand Density Across US:Southern states have a stronger demand for A3 SKUs than other states.

Demand for Class Satisfied within Each State

123ABCClassSubclass##We project demand information for SKU classes onto maps. An advantage of this visualization is that we can easily identify which states are major customer for each class. The darkness implies that the states ordered more items, which belongs to the SKU class, compared to other states.Lets take a look at A1 first. North Dakota is very dark and west coast (California, Oregon, Washington, idaho, utah) are also pretty dark too.From this information, we know that those states are the major buyers for A1 class products. Based on this, we can even perform personalized marketing strategies for each SKU classes.For example, we can promote A1 items to North Dakota and west coast states only. And A2 for central and A3 for the south. 19Network AnalysisProprietary & Confidential, Property of Walgreen Co.

##Objectives1. ModelingUsed 15 months of order data Leverages ABC SKU AnalysisScalableRepeatable

2. Hypothesis TestingWould it be both cost effective and improve delivery speeds if we only stocked C SKUs in one DC?

##MethodologyToolsLogic Net PlusLimited to contiguous US

Set upAggregate customers at the 3digit zip code level:Benefit: infinitely scalable

Use package weight as a proxy for order demandThe most relevant contributor to shipping cost is weight

Aggregate all orders as C or Not-C Sku OrderCreate blending profiles for each 3-digit zip code

Estimate UPS shipping rates Proprietary, make an educated guess on corporate discount rates

Set constraints for warehouse storageProhibit C SKUs from being stored at all location except 1

##Blending ProfilesAggregate all customers to their 3-digit zip codeSubset orders into those that contain C-Skus and those that do notFurther subset packages by their shipping weightNow, specify to LogicNet Plus that each customer must have a proportional percentage of their total demand for each package type in shipments of the corresponding weightThis permits abstraction of thousands of products and millions of customers down to a manageable size.

AllOrdersNo CSkusCSkusWeight (lbs.)Quantity1x2ynz##Delivery AnalysisStoring C SKUs at all will result in at least a 10% improvement in delivery times across all distance bands from DCs. At each distance band, this new methodology will satisfy a greater % of total customer demand.

10%10%14%10%% improvement at each band

##