Wasn't the internet supposed to have vanquished catalog merchants by now? If so, somebody forgot to tell Sierra Trading Post, Inc.

Headquartered in Cheyenne, Wyo., the seller of name-brand overstocks and closeout merchandise sends out nearly 60 million catalogs a year. Web sales are thriving as well-Sierra Trading Post has appeared on Internet Retailer's Top 400 list-but catalog orders still make up a good piece of the business. Four retail stores round out a multi-channel supply chain.

Balancing all these demands in a cost-effective manner-this is a discount retailer, after all-is a daily challenge. What's more, the entire operation is supplied from a single fulfillment center in Cheyenne, hardly the center of the country in terms of consumer markets.

Sierra Trading Post was founded in 1986 by Keith Richardson, former president of Sportif USA. From inaugural headquarters in Sparks, Nev., he came up with the idea of an "in-home outlet mall." Much of the business would focus on outdoor and adventure gear, although the company also sells substantial amounts of dress and casual clothing, footwear, home furnishings and accessories.

Richardson moved the company to Cheyenne in 1992, opening a 30,000 square-foot warehouse. He was courted aggressively by local Wyoming authorities, who had just opened a business park in Cheyenne and even arranged a personal meeting with the governor. Sierra Trading Post worked closely with Cheyenne LEADS, the private economic development corporation for Cheyenne and Laramie County, to set up operations there.

In Wyoming, a newly enacted measure allowed officials to provide seven acres of land and subsidize financing for facility development, bypassing a constitutional stricture against government aid to any individual or business. In Nevada, by contrast, where Sierra Trading Post had been renting warehouse space, the company was faced with an onerous tax burden and couldn't afford to own a facility.

"What was given to us in Wyoming was just a drop in the bucket, but it was enough," says Robin Jahnke, director of fulfillment and facilities. Today he manages a distribution center that covers 348,000 square feet, including mezzanine level. It employs more than 200 non-management workers within the facility, out of a company-wide headcount of around 650. There are also customer-service call centers in Cheyenne and Cody, Wyo. In all, corporate operations at Cheyenne occupy some 500,000 square feet, with 60 acres set aside for expansion.

Inside the facility is a distribution setup that was designed to meet the company's unique needs. Most mail-order merchants maintain a steady supply of the same basic product, at least within a given season. Not so at Sierra Trading Post. Because it draws on overstocks and closeouts from more than 1,000 vendors, the company can never predict exactly what it will be offering until the deals are made. One moment it will have tents from Kelty. Then it will be selling Bruno Magli shoes. And when an item sells out, it's gone for good.

"We have more turns than the average company," says Jahnke. "Product changes so fast, we can't use conventional binning."

In a business often ruled by consumer impulse, velocity is key. Nearly all orders called in by 3 p.m. ship the same day. And forget about a weekend lull. Saturdays and Sundays are the busiest days, because many customers now have high-speed internet connections at home, and shop on their days off.

Jahnke is precise about the type of operation he runs today. "This is a fulfillment center," he says. "It's not a warehouse. We're not in the business of storing goods."

All of which posed an interesting puzzle, when Jahnke set out to design a new fulfillment system. Formerly with J.C. Penney Co. Inc., he encountered a vastly different environment at Sierra Trading Post.

In the early days, the system was highly manual. As volumes grew, the company could get up to two weeks behind on keying in data. Today, Sierra Trading Post has around 83,000 active SKUs, out of more than 100,000 in total. Varying colors and sizes for items such as footwear can further drive up the SKU count and add complexity. The backstock area has room for about 160,000 cartons, according to Jahnke.

Building From Scratch

A review of the warehousing software market convinced him that there were no off-the-shelf solutions for Sierra Trading Post. So Jahnke partnered with a vendor to come up with something entirely new. "I got to start with a blank piece of paper," he says.

Phoenix Systems Group Inc., headquartered in Boardman, Ohio, had been supporting the company's order-processing side. Now it was called in to design a system that would get product out the door with speed and accuracy. Formed in 1994, the vendor already had experience with multi-channel merchants, especially small and medium-sized accounts, according to president Jeff White. "We're a custom software house with a fairly limited client list," he says.

A basic inventory control system had worked for awhile, says White. But with the growth of Sierra Trading Post's business, "it started to break pretty badly. The processes became far too labor-intensive, and they were fighting issues of space."

That's when Jahnke came up with a radical idea. Forget about the labor-intensive reliance on a static picking system, he said, with every item assigned a particular place where it had to be stored. Instead, why not go for dynamically assigned picking locations, involving random putaway?

Management was dubious. Jahnke's predecessors had experimented briefly with that approach, to "disastrous results." It was something of an alien concept to Jahnke himself, with his background in traditional department store retailing. But several sleepless nights convinced him that random putaway in backstock was exactly what Sierra Trading Post needed in its fulfillment center. A fully dynamic system would allow the operation to react much more quickly to the company's ever-changing product mix.

The current system works on the fly, directing incoming product to an empty rack. It does some profiling on the basis of higher volumes and packaging types, but for the most part, each item is randomly assigned a slot. Jahnke believes the concentration of too much fast-moving product in a particular area can cause congestion in the aisles, says White. "Instead, we concentrate on pushing inventory out of picking shelves in a fairly random fashion, then we optimize by building picking patches that are more efficient, so that a person only needs to visit a small number of aisles to get the job done."

From backstock, merchandise moves into a series of forward bins-but only if an item is selling. The sale of one unit signals staff to set up one or more bins, depending on demand. When the item sells out, the bin is converted for other products.

Most warehouse systems require a forecast of anticipated volume. In a catalog operation, that typically involves determining the peak sales week for each item. Bins are then set up to accommodate that period, but their size is little more than an educated guess.

"Our system is fully dynamic," says Jahnke. "If you sell a whole bunch of [a given product] and need four bins, we'll give you those. But as soon as your sales drop off, it fades back to one bin. It's really slick."

No warehouse can be prepared for every possible order, but Sierra Trading Post responds quickly to surprises. If an ordered item isn't in a forward bin, it can be easily retrieved from backstock. Say the order comes in right at the daily cutoff time, around 3:30 in the afternoon. It might be picked and sorted by 5:00, and stocked by 9:00. Once it's in the bin, the order will print, probably by early the next morning, then be gone within 24 hours of the original order.

If the desired item is already in a bin, it can be immediately committed, and the order produced during the next print run, which happens multiple times each day. "Right now," says Jahnke, "we're running 97.58 percent of the orders out within 24 hours of when they become available to the fulfillment center."

Air is an option for impatient buyers. All orders received by 3 p.m. and slated for one- or two-day delivery by air go out on the same day, even if warehouse staff has to manually pull product out of backstock, Jahnke says.

The fulfillment center incorporates a number of design features that are intended to save energy while improving the workplace environment. Skylights and white walls brighten the atmosphere, while much of the facility's power comes from solar panels that are programmed to follow the path of the sun. Motion-control lights, on the other hand, keep dark those areas where there is no activity.

How It All Adds Up

Even with the ever-changing nature of Sierra Trading Post's product mix, keeping tabs on items in the warehouse is a relatively straightforward task. "We're at the point where we don't even take an annual inventory now," says Jahnke. "We take physical reconciliations of our backstock cartons and we cycle-count the few static bins that we've got, and that's it. It's a self-cleaning system."

Any mistakes are quickly rectified. For example, if an extra piece turns up in a bin, a stocker can immediately adjust the count and put the stray item back into the system, making it available to customers.

Implementation of the home-grown warehouse management system took around nine months, says White. There were challenges in the design phase, as planners figured out how to make dynamic allocation work efficiently. Complicating matters was the decision to barcode all inventory in the building. First, White says, managers "put a stake in the sand" and began applying barcodes to all new incoming merchandise. Then, teams of workers started going aisle by aisle, adding labels to all backstock and forward pick locations.

In the course of a single weekend, all inventory was scanned to activate the barcoded labels, and a physical count was done on the picking area. Recalls White: "It was one really long, tough weekend."

Phoenix Systems has continued to refine the software. In the process, it has inched away from the concept of totally random putaway. Now, the system makes some allowance for selecting the best aisle, especially with regard to carton dimensions. But the basic idea behind Jahnke's brainstorm remains intact.

The fulfillment center processes between 8,000 and 9,000 orders per day, according to Jahnke. Typical throughput is around 1,600 cartons per hour, although that can peak at 2,000 cartons during the busiest times.

Roadway Express Inc., a division of YRC Worldwide Inc., is the company's number-one mover of product destined for its retail stores, shipped on pallets in less-than-truckload service. For the catalog and internet business, UPS is the carrier of choice for most outbound orders, while DHL handles packages by air. Despite its heavy reliance on small-package carriers, Sierra Trading Post can't take advantage of cost-saving options such as zone skipping. That would add to transit time, and "the Web customer wants it now," says Jahnke.

Sierra Trading Post has retail stores in Cheyenne and Cody, as well as in Reno, Nev., and Meridian, Idaho (near Boise). The last, with 25,000 square feet of space, opened in February of this year. Jahnke says the company has been careful not to place stores too close to the major retailers whose products it sells by catalog and over the Web. For that reason, he expects the brick-and-mortar side of the business to grow slowly.

Another store could open in 2009, Jahnke says. And within five or six years, the number could double. But first, Sierra Trading Post wants to see how the Boise location works out. It represents the first time the company has opened a retail store in a major metropolitan area, placing it relatively close to first-run outlets. "The Boise store," says Jahnke, "is going to be a real good litmus test."

Sierra Trading Post was born as a mail-order operation, however, and it continues to emphasize that side of the house. Online orders account for about 55 percent of business, according to Jahnke. Prior to the opening of the Boise location, retail stores were contributing another 6 percent to 8 percent, and the rest was coming from catalog sales.

Whither the Catalog?

Jahnke doesn't expect catalogs to disappear any time soon. Sierra Trading Post maintains 11 or so different catalog titles, ranging from its core publication to specialty books for shoes, clothing, outdoors and travel. There's even one for "Hot Deals," with every item priced below $99.95.

Despite the popularity of the internet as a channel for consumer sales, Jahnke says, many buyers still prefer to browse through paper catalogs instead of navigating their way through screen after screen of computerized images. Often they'll select items from the catalog, then order them online. They go for the convenience of paper, combined with the order-tracking abilities of the internet.

"Fifteen years from now, maybe you won't have a printed catalog," says Jahnke. "As people get more comfortable with the internet, at some point in the future things could be fully electronic." But that's not a concern of Sierra Trading Post today. In fact, he suggests, catalogs generate sales that probably wouldn't have happened otherwise. People seem more likely to discover impulse buys in printed pages. "We have a really nice relationship between our catalog and the Web," he says, "and I think that's one of the reasons that we've been successful."

Sierra Trading Post is charting a somewhat cautious course for growth. Last year, Jahnke was planning to install a tilt-tray sorter in the fulfillment center, a piece of equipment that could double productivity. (That's an especially valuable tool in a tight labor market like that of Cheyenne, where unemployment is around 3.7 percent.) However, the purchase has been postponed. Within a year, Jahnke hopes to move to paperless picking, although major projects are mostly on hold for now.

The strategy of the moment calls for "organic growth," Jahnke says. The idea is to let the business expand naturally, rather than through any aggressive marketing initiatives. In the past, the company has dealt with rising inventory levels by offering additional discounts or free shipping. That resulted in greater activity, but it didn't contribute much to the bottom line.

Now, Sierra Trading Post is seeing single-digit growth with more profitable results. In addition, the company wants to do a better job of balancing out sales activity throughout the year. While it doesn't experience the huge Christmas-season peaks that typify many retail operations, sales do more than double in the fall. With moves such as the recent launching of an adventure catalog, Sierra Trading Post aims to boost volumes throughout the spring and summer. A recent surge of kayak sales indicates that it is already succeeding in that goal.

"It's a good exercise," says Jahnke. "It has produced some discipline. We're doing a really good job of servicing our customers." Within the fulfillment center, the company has managed to lower its error rate while shipping more product within 24 hours of an order. Adds Jahnke: "I think it's going to be a very good year for us."

Sierra Trading Post At a Glance

The company: Sierra Trading Post, a seller of name-brand overstocks and closeout merchandise via the internet, catalogs and retail stores.

Headquarters: Cheyenne, Wyo.

Top executive: Keith Richardson, founder and owner. Started the business in Sparks, Nev., in 1986.

Number of employees: Around 650

Financial results: Privately held; not disclosed.

Supply chain: Includes a 348,000-square-foot fulfillment center in Cheyenne, Wyo., two customer call centers in Cheyenne and Cody, Wyo., and four retail stores in Cheyenne, Cody, Reno, Nev., and Meridian, Idaho.

Supply chain challenge: Creating a warehouse system that can accommodate an ever-changing mix of products while ensuring the shipment of merchandise within 24 hours of ordering.