With racks of silk flowers and Styrofoam balls, shelves of picture frames and glue guns, Michaels Stores is a crafter's paradise. Unseen, however, by the customers who spent $3 billion at Michaels last year are the complicated trucking moves that ensure glue sticks and glitter spray are available any time shoppers want to buy them.

Indeed, much of that transportation process used to be invisible even to Michaels itself.

The largest crafts retailer in the United States relied on a small outside service provider to coordinate its trucking and delivery. But twin business mandates?accelerated growth and reduced logistics costs?convinced executives at Michaels they should reclaim management of its own transportation operations.

The company's sales had jumped to $2.2 billion in 2000, up 54% since 1997, while its total number of stores reached 748, up 42% during those four years. Yet Michaels yearned to reach 1,000 stores while at the same time stripping unnecessary spending on logistics.

Michaels' decision to dump its transportation outsourcer, ProLog, meant it would take back responsibility for coordinating shipments to stores, warehouses and distribution centers across the United States from suppliers in the U.S., Mexico and Asia.

Before taking over the job, Michaels had to maneuver through the sensitive in-between time when an outside manager winds down operations but replacement systems are still ramping up?a stretch when a lot can go wrong. Michaels had to learn about transportation operations, evaluate technology vendors, and hire auditors, analysts and managers to staff a transportation department. Then Michaels had to choose software and get it working?all while working with ProLog, whose managers knew they were losing one of their company's biggest accounts.

The switch was a risk, but it was the right risk, says Brittain Ladd, manager of domestic transportation at Michaels. The company wouldn't be able to grow as quickly or efficiently as it wanted if it didn't control its own trucking processes, asserting the power to negotiate rates and push truckers and suppliers to meet strict performance measures, Ladd says.

Transportation?the trucking of products between suppliers, warehouses, distribution centers and stores, plus the personnel to manage that process?is typically the biggest single logistics expense for a retailer. Chris Caplice, executive director of the logistics program at the Massachusetts Institute of Technology, says the average retailer spends 0.5% to 1% of sales on transportation. Others say it's 3% to 5% of sales.

Michaels declines to disclose its transport costs, except to say that it wanted to cut them. In 2000, the year it decided to end its relationship with ProLog, Michaels' sales topped $2.2 billion. If Michaels ran on the high side of industry averages? 5% ?transportation would have cost roughly $110 million. Chopping those expenses to 4% of sales by, say, consolidating routes or packing more onto trucks on each haul would have saved $22 million that year.

But to do that, Michaels needed information and control it wasn't getting under the ProLog deal. ProLog wasn't screwing up, but it couldn't provide some analysis services, such as auditing the accuracy of every bill from the 100 trucking companies used by Michaels. ProLog did manual spot checks for a few out of every 100 freight bills.

In addition, a lot of work was done manually, further complicating Michaels' attempts to review operations and improve efficiency. Every week, 18 men and women from ProLog collected faxes and wrote down information phoned in by suppliers relaying the number, size and weight of cartons ready for pickup. With that data, ProLog staff collated store orders and the availability of trucks from shipping companies. They spread all the papers across desks at Michaels headquarters to plot sensible delivery routes.

It was ProLog, one of hundreds of third-party logistics providers in the U.S., and not Michaels that spent most of its time communicating with Michaels' truckers and suppliers about delivery. ProLog negotiated rates with the truckers and managed the vehicles moving skeins of Jiffy Thick & Quick yarn and bottles of Mod Podge sealer for Michaels at any given time.

Michaels was cut off from some details that would have made its daily trucking more efficient. For example, it didn't know how many dock doors a given supplier had, or how many trucks the supplier could load in a day. Such knowledge helps determine the most practical weekly pickup schedule, especially of fast-selling products like scented candles.

Operating at arm's length from its own transportation management limited Michaels' ability to cut transit costs or improve the process. "We hadn't learned about our vendors because the [logistics provider] was doing it," says Ladd, who served in the U.S. Marines and came to Michaels from Fas Tex, a logistics provider that worked with Dell. "We can't rely on others to make us successful. We're the only people who truly look out for our company's best interest."

Ladd chose forthrightness as the approach to try to preserve good working relations with ProLog during the phase-out.

"We leveled with them; we complimented their services, but it was a business decision," he recalls. "They didn't do anything wrong. They just didn't have the technology we needed."

John Lesniewski, a ProLog manager on site at Michaels at the time, says the news meant the 18-member ProLog team in Texas would be out of work. ProLog's main office was in California and few wanted to transfer. "Those employees were down there for years and did great things for Michaels," he says. "We looked at them as family. It was difficult for us to go through this."

A common mistake after deciding to end a deal is to then view the outside contractor as an obstacle?or worse, an enemy, says Kate Vitasek, managing partner at consulting firm Supply Chain Visions in Bellevue, Wash.

The goal must be to remain cordial and learn what the contract firm already knows about your company. If those people feel tricked or cheated, they won't share their insights, and "that's where a lot can go wrong," she says.

Michaels offered bonuses to ProLog workers who agreed to stay through what turned out to be a nine-month transition. It also gave them the chance to vie for jobs in the newly created nine-slot transportation department, although ultimately none were hired. Ladd helped ProLog workers with resumes and offered to be a reference.

"Michaels took a very humane approach to us," says Lesniewski, who's now working in Walnut Creek, Calif., as a director of sales support for Pacer International, which acquired ProLog in 1997.

While Michaels was respectful and appreciative of ProLog, keeping relations cordial wasn't simply a matter of good will, Ladd says. Michaels needed help. "There's going to be days when they won't be happy, but you have to have their cooperation," he says.

To determine how Michaels could improve delivery times, routing and load balancing, Ladd's department first had to map the "as-is" transportation process. To do that, they needed information from ProLog's databases and its people.

For example, ProLog staff sat with Ladd and his newly hired transportation analysts to outline major shipping lanes used to carry Michaels merchandise. Lanes are the specific routes a carrier drives between set locations. FedEx, which handles 4 million packages per year for Michaels, takes a particular route from Southern California to Spokane, Wash., a 1,200-mile, tw0-day trip.

"Shipping points, rates?we helped them learn what the data meant to us and it was transferred to the new system," Lesniewski recalls.

ProLog had incentive to be cooperative, because it wanted to enlist Michaels as a customer reference for prospective clients, he says.

Time was another buffer Michaels used during the transition. Often, managers feel pressured to move too quickly at the start of a new project. "They have an idea and try to blast through to the end to try to make it real, which leads to bad decisions," says Mark Goulston, a psychologist and director at Sherwood Partners, a management consulting firm in Los Angeles.

On the hunt for new transportation management software, for example, Michaels could have skipped time-consuming research and evaluated just the one or two leading suppliers. Instead, Ladd slowed the process, sending requests-for-proposals to 10 software companies. That guaranteed several months of research instead of the few weeks some companies take.

Six vendors were invited for in-depth interviews and the top three returned for more discussion. Then, Michaels interviewed their customer references. The process took 15 months, including two months to narrow the field from three to the eventual winner, i2 Technologies in Dallas.

There was a rationale behind the methodical approach, Ladd says: "When it came time to make the decision, we could clearly state we identified the best solution for the company, not something hurried to and not a reaction to simply go in a different direction than what we had [been doing]."

In consultation with the information-technology department, Ladd's group decided not to license the i2 software but instead sign up for hosted services from the vendor. Michaels signed a five-year contract to pay i2 a fee based on the number of merchandise shipment transactions processed by the software, plus a monthly subscription fee to cover i2's hosting costs, such as server upkeep.

Michaels is now better informed about its transportation. For instance, i2 distributes "vendor load" reports to Michaels suppliers at midnight and noon, telling them which carriers are coming that day for pickups so they can pack the right merchandise. Then, i2 lets Michaels know which suppliers consistently had the fake ficus trees or grapevine wreaths ready when the truck arrived, and which didn't.

Throughout the switchover, Michaels had to adapt to a new mind-set: that it controlled the process. It would have been easy to let i2 take over implementation, for example, because it was all uncharted territory for Michaels. Three i2 consultants were on site, but Ladd and his boss, Hal Feuchtwanger, director of domestic transportation, led the project. After having ceded transportation management for so long, Michaels intended to retain all authority and knowledge, Ladd explains.

While i2 might have glossed over some details about servers and network equipment it planned to use to host Michaels' application, Ladd insisted on knowing all the particulars: "We used the phrase over and over, 'command and control, command and control.'"

Michaels Stores Base Case

Headquarters: 8000 Bent Branch Drive, Irving, TX 75063

Phone: (972) 409-1300

Business: Arts and crafts retailer

Project Leaders: Hal Feuchtwanger, director of domestic transportation; Brittain Ladd, manager of domestic transportation

Financials in 2003: $3.1 billion in revenue; $178 million in profits

Challenge: To cut costs and control truck loading and routing of 40,000 core products between suppliers, warehouses and stores.

BASELINE GOALS: