While the topic of retail transformation is high on the agenda for many operators, only a few retailers have successfully put their supply chain at the heart of this process. One of the leaders in this space is Target, a leading general merchandise and grocery retailer in the US. It operates just under 1,800 predominantly large format stores with an annual turnover of $70bn.
Moving fast, but not fast enough!
Two years ago, it outlined a plan to totally transform its supply chain. This was part of a broader turnaround strategy designed to improve sales and profit performance. Equally pressing was the need to set the business up for success in a digital retailing world. Target’s ambitious goal was to significantly reduce costs whilst improving speed, efficiency and reliability across its network.
Having made good progress over a relatively short period, last month, Target announced it had to move even faster. To keep up with the pace of change in the retail sector, it would introduce something that very few have managed to do well – single item picking.
Building capability to move single items
This development fundamentally changes how Target will flow products to its stores. Until now, its supply chain has been built over time to move cases, and while this will continue to be important, it has identified a need to be able to move single items as well.
There are a few factors driving this. Firstly, it is aiming to build a highly responsive supply chain that can replenish single items within hours, and flow them directly to the sales floor. This will drive speed up and inventory down.
Secondly, this model is an integral part of its small format growth plans. These stores are a relatively recent development for Target, but will represent most of its new space growth going forward as it goes after the opportunities in urban and dense suburban areas. These stores typically have a very small or non-existent backroom. Target plans to grow the network from 30 stores to 130 over the next three years, and is aiming to have a scalable supply chain model in place to support it.
Improving digital profitability
However, at the heart of all of this, is Target’s determination to improve digital profitability. As sales in this channel continue to grow, it’s become increasingly important to address profitability. To put it in context, Target has seen the contribution from digital jump from 7% of sales in 2014, to 14% of sales in 2016.
Given what we know about shopping habits, the rate of channel shifting looks set to accelerate in the near-term, making the case for investment pretty compelling. Currently, almost 70% of online orders are fulfilled through its store network and its ship-from-store program; around half of orders are collected by shoppers in-store, and half are shipped to customers’ homes.
As this program is expanded from the current 1,000 stores to the entire portfolio, it is aiming to make the most of its store network and the proximity of inventory to its customers. The ability to move single items efficiently and quickly is what is required to fulfil direct to customer orders. With the very low cost of moving products to its stores using its existing network, this model will help cut the costs associated with last mile delivery.
An investment plan to secure future success?
Transformation projects on this scale don’t come cheap! To support its supply chain transformation and a range of other initiatives, Target will invest around $1bn of its operating profits this year and $7bn of capital over the next three years. There are not many retailers that have the balance sheet strength of Target to support investments of this scale. Within the business, these changes are viewed as essential to secure its future success; the case has begun to convince its investors that this is the right thing to do.
Programme Director, IGD Services Canada