Shrinking the Supply Chain: Target needs an integrated digitalization strategy to thrive as an omnichannel retailer

This post was originally published on the Digital Initiative’s classroom blogging platform as part of the 2017 RC TOM Challenge.

 

While many big-box brick-and-mortar retailers focus on closing stores and cutting costs, Target (NYSE: TGT) is bucking the trend by opening new stores, renovating existing locations, and pouring money into its physical infrastructure.

To be a successful omnichannel retailer in the age of e-commerce, Target can no longer simply continue to incrementally improve each individual aspect of its business. Instead, the company needs a unique and systemwide digital supply strategy that will strengthen Target’s customer promise as well as its bottom line.

Why digitalization? Why now?

As e-commerce companies offer shorter delivery times (e.g. Amazon’s “Prime Now” 2-hour delivery) and wider product portfolios even including perishable groceries (e.g. Amazon Fresh), physical retailers need to strengthen their value propositions just to maintain their customer base. Adding product lines and expanding delivery should help [1], but Target needs to seamlessly integrate its e-commerce platforms, physical stores, and supply chain to differentiate itself from omnichannel competitors like Walmart. A fully digitalized supply chain includes things like automated demand forecasting and fulfillment, which together reduce stock-outs and optimize inventory, ultimately better serving Target’s end customer.

Target is in the midst of a complicated company turnaround in which survival and profitability are the end goals. In just the last month, Target’s leadership announced that they will close a dozen unprofitable stores [2] but also open 35 new stores in 2018 [3].  Improving the efficacy and efficiency of its supply chain will allow Target to maintain discount prices and sustainable margins in new, costlier, urban locations [4][5].

What is Target doing to turn the company around?

This year, Target announced a $7 billion investment to “modernize” the company [6], which builds on a $5 billion investment in supply chain and technology that started in 2015 [7].  Several initiatives are focused on specific aspects of the supply chain, but these projects may not go far enough.

For infrastructure, Target has built one fully-autonomous distribution warehouse, with plans to build another [8]. While these warehouses offer state-of-the-art robotic inventory-picking technology that allows for dramatic cost savings on warehouse space, the two autonomous warehouses represent a small subset of Target’s 40 distribution centers in the U.S [9].

More recently, Target has started migrating to a more “store-friendly” distribution model in which stores receive products by the individual unit rather than by the full case. This delivery method increases distribution efficiency (freeing up shelf space in stores) and flexibility (allowing distributors to package each shipment according to a store’s specific needs), but at an unspecified cost [10]. Concurrently, Target is rolling out “order-to-shelf” initiatives by which products are delivered straight to store shelves, eliminating the need for an inventory buffer in the store’s receiving/storage area, thereby saving on building costs [11]. Both of these new distribution models are only made possible by advancements in Target’s IT infrastructure.

Once these innovations have been proven, the company hopes to apply the most effective models to a broader range of warehouses and products. While it’s easy to pilot distribution models on a small scale, a continent’s supply chain can’t be replaced overnight, considering something like an automated warehouse system takes years to install.

What else should Target be doing now to ensure a sustainable future?

Walmart and Amazon, Target’s largest competitors, have been working on similar digital approaches to demand forecasting, supply chain optimization, and inventory efficiency. For Target to win the omnichannel retail arms race, the company needs an integrated digital infrastructure. What does that mean? It means not just modernizing each link in the supply chain, but connecting the entire supply and demand ecosystem so that the top of the supply chain is constantly and automatically adapting to consumer behavior.

For example, Target should be seeking the level of automation at which a customer browsing for items on Target’s website or mobile app can trigger a demand forecast that, along with the corresponding projected inventory levels of said products at the customer’s nearest store, triggers a fulfillment order from the closest distributor. By a similar process, Target could guarantee it has an item in stock locally and ready for pickup or delivery before the customer has even completed the purchase decision.

Better store layouts, smarter delivery models, and autonomous warehouses are all technology-enabled improvements to Target’s supply chain. Differentiating innovation requires more than these incremental and individual improvements; lasting success calls for a system-wide digital transformation that shrinks the entire supply chain.

Could this investment be all for naught?

Will the promise of renovated and new small-format stores be realized at scale? If so, will their profits be enough to offset potential further declines in older big-box locations?

Even if Target is able to deploy a best-in-class digitalized supply chain, could the continued evolution of consumer behavior and innovations in e-commerce technology nonetheless kill brick-and-mortar retail?

Sources