Shrinking the Supply Chain: Target needs an integrated digitalization strategy to thrive as an omnichannel retailer
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 , 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  but also open 35 new stores in 2018 . Improving the efficacy and efficiency of its supply chain will allow Target to maintain discount prices and sustainable margins in new, costlier, urban locations .
What is Target doing to turn the company around?
This year, Target announced a $7 billion investment to “modernize” the company , which builds on a $5 billion investment in supply chain and technology that started in 2015 . 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 . 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 .
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 . 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 . 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?
 Catherine Chen, “Target to Open New Stores in 2018, Expand Delivery as Retail Pressures Mount,” TheStreet, October 19, 2017, [https://www.thestreet.com/story/14349243/1/target-will-open-35-new-stores-in-2018.html], accessed November 2017.
 Lauren Thomas, “Target to close a dozen underperforming stores,” CNBC, November 7, 2017, [https://www.cnbc.com/2017/11/07/target-to-close-a-dozen-underperforming-stores.html], accessed Novemeber 2017.
 Chen, “Target to Open New Stores in 2018, Expand Delivery as Retail Pressures Mount,” TheStreet.
 Kevin O’Marah, “Target: Is the Supply Chain Ready?” Forbes, March 6, 2015, [https://www.forbes.com/sites/kevinomarah/2015/03/06/target-is-the-supply-chain-ready/#8cb4f395f41b], accessed November 2017.
 Michelle Lodge, “Target CEO: This Is How We Will Beat Walmart,” TheStreet, October 22, 2017, [https://www.thestreet.com/story/14349966/1/target-ceo-brian-cornell-vs-walmart.html], accessed November 2017.
 Nandita Bose, Nathan Layne, “Exclusive: Target gets tough with vendors to speed up supply chain,” Reuters, May 4, 2016, [https://www.reuters.com/article/us-target-suppliers-exclusive/exclusive-target-gets-tough-with-vendors-to-speed-up-supply-chain-idUSKCN0XV096], accessed November 2017.
 Robbie Whelan, “Fully Autonomous Robots: The Warehouse Workers of the Near Future,” The Wall Street Journal, September 20, 2016, [https://www.wsj.com/articles/fully-autonomous-robots-the-warehouse-workers-of-the-near-future-1474383024], accessed November 2017.
 Target Corporation, January 28, 2017 Form 10-K (filed March 8, 2017), via EDGAR, accessed November 2017.
 Mark Hamstra, “Supply chain changes drive results at Target, Whole Foods,” Supermarket News, March 3, 2017, [http://www.supermarketnews.com/retail-financial/supply-chain-changes-drive-results-target-whole-foods], accessed November 2017.
Student comments on Shrinking the Supply Chain: Target needs an integrated digitalization strategy to thrive as an omnichannel retailer
With respect to your question about whether or not e-commerce will kill brick and mortar retail – I believe that for stores like Target it will shrink them but not eliminate them altogether. Customers who used to rely on regular trips to Target to purchase routine household goods such as paper towels may find it far more convenient to order them online. However, many Target customers such as my sister go into the store to browse (even on a weekly basis) with only a vague idea of what they’re looking to get, if anything. This is because for them, going into the physical store is an experience. The serendipitousness of running into an item you didn’t realize you needed or wanted, or a great deal, is much more rewarding and easier to create in a brick-and-mortar store as opposed to online, where much of the customer’s product discovery is through intentional search.
Target’s e-commerce platform can better create this experience of the unexpected ‘find’ by being able to track a customer as they interact with the customer both in the store AND online. This would provide a holistic view of customer shopping patterns, and would enable Target to better customize the online user experience. However as you alluded to, this is a huge challenge of digitalization.
I agree with Shalei that while physical brick and mortar stores might transition to smaller spaces or decrease in store count, they will be here to stay for the time being. However, I believe the main trade off Target has to consider is that the in-store experiences is curated to drive sales, but at the cost of efficiency. Target’s in-store experience increases the time customers spend in the stores and creates an unconscious need for superfluous items. If Target streamlines their shopping experience, do they risk losing sales?
Previously, Target had utilized a mobile phone application that engaged with their customers while shopping in store by providing additional discounts and providing points towards a customer loyalty program. The app design supported the consumer behavior of meandering around stores and “discovering” additional deals. This app has now transitioned to provide a map of the store, guiding the consumer to specific products and deals. This transition seems to provide Target with operational efficiencies, potentially needing less staff to guide customer and more predictable sales that then drive back end efficiencies. Additionally, the customer perceives a more efficient shopping experience. However, I can’t help but wonder if their overall revenue might decrease due to these efficiencies and shifted customer shopping patterns? I believe the Target should incorporate suggestions for the customer based on their shopping history in the app to continue to drive a discovery based shopping experience, while engaging digitally with their consumers.
I agree with Shalei and iloveTOM that there will always be a need for brick-and-mortar stores. However, these physical locations must be transformed to create a unique experience that builds seamlessly on how customers digitally engage with Target. The complete integration of online and offline will allow Target to become a truly omnichannel player. This integration hinges on digitization and data analytics to inform operations. Predictive analytics based on observed buyer behavior will increase the accuracy of demand forecasting, which will in turn drive efficiency in inventory management. An integrated, automated supply chain will allow Target to respond quickly to shifting customer tastes and result in better merchandising.
I agree with all the steps Target is taking to “modernize.” Supply chain digitization is absolutely necessary to optimize Target’s performance and maintain margins in the fiercely competitive retail landscape. Digitization is not a question of if, but when and I worry that Target may not be evolving fast enough.
To comment on the question of if e-commerce will kill brick-and-mortar stores, I believe the answer is no, and no company would want that. We are seeing some digitally native brands add brick-and-mortar stores to their strategy and they would do this for many reasons, here are just a few: 1) A customer is worth the least if they only engage with your brand online, a bit more if they engage only in-store and by far the most if they shop both online and in-store. 2) Customers still often like to engage with a brand in person and have the opportunity to touch and see products. 3) If you can make being in-store more experiential, customers will be more inclined to come to the store, and will end up purchasing more than she would have online (usually). Adding more services, i.e. hair salons / hair drying salons, restaurants etc. gives the customer another reason to come to the store rather than shopping online and will elongate the life of brick-and-mortar locations.
I’m a proponent of Target’s decision to build out smaller format stores. According to Business Insider, these stores offer a curated selection of inventory and a unique environment geared towards the surrounding population. For example, the Herald Square location in NYC offers products attractive to tourists and a large selection of beauty products, since the store is located nearby a Sephora. In terms of environment, management has employed distinct architecture and artwork that reflect local consumer interests and preferences. Management is also focused on shutting down the larger boxes that are under-performing.  On management’s recent earnings call, the COO recounted: “our July openers have been particularly strong out of the gate… the guest response has been phenomenal.” 
However, I disagree with your suggestion that Target “can no longer simply continue to incrementally improve each individual aspect of its business.” This isn’t just a matter of winning versus losing. I believe this is a matter of differentiation and knowing who the customer is. What makes Target different than its competitors, such as Amazon and Walmart? Target’s slogan is: “Expect More, Pay Less.” The chain offers higher end, more exclusive goods that are more fashion-forward. Omnichannel integration is a must for all retailers. The key for Target, I think, is learning how to tap into this segment of the market through the more curated offering that these smaller scale stores provide.
Furthermore, piloting these store formats in the manner that management is doing is key to ensuring that the format works. Since Target is making such a substantial investment, it is important to confirm that the idea is working before rolling it out. Our previous case on Ron Johnson at JC Penney demonstrates how implementing rapid, bold stroke changes can lead to failure.
The issue with your proposed solution to use customer browsing to trigger a demand forecast may also lead to issues in the supply chain. For example, how do you quantify customer browsing? How can target ensure that browsing data is reliable?
Regarding your second question, I don’t believe that innovations in e-Commerce technology will kill brick and mortar retail. There are a number examples of companies, such as Warby Parker, Casper, and Bonobos, that are building out a smaller scale retail base due to the benefits that brick and mortar offers. Why is this? Well, there are several benefits that are derived from brick and mortar. Customers often desire the ability to try on certain products, such as apparel. In addition, customers value the convenience, especially when delivery is expensive and requires substantial lead time. I would argue that Target can further develop its position in the market, catering to higher income consumers who can “expect more” through its curated stores.
 Keyes, Daniel. “Target Opens New Small-Format Stores.” Business Insider, Business Insider, 23 Oct. 2017, http://www.businessinsider.com/target-opens-new-small-format-stores-2017-10.
 Garcia, Tonya. “Target’s Small-Format Stores Are Turning into a Big Win for the Retailer.”MarketWatch, 19 Aug. 2017, http://www.marketwatch.com/story/targets-small-format-stores-are-turning-into-a-big-win-for-the-retailer-2017-08-16.
Thanks Bob, this was a great read. Regarding your question of “could the continued evolution of consumer behavior and innovations in e-commerce technology nonetheless kill brick-and-mortar retail?”, I’m rather bearish on Target’s prospects. Many of the initiatives you mentioned that Target is implementing or should implement, including autonomous distribution warehouses, automatic demand forecasts, etc, are all things that Amazon is already doing. These initiatives will shrink Target’s supply chain and make it much more efficient, but it won’t solve the fundamental problem that consumers simply would rather have goods (especially commoditized goods) shipped directly to them vs. having to visit a store.
Unless Target actually becomes a distribution company, I’m not sure how they will be able to compete with Amazon in the long run. It’s puzzling to me that they would be opening more stores against this macro environment in retail. The markets seem to be bearish as well, with Target’s share price having declined 23% over the last year(1). I do think there is a place for a certain amount of physical stores, but only in Target’s most profitable locations. I’ll be interested to see how the Target story continues to play out over the next few years.
1. Sourced from Capital IQ as of December 1st, 2017
Bob: I agree with you that Target needs to take the digitization initiatives it’s rolling out in the warehouses to broader integration of the supply chain and the sales & marketing function. Your suggestion of a demand forecast and inventory refill system that’s based on customer browsing of the Target website is interesting. But I am afraid it does not go far enough to create an individualized omni-channel shopping experience for each customer. One possible strategy is to entice shoppers to create online profiles with coupons to start accumulate more detailed purchasing behavior of Target customers. Based on those purchasing patterns, Target could send reminders to shoppers to replenish groceries when it predicts stock has run low, recommend new products that match previous tastes, and offer in-store pick-up for online orders. By applying digitization to both the back-end logistics and front-end customer interaction, Target can serve its customers in a more personalized and efficient way to increase customer retention.