Target's (NYSE:TGT) supply chain woes are coming to a boil. Out of stocks and sometimes entirely empty shelves have become all too common, and have come to the attention of the national media.
Brian Cornell, Target's CEO, has stopped downplaying the supply chain issue and has said it is a serious problem that must be solved, according to MPR News. Supply chain problems played a big role in the chain's decision to close its stores in Canada, but the issue is also apparent to shoppers in U.S. stores, especially in the grocery aisles. Target is now investing $1 billion in supply chain and technology. Walmart is also making supply chain changes to adapt to the new retail environment.
A first step in Target's strategy was naming John Mulligan as COO last month and tasking him with fixing the supply chain challenge. He said the retailer's supply chain has struggled to deliver appropriate goods to stores in a timely manner. Cornell, who came to Target from PepsiCo a year ago, cares more about these supply chain issues than former CEO Gregg Steinhafel.
The growth of online ordering coupled with pickup of these orders in stores has magnified these problems. "We've been asking our supply chain to move well beyond its original design and become more flexible in the way we serve our guests," Mulligan told analysts. "However, while we understand the reasons, the simple fact is that our current performance is unacceptable."
Satisfying the demands of online and in-store customers requires different approaches, said Marc Wulfraat of MWPVL International, who has researched Target's supply chain. "They have to please both masters," he said.
"They've got the online customer who wants it immediately and then they've got the shopper in the store who wants to have the stock when they go there as well. So, now you have two separate supply chains that you now have to optimize inventory for."
Demand forecasting and effective communications through information systems is the key to making sure Target's 37 distribution centers have enough inventory and can deliver on time. "The devil is in the details," said K.K. Sinha, chair of the supply chain and operations department, University of Minnesota's Carlson School of Management.
"You have to be able to forecast the demand and make sure all the systems are talking to one another—and you have to work through the details. You have to sense and respond with respect to what's happening in every store, in every different location," Sinha said.
While the supply problems are chain-wide, Target's biggest challenge has been in grocery. "Target is not primarily a grocer," said Dave Brennan, business professor at the University of St. Thomas. "And that's probably one of the areas that needs greater attention, not just in terms of inventory, but in terms of what is stocked and how deep and how broad of an assortment of products that they're going to have."
Walmart (NYSE:WMT) has also been focusing on supply chain recently, holding more inventory at distribution centers rather than in its stores, said Greg Foran, CEO of the chain's U.S. stores. This has given the chain more flexibility in meeting demand, Foran told The Wall Street Journal.
The strategy also helps Walmart's e-commerce efforts by keeping smaller amounts of a wider variety of merchandise at the distribution centers and making items available to both online and in-store shoppers, said Kevin O'Marah, chief content officer at SCM World. "It's smart, it's naturally an outgrowth of e-commerce. They can have less inventory system-wide, and still offer more variety."
Upgrading technology and keeping store employees out of the stock rooms enables workers to operate more efficiently, Foran said. Overhauling inventory management has allowed Walmart "to reduce (store) inventory while improving both in-stock levels and sales. Inventory management will continue to be an ongoing focus for us," he said.
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