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How Target’s Supply Chain Investments Shrink the Last Mile

In February, Target laid out ambitious goals to expand its sortation network from just three facilities last year to 15 by 2026. So far, the $100 million project appears to be paying dividends for the company’s last-mile delivery goals.

For one, the investment is helping the retailer to use larger passenger vehicles on more delivery routes in its sortation markets, with early “positive” results so far, said executive vice president and chief operating officer John Mulligan.

“Compared with routes previously served by sedans, SUVs and minivans can deliver more than double the number of packages per route, while high-capacity vans can serve nearly five times as many packages,” Mulligan said in Target’s first-quarter earnings call on Wednesday. “And beyond capacity, the use of larger vehicles enables further route optimization, increasing the number of packages that can be delivered per hour.”

In the first quarter, approximately 65 percent of last-mile deliveries serviced by Shipt in these markets were made with larger vehicles compared with zero a year ago.

Target’s sortation centers are designed to serve a different purpose than the company’s legacy distribution centers. They’re positioned farther downstream from the retailer’s stores to offer speed and efficiency that supports last-mile delivery.

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Last year, Target delivered 26 million packages via these sortation centers, and aims to roughly double that amount this year.

In bringing larger vehicles into the last-mile mix, Target has seen “meaningful ” delivery cost savings, Mulligan said. The mass merchant is working to begin testing high-capacity vans at a larger scale in its hometown of Minneapolis and Dallas, the COO said.

It’s more than just the vehicles and the facilities that are improving delivery.

“We’re developing a standardized faster way to load those vans, enabling package containerization and easy identification of the correct packages at delivery,” Mulligan said. “In addition to simplifying the load process for the drivers, this new process will enable us to safely move a larger number of Shipt drivers in and out of our sort centers in a given amount of time, expanding our last-mile delivery capacity in these markets.”

Target is beefing up its last-mile and next-day delivery capabilities not just by scaling up its sortation center network, but by innovating around its current existing processes.

Earlier this month, the company opened a new facility in Smyrna, Ga. designed to serve as an extension to the Atlanta sortation center, which “cost very little to open,” according to Mulligan.

This new facility takes the burden off the Atlanta sortation center, since a portion of local orders falling outside the latter’s last-mile delivery area can now be transferred to the Smyrna extension where Shipt drivers can pick them up and serve additional neighborhoods. With the opening of this extension facility, Target says it can now offer next-day delivery to more than 3 million customers in the Atlanta market.

While automated warehousing is a top area of supply chain-related investment, Mulligan stressed that “automation is only one way to deliver value to our business.”

He pointed out that these sortation centers are “not highly automated.” Instead, they use technology and sophisticated process logic to sort packages, which he says still provide a faster and more efficient customer experience “at a significantly lower cost.”

Target’s executive vice president and chief financial officer Michael Fiddelke said in the call that he expects the sortation facilities will “do a lot of business in the back half of the year” and in the years to come as the company cuts last-mile shipping costs.

Burden of freight costs eases

The distribution network updates come as freight rates continue to fall from year-ago numbers across the supply chain, as retailers including Target, TJX and Ross Stores recently highlighted improved margins due to the slumping costs.

Fiddelke cited the declining freight and transportation costs as the primary factor in Target’s gross margin rate, which increased 0.6 percentage points year over year to 26.3 percent.

As of Thursday, the Drewry World Container Index of $1,720 per 40-foot container was 78 percent below the year prior’s $7,657 per container, but just 1 percent lower from $1,741 in the week prior.

“We believe that many of the same trends that emerged in Q1 will continue in the second quarter, including a meaningful tailwind from freight and transportation costs and a significant headwind resulting from inventory shrink,” Fiddelke said, referencing the retailer’s $500 million in projected inventory shrink this year.

However, Fiddelke was realistic about the declining costs. “Freight is still a headwind, to be clear, but on a year-over-year basis, we’re seeing some benefit,” he said.

Target sourcing VP on circular private label strategy

Target’s rethinking of its domestic distribution network comes as the retailer reevaluates its wider international supply chain to achieve net-zero greenhouse gas emissions by 2040. The commitment extends across Scopes 1 and 2, or emissions that Target directly controls, and Scopes 3, which are emissions produced primarily by the retailer’s supply chain partners.

At the Reuters Supply Chain USA event in Chicago on Thursday, Maithili Shenoy, vice president, sourcing and manufacturing, Target, said the mass merchant plans for 100 percent of its owned brand products to be designed for a circular future.

“What that means for us as we think about net-zero, it is requiring us to understand our product movement—such as how cotton meets the end consumer,” said Shenoy. “So an example—the cotton is from India, it goes to Vietnam to get knitted and then it goes to Indonesia, where it is sewn—that’s a lot of carbon. As we are looking at our footprint, we are actually also looking at: ‘What are the carbon emissions? What’s the waste situation there?’”

By 2025, Target aims to establish two circular private-label brands using materials that are regenerative, recycled or sourced sustainably and create products that are more durable, easily repaired or recyclable.

Target is partnering with companies such as comfort footwear manufacturer and brand Okabashi as well as circularity initiative Fashion for Good to aid in designing more circular products.

The retailer has already created its own circular programs, like a car seat trade-in event that enables consumers to get rid of their unwanted car seats in exchange for a 20 percent off coupon for either a new seat, one stroller or select baby apparel.

“We take back these car seats in our stores, and we grind them and use them to make new Target home products such as storage crates. It doesn’t make a whole bunch of sense to take all these car seats, burn more carbon, ship it back to Asia only for it to be delivered again.”

Shenoy said that she sees the retail supply chain evolving into a model that prioritizes the total cost of ownership (TCO), which accounts not just for the bottom-line immediate costs, but added usage and maintenance costs that continue in the longer term.

“It is no longer just about cost, but it includes agility,” said Shenoy. “That speed and flexibility has a direct impact on markdowns, on out-of-stocks, on the guest experience and on inventory. As we are looking at our sourcing business model, we are expanding our journey that follows those four dimensions of agility, speed, resiliency and also sustainability.”