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Target’s Leveraging its Stores to Cut Fulfillment Costs

Target Corp.’s found a way to cut fulfillment costs–and create supply chain efficiencies–as it leverages its store fleet to help it speed delivery for consumers’ purchases.

The mass discounter hosted its annual Analyst Day in Manhattan Tuesday, the same day that Target posted fourth quarter earnings results, where chairman and chief executive officer Brian Cornell said the retailer is “America’s easiest place to shop.”

Cornell told analysts that the mass merchant has the “most comprehensive fulfillment choice” for its shoppers. Those options include same-day delivery in some areas, shipping from store, and pickup from the store, to name a few options. The drive-up option even includes a store associate placing the purchase in the trunk of the shopper’s car, a service Cornell said time-pressed mothers love because they can go to the store with their kids in the car and never have to enter it.

But while the mechanics of delivery look easy, it has been the planning and implementation of supply chain efficiencies that has helped the retailer cut operating costs on the fulfillment side, while being able to meet consumers’ needs.

John J. Mulligan, Target’s chief operating officer with oversight for stores, supply chain and properties, told analysts that how ever shoppers want to receive their purchases, “We have a way to deliver it.” The placement in the trunk of the car is a new concept, and that the drive-up feature “makes a Target run easier than ever.” There were more than two million parking deliveries last year, and each one took no more than two minutes, he said, noting, “That’s easier than having a box left on their step.”

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The COO explained that using its stores as the foundation of its hub strategy helps Target lower costs and “handle online orders not far from the guests who bought them.” Shipping an online order from a nearby store gets the purchase to the customer a full day faster than when using an upstream delivery center because the store can ship on the same day the order is place, he explained.

As for the logic, Mulligan said the costs are lower when you can reduce the distance for delivery, and you get the benefit of getting it faster to the consumer. What’s more, the stores already have the items on hand. Target last year “shipped out the back of 1,400 local stores.” And that new parking delivery option? Mulligan said order pickup through the drive up option “costs 90 percent less than fulfillment from a warehouse.”

Target also gets an incremental benefit—there are different shipping costs attached to a variety of options. And using the hub strategy helps the retailer keep up the “incredible growth” in Target’s digital business, Mulligan said.

“Stores fulfill three out of every four orders, and are doing the work of 14 warehouses [so we don’t] have to build distribution centers. We’re using stores as the most efficient way to use our resources. It’s not coming at the cost of same-store sales,” he said, explaining that fulfillment on a sales-per-square-foot basis grew 67 percent, while in-store sales grew 4 percent.

That means the key to making the hub strategy work is really on the replenishment end of the operations. Target has that covered too.

As for replacing what is sold in the stores, or even what is shipped out, Mulligan said the “key is getting the replenishment right and sending only what [the stores] need when they need it.”

Target has been investing in its supply chain to modernize the upstream [supply chain] processes. Citing the company’s Perth Amboy center in New Jersey, Mulligan described it as one warehouse doing work for a “whole group of stores.” The use of robotics allow the team to manage “millions of units for each store.” That includes picking the items by category, sorting by aisle, and the ability to wheel the sorted items to the appropriate sales floor.

Target is testing the process in Boston and New York City for its small-store format. Mulligan said it’s about “keeping the sales floor in New York and moving the back room to New Jersey. For the stores, that has made all the difference.”

How so? According to Mulligan, the full-size stores can be used as the fulfillment house. Learning more about the replenishment process will enable Target to lower its out-of-stocks. At the smaller format locations, the stores get a precise amount of products several times a day, and according to Mulligan, it will take some time before the model can be scaled and rolled out across the country.

“With a strong foundation in place, the fulfillment glides right on top,” he said. The end benefit is that it will help the sales team spend more time on the sales floor helping its “guests.” While digital sales have been growing, Mulligan said the retail experience is still happening inside the stores and having more members of the team on the floor means they can “help guest find what they need before they ask.”

When it comes to aesthetic, Target is investing in the stores by modernizing the look, both inside and out. Improving sight lines inside the store lets the product shine, and “guests” shop us more often, Mulligan said, noting that there’s a “2 to 4 percent lift per store after a remodel.” The goal is to remodel more than 1,000 stores by the end of 2020, with more beyond that at a more moderate pace.

Cornell told analysts that the plan is to remodel 300 this year and 300 more in 2020 to reach that goal of over 1,000 stores.

The CEO said the team is “building a durable financial model that will propel Target forward in any economic model.” It also has been focused on controlling costs to offset the pressures for wage growth–currently set for $15 an hour next year.

The last few years, Cornell explained, was about an ambitious agenda to reimagine the stores, reinvent the supply chain and reposition the brand portfolio. That was all aimed at building a durable model that delivers strong, consistent growth. The CEO also told analysts they can expect Target to continue to deliver, adapt and evolve. And he said that while 2018 was a great year for the retailer, “2019 will be even better.”

According to Cornell, there’s no big capex or other major investment on the horizon as so many of the big investments already made are now starting to normalize. Target will continue to open stores, scale its supply chain and roll out new brands.