It may seem like a contrast, but for Target, keeping more inventory on its store shelves might be the answer to increasing its online sales. That claim might not make much sense at first glance, but in the ever-changing world of retailing, it reflects the constant need to reconsider and reconceive of the best ways to get the products that customers want in their hands, at exactly the time and place that they want those items.

Lo-res_146264005-SIn a traditional model, more inventory on store shelves reduces the chances that a retailer might find itself out of stock of some product that a shopper wants to buy. But it also increases inventory holding costs, so finding a balance traditionally has entailed finding the exact amount of product to hold so that the store is never out completely but also never overstocked with too much of something.

In an online sales model, the inventory holding costs were supposed to nearly disappear. Online retailers did not have to worry about putting products on display. Instead, they could hold them relatively inexpensively in a warehouse and just ship them out to each customer for each order as it occurred.

But in the new, omnichannel environment, these two models blend and combine, creating a far more complicated algorithm for retailers. Target has sought to resolve the challenges by establishing a new balance. It keeps more products on shelves in its stores, but it also relies on these stocks to supply its online orders. Therefore, it can afford to increase its inventory, because it is using them to support its online sales supply as well as its in-store sales.

The strategy has provoked a lot of questions, but Target appears quite pleased with the results. In recently released data, it noted that it had improved its in-stock performance by about 20 percent. Furthermore, it was able to fulfill approximately 30 percent of its online orders with products taken from local store shelves, which also minimized shipping distances. Many online buyers also volunteered to pay online, but then pick up their orders in stores. In perhaps its happiest statistic, Target noted that its online sales grew by 34 percent in a recent quarter and surpassed the sales achieved by its main rival, Walmart.

To achieve these outcomes though, Target increased its in-store inventory levels by about 4 percent.

Discussion Question:

  1.  What are the advantages and disadvantages of filling online order by using store inventory?

Source: Loretta Chao, The Wall Street Journal, February 24, 2016