One of the key resources that Target has at its disposal is its vast network of physical stores. Yet some arguments suggest that these assets are problematic, in that they increase the company’s unavoidable or sunk operational costs, compared with the costs borne by purely ecommerce retailers. In Target’s strategic view though, the best option is to embrace them as assets that it can leverage in multiple ways to enhance its competitive positioning.
Beyond serving their essential functions, as places consumers can visit to try, purchase, or return items, Target stores also promise to become fulfillment centers that serve ecommerce markets more effectively than is possible by retailers without physical store locations. Orders placed online thus would be fulfilled by stores local to the purchaser, rather than dispersed and shipped from some distant distribution center.
Some key figures suggest how this operational and supply chain design might work. Specifically, approximately 80 percent of ecommerce sales get fulfilled by stores, and of those sales, nearly one-quarter involve in-store pickup options. Consumers place their order, perhaps on their lunch break, then swing by the store on their way home to pick up the items, quickly and conveniently. Thus, the stores are not subjected to any relevant shipping or packing costs; employees simply bag up the items for shoppers to grab and go. By using stores to in this way, Target was able to decrease its per unit fulfillment costs by 25 percent.
The rest of the sales involve shipping costs, including the box and the payment to a logistics operator to pick up the packed items. These costs may limit the efficiency of the in-store efforts, because each store needs to work with a shipper, rather than everything leaving from a central location such as a distribution center.
To ensure that the balance falls in its favor, Target is seeking other areas in which it can ensure the efficiency of its novel supply chain. For example, product deliveries to each store get sorted by a robotic system that organizes and places item into a box dedicated to a particular aisle. Thus, when it is time to restock store shelves, the items already are sorted according to the store’s design, which makes the process more efficient. It also facilitates integrated inventory operations across in-store and delivery options, such that whether store employees are looking to pick items for shipping or to replenish shelves, they know precisely where to find the needed items.
Achieving these operational innovations is not cheap though. Target estimates that redesigning all its stores to support these varied fulfillment and supply chain efforts has cost it around $4 billion over the past three years.
Discussion Questions:
- How do the key financial ratios discussed in Chapter 6, (gross margin, inventory turnover, operating expenses/net sales, net profit margin, asset turnover, and return on assets) change if Target fulfills online orders from its stores versus distribution centers?
- How is the in-store customer experience different when in-store online fulfillment is operational?
- Should Target fulfill online orders from store inventories?
Source: Emma Cosgrove, “Target’s Tech for Store-Based Fulfillment Operations Is Ready to Scale,” Retail Dive, March 5, 2020