Retail giants scaled operations and only became bigger over the last three years and now it's time to optimize processes, say retail leaders.
Process excellence and continual improvement were common themes as large retailers reported fourth quarter and delivered cautious outlooks for 2023. However, retail executives were confident they could optimize and improve operating margins and cash flow going forward.
Celonis Media covers the process economy and the impact of process mining and execution management across industries. This article is based on publicly available information and doesn't reflect whether Celonis technology was used or whether the company is a customer.
The primary takeaways in the retail sector are:
Retailers are investing in front-line workers;
These companies are looking to optimize processes across all functions;
Retailers have transformed into omnichannel giants with scale;
Supply chain inflation is expected to improve somewhat along with logistics costs;
And supply chain as well as inventory management are increasingly tied to customer experiences.
Target, on its fourth quarter earnings conference call, highlighted how it is optimizing processes at scale. For fiscal 2022, Target had revenue of $109 billion, up from $106 billion in 2021 and more than $30 billion since 2019.
Brian Cornell, CEO of Target, said a new normal is arriving. "Some of the most exciting progress we anticipate will be translating our newfound scale in a simpler, more efficient way is to run Target," said Cornell. "The difference between an enterprise-wide efficiency mindset and a cost cutting program starts with what questions you ask yourself. For us, the question isn't what can we cut?
It's how do we make things easier for our team to more efficiently deliver a guest experience that continues to live up to our brand promise."
Specifically, Target is developing repeatable processes to test concepts and then refine them. This approach goes across the company and is expected to lead to $2 billion to $3 billion in cost savings over the next three years.
Michael O'Neil, senior vice president of FP&A at Target, said the company is looking for ways to simplify work, streamline processes and reduce redundancies while improving customer experience. "The things we're not willing to sacrifice start with a team member and the guest experience," said O'Neil.
O'Neil added that Target's apparel business is looking to optimize processes. "We're focused right now on driving simplicity, speed and consistency across the entire of value chain. And in doing so, we expect to see benefits from assortment planning, to supply chain, all the way down to guest fulfilment," he said. "And the benefits will be across the P&L. We'll see it in lower markdowns, received increased productivity, labor productivity, and we'll see it in top line sales."
Michael Fiddelke, Target's CFO, said the retailer will optimize its core processes—inventory, payables, supply chain, fulfilment to name a few—over time. "Changing some of those core processes won't happen overnight," he said. "That's why the multiyear nature is important. But we expect those benefits to be significant."
Target's approach to drive process excellence and productivity rhymed with comments from other leaders in retail. Ted Decker, CEO of Home Depot, said it is improving store experiences through a productivity effort called Get Stores Right. Decker added that Home Depot is also building out its supply chain so it can deliver big shipments such as appliances better.
Ann-Marie Campbell, Executive Vice President of US Stores & International Operations at Home Depot, said the retailer has simplified order management in stores. "Historically, our associates have to navigate dozens of systems but with order up, we have been able to streamline multiple systems into one that is simpler and more intuitive," she said. "We took simplification even further this year with the introduction of the new HD phone and associated applications."
Home Depot rival Lowe's also has multi-year process improvement efforts. It is optimizing processes for omnichannel shopping, delivery and other areas. "We have been working aggressively to update our IT infrastructure. We still have a 30-year-old basically mainframe system that we're getting ready to retire, and it's literally taken us 4.5 years to get to this point," explained Lowe's CEO Marvin Ellison. "The moment that system is officially retired, it gives us the ability to create so many technology advancements that will simplify the associate's job and limit friction points for customers."
Lowe's Ellison noted that perpetual productivity initiatives (PPI) on the store, merchandising and supply chain all improve experiences since the processes are intertwined.
Another area Lowe's is looking to optimize is its returns process. The returns desk now has touchscreens that enable associates to quickly scan items and process to correct return values. Systems will automatically account for returns policies and promotions.
Return processes are a big pain point for retailers, said Lindsey Peters, Retail Industry Lead for Celonis, in a recent interview.
"The volume of returns, especially coming off of a holiday, has been challenging for retailers. People can return to store, they can return through a carrier - there are multiple channels. Returns often need to happen within a certain time frame to ensure the retailer can still sell the goods. Actually, tracking and managing returns is difficult. A lot of companies don't have a great process in place yet to support the volume of returns wreaking havoc downstream business processes."
Walmart CEO Doug McMillon said his company will remain nimble. "We're driving a lot of change inside our company. We know where to tap the brakes on cost and inventory, but our focus is more on the gas pedal with respect to our strategic improvements related to assortment growth and our customer member experience," he said. "We'll keep shaping the business model by scaling our newer mutually reinforcing businesses in areas like marketplace, fulfillment services and advertising."
John David Rainey, Walmart CFO, said the company will continue to change due to investments in e-commerce and supply chain automation. Rainey said Walmart has improved performance at its perishable distribution centers to improve throughput with more cases per hour. In addition, Walmart's e-commerce distribution centers have cut a 12-step process to five steps.
"These are high ROI investments where we've got clear line of sight into the return. This allows us to not only invest appropriately with our associates and continued technology, but also to see margin expansion over time," he said.