Target had too much of the wrong inventory and chose to course correct as rapidly as possible so it wouldn't hamper the customer experience or its supply chain in future quarters.
Due to a rapid shift in consumer behavior, Target said in June it would right-size its inventory for fiscal 2022 and add supply chain holding capacity near US ports to manage through volatility, transportation and fuel costs. In August, Target released its second quarter results with an update on its efforts.
The update: Target reduced its inventory exposure in discretionary categories and invested in frequency categories of products. The rapid inventory shift meant second quarter earnings per share were down 89.2% from a year ago. CEO Brian Cornell said the alternative of holding inventory over time didn't work for the customer experience or supply chain.
Here's the lesson: Businesses need to know how processes across functions impact each other as they manage through supply chain issues and inflation. For Target, the core metric was distribution center capacity because costs surged. John Mulligan, Target's Chief Operating Officer, said inventory in the retailer's distribution center network peaked well over 90% of capacity. Less than 2 months later, Target had inventory below 80% of distribution center (DC) capacity.
We want to keep our DC network operating at or below 85% of its maximum capacity, given that operational difficulties and costs rise significantly when we move beyond that level. So, it's important to note that back in June, inventory in our DC network peaked at well over 90% of our capacity. Also notable, by the end of the second quarter, less than 2 months later, our team had quickly reduced DC capacity utilization to below 80%.
Put another way, by the end of the second quarter, the physical space occupied by our distribution center inventory was more than 20% lower than the peak we reached in June. So today, while we still have some individual sites where we need to make more progress, the team has accomplished a remarkable improvement in a very short time, which will allow our end-to-end operations to function more efficiently and effectively in the back half of the year.
Target's plan is to continue to invest in its supply chain with a focus on developing and automating processes that reduce the amount of store workload devoted to receiving inventory and restocking shelves.
Also see: Why optimizing truck pickup, delivery processes are so important | See Webinar: Are Your Processes Keeping You From Filling Your Trucks On Time? | These 8 characteristics of resilient supply chains can give your business a competitive advantage Mulligan added:
We're continuing to modernize how our existing distribution centers serve our stores by developing and automating processes that reduce the amount of store workload devoted to receiving inventory and restocking store sales floors. And finally, we're rapidly expanding the number of sortation centers operating around the country. We have 6 of these facilities operating today, including 3 that have opened in the last few months, and we have plans to add 5 more by early next year.
These small facilities expand ship-from-store capacity in the locations they serve while significantly reducing last-mile delivery costs, particularly as we integrate our Shipt drivers into the process. Given the package delivery density we've achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which adds speed and significantly reduce last-mile costs in markets where they operate.
While Target spent a lot of time on its earnings conference call on inventory and supply chain processes, it's worth noting how supply chain is intertwined with the front-end customer experience. Cornell noted the customer experience can decline due to excess inventory clogging the supply chain.
While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward. Consider the alternative: we could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time. Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But much more importantly, it would have degraded the guest experience. It would have cluttered our sales force and hampered our ability to present new, fresh and fashionable items, the ones our guests expect from Target.
Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and store teams, as they face the distraction of working around it day after day.
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