In our Supply Chain Matters commentaries focused on online customer fulfillment and especially the 2021 holiday fulfilment period, we cautioned retail and consumer goods supply chain management teams to be watchful for the bullwhip effect in inventory planning and replenishment needs to support expected customer demand.
In the first half of 2021, large retailers were financially benefiting from the post-pandemic economy in the U.S. and specifically increased demand for many forms of pandemic related consumer goods. Industry and business media had noted that retailers were actively accelerating inventory purchases from global based suppliers to avoid being in the position of having not enough inventory to meet holiday focused demand. However, warning signs existed and ultimately came to roost with the unprecedented disruptions in global-wide ocean container shipping and U.S. West Coast port and inland logistics congestion that spilled over well into the first half of this year. In our commentary published in August of 2021, we indicated that precision planning and inventory management was essential for retailers and wholesalers.
What is becoming more apparent with retailer’s most reporting of quarterly financial performance is that indeed, a condition of excess inventory exists, and it includes multiple retailers.
Retailer Target’s Acknowledgement and Plan
Supply Chain Matters has come to admire Target Corp. both in the insightfulness and boldness of CEO Brain Cornell, and Chief Supply Chain Officer, Arthur Valdez.
In 2017, Cornell provided the vision and articulation of five strategic priorities that formed the basis of a comprehensive business transformation strategy. It recognized that physical brick and mortar retail stores were the advantage that traditional broad line retailer’s like Target had over online retail platform providers, especially Amazon. It was counterintuitive industry thinking at the time.
Valdez, who was recruited from Amazon, led the process, people and technology aspects of the supply chain and online fulfillment transformation journey for transforming planning and customer fulfillment execution under the notions that retail stores would support both in-store demand and online fulfillment need. This pre-dated Walmart efforts directed at a similar strategy.
This week, Cornell made another bold, and industry counterintuitive move. The U.S. retailer announced actions to right-size its inventory for the balance of 2022.In his communication to investors, Cornell has openly acknowledged that Target has too much inventory on-hand and warned investors of lower expected profitability in the coming quarter because of this situation.
In an interview with The Wall Street Journal, he stated: “We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year.” He further expressed his belief that product demand signals have changed amid existing high rates of inflation, the implication being that consumers are changing their spending actions to prioritize essential vs. discretionary purchases. Actions further indicate adjusting the retailer’s planning cycles for either deemed essential vs. discretionary product inventory plans to be more agile in planning essential items such as food and grocery.
A further described plan includes the addition of incremental holding capacity near U.S. ports to add flexibility and speed in the portions of the supply chain most affected by external volatility; pricing actions to address the impact of unusually high transportation and fuel costs. The stated goal is to work with suppliers to shorten distances and lead times in the supply chain.
Rather than holding on to inventory in hopes that cyclical or seasonal consumer demand will eventually return, this retailer will reportedly selloff excess inventory at a discount in coming weeks in addition to canceling existing orders for specific inventory items in various discretionary goods categories.
The notion of contrary thinking in inventory management in now in the ability to leverage prescriptive analytics, namely actions that can be taken to affect a desired business outcome or range of outcomes, along with predictive analytics, what is likely to happen given differing inventory management actions. In essence, it is moving beyond traditional or “gut feel” thinking and into analytics and data-driven decision-making.
When integrated business planning teams have the ability to simulate and assess various product demand and inventory management scenarios to likely short or longer-term demand and cost impacts, senior management has a more educated perspective on the decisions that need to be made and communicated, along with the impacts. Taking steps now to be better positioned for a more pronounced market shift is what this is all about.
How Target fares in contrast to other retail industry players is something to observe for the remainder of this year, especially in the 2022 holiday fulfillment period. Our Supply Chain Matters prediction is that this retailer will again set a standard.
Bob Ferrari
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