Target's operational excellence strategy

Forces Shaping Operations Management
Operations management at Target has been driven by two main forces, competitive forces and technological change. The two work in concert with one another, so it is necessary to understand both. First, competition in Target’s industry is highly intense. The company is positioned as an mass market retailer, with a wide range of goods and an omnichannel strategy. Its most critical competitor is Wal-Mart, but the reality is that Target competes with a wide range of retailers. If a person wants groceries, clothes, cosmetics or kitchen supplies, they could go to Target or Walmart, or any of dozens of other stores, or shop online. So in that sense, competition is intense. Target competes as something of a cost leader – it has actually positioned itself a step above cost leaders, as a company that offers better value than the goods at the absolute cheapest stores, but still a store that is competitively priced versus most mass market outlets, for whatever the good in question is.
In order to compete at this level, Target needs to be able to move goods through its system quickly and efficiently. It makes its money on volumes, not margin, so a high throughput and tight cost controls are essential for Target to be consistently profitable. Maintaining competitive positioning is also important for Target. If costs drift too high, then the merchandise strategy and in-store experience will be misaligned with the pricing. Either that or the company becomes unprofitable. Keeping costs under control, however, is a tremendous challenge given the expertise with which competitors like Wal-mart and Costco can perform that task. When compared with higher-end retailers, or Amazon for that matter, Target has to undercut those companies in order to attract business from them. All of this means that Target is under incredible competitive pressure to execute on a highly efficient supply chain strategy, and control costs elsewhere.
The second major force on operations management is technology. Target’s competitors understand that technology is a source of significant productivity gains. This is mainly because any high volume business can win major cost savings with every incremental gain. If Target saves a quarter of a cent on every item it sells, that ends up being incredible cost savings, given that Target sells millions of individual items per day. Any firm that relies on supply chain efficiency for competitive advantage, or even just as a core competency, inevitably relies on technology to drive operations.
There are a number of technological advancements that have proven especially useful in recent years. One is on the demand forecasting side. Target’s ability to proactively gauge consumer demand is what allows it to increase the throughput at its stores, and thereby reduce inventory holding costs. Furthermore, demand forecasting makes it easier for Target to sell a greater percentage of merchandise at full cost, rather than discounting it for quick sale. Another technological advancement is software that tracks each piece of inventory as it moves through the system. This granular level of information can allow management to make changes more quickly when needed. For example, if a snowstorm is predicted in Seattle, and there is an excess of snow shovels in Boise, Target can redeploy those shovels to Seattle before the storm arrives. Thousands of that sort of decision can be made daily, based on granular information. A lot of these decisions regarding the flow of goods can be made in an automated way these days, further saving time. Fully automated warehouses are another means by which a company like Target can reduce costs and increase the efficiency of its supply chain, but all of these technologies require significant investment.
Obstacles and Issues
One of the major obstacles with respect to operations management in particular is the need for constant investment. In the past couple of decades, technology, especially on the supply chain side, has advanced rapidly. Where twenty years ago everything was done with paper manifests, and maybe a little bit of computer work, today there are fully automated warehouses. As the pace of change increased, the need for technology investment did as well. For Target, there will always be the decision of how much to invest in operations technology, and when. The sums can be quite substantial. For example, Target invested $7 billion in 2017, and then immediately followed up with more investment last year to address the consumer trend towards digital shopping (Target, 2017).
There are other issues that arise as well. For example, a move to more e-commerce had to be paired with two-day shipping in order for Target to remain competitive. That came with increased logistics costs, which naturally threatened the company’s margins and had it looking for savings elsewhere (Lopez, 2018), but management signed off on this because it knew that the long-run trend for consumers was digital, and that Target needed to invest this money in order to stay in the game, or risk struggling mightily like one-time rival K-mart has.
One of the core competencies for Target has been its adaptability, and the willingness of senior management to change. The company is fairly consistently profitable and has many strengths, so it would be easy to rest on its laurels, but senior management clearly understands that the nature of its industry is that, even if the in-store experience changes only periodically, the back end changes continuously. Being receptive to change, and investment in new technologies, has been one of the factors that has allowed Target to succeed to this point. One only needs to look at K-mart, once a rival, for an example of a company that was unable to change its ways in the face of rapidly changing technological and social environments, and then subsequently fell on hard times, for an example of the sort of negative motivator that Target’s executive leadership must be feeling.
Changes in Operations Management
The changes to operations management have been fairly dramatic. These changes are not simply a matter of adopting new tools and technologies. Going along with those tools and technologies is the need to adapt mindsets along the way. Target’s operations team has been forced to shift from fairly manual approaches to logistics management, demand forecasting and other back end roles, to ones that are data-driven and automated. While this shift started in the 1990s sometime, the company recognized fairly early on how important it would be to take a pro-technology approach to operations. As such, Target was able to foster a culture that promoted such change, and also an increasingly rapid pace of change. This culture, in turn, has supported the company’s initiatives, because of the motivation to remain competitive, and the desire to adopt the latest technologies.
To fund shifts in operations management, Target has been able to dedicated money on a periodic basis, typically for multi-year projects. The $7 billion investment in e-commerce the other year was a good example of this. When the executive leadership saw the trend, they knew that they needed to make this investment. To lose market share at this point would be a strong negative for the company, because it might not win those consumers back. When brand loyalty erodes because of poor strategic decision-making, the company can become a dinosaur, and fairly quickly. Given the need for scale to make Target’s cost structure competitive, failure to act was something that the company could not afford. As such, Target’s management was prepared to make the investment, which could be seen as short term pain for long term gain. All told, this approach of constantly evaluating the strategic environment, and responding to trends and shifts, is one of the calling cards of Target’s management that has allowed it to become such a powerful retailer.
Mission and Vision
Target’s operations are a core component of its mission and vision. The company needs to operate with a high degree of efficiency in order to remain competitive. It has a specific competitive positioning within its industry, and needs to support that by maintaining its ability to price competitively. This means driving efficiency at all points in the company’s operations. The use of data-driven decision-making and automation falls in line with that. Target would simply not be able to execute its mission if it did not put so much emphasis on operational excellence.
The public-facing element of the strategic plan is to create a great place to shop, where quality goods can be had at value prices. A place where the staff is engaged in the community, and enjoys their jobs. But behind the scenes, this is supported with strategies that aim for optimal efficiency, because at the end of the day, consumers who shop at Target may not be the most price-sensitive, but they still have fairly high price sensitivity. So the investment in operations, and the overall approach to operations management, very much supports the company’s strategy.
Productivity and Profitability
At Target, productivity and profitability go hand in hand. Profitability derives mainly from operational excellence, because that is what allows Target to set its prices at a competitive point that attracts consumers. Those prices stimulate demand, sufficient to cover the high fixed costs of running a Target store. The thing about prices at Target is that the market basically sets the prices. Walmart and other, cheaper stores, set the low bar on prices for many consumer staples. Target will set prices at that level, or just above, depending on the good. As such, when those companies are highly efficient, Target needs to be almost as efficient, or as efficient, in order to remain competitive.
The high volume, low-margin business model that Target has demands both price competitiveness to spur the high volume, but it also means that Target has to be efficient enough to sell goods profitably. The brand carries with it an expectation of low prices as well, so there is also the point that the company must deliver on the brand promise. Again, this comes back to the need to have high throughput at the Target stores. Target would not be profitable without this. So being able to deliver consumer staples at competitive prices is an essential component of the business strategy for Target, and to be able to do this requires operational excellence, as defined as highly efficient, high productivity operations.
Key Trends in Production, Quality, Resource and Information Management
Information is the most prominent trend that affects Target. Retail operations have the theoretical ability to collect massive data sets that they can use to drive decision-making. Data is used to make merchandise decisions, and this can be done at the store or even shelf level. Data is also used in marketing, especially for customers who have given their information to the company. Of course, the back end uses data extensively, in terms of real time ordering, management of inventory flows, even to the point of having autonomous warehouses. So information is really a critical component to Target’s business.
Resource management is also important. The reason why Target has been so vocal about the country’s trade policies is because it is so dependent on China for the provision of low cost goods of reasonable quality. Target sources from all over the world, but China in particular is the world’s manufacturing hub. Target could source many items in the United States, but those items might have to be priced higher than Target customers expect, and this would pose a challenge for the company. Target has a large team to source goods, such is the importance of purchasing and sourcing to the supply chain, and ultimately to Target’s ability to be competitive.
While there are trends in quality management and production, Target is not a manufacturing company. It merely needs to set specs for its suppliers, not manage those specs. So these particular trends are less vital to Target’ success – as long as the products are of reasonable quality so they don’t damage Target’s reputation, Target extracts higher value out of other activities.
Impact of Trends on Business
Target needs to be aware of quality and production trends, most certainly. It needs to set specs for its goods that are in line with industry standards and norms, and it needs to understand where the best goods in each class are produced. But ultimately, Target derives the most value from being a leader in the use of information. Walmart is traditionally renowned for its use of data and its supply chain innovation. At the very least, Target needs to benchmark against Walmart, and to a lesser extent Costco. For its e-commerce, it needs to benchmark against Amazon. Ideally, Target can be a leader in these fields, rather than a follower, but the trends in the use of data, especially the massive data sets that retailers collect, and in the resource side of supply chain management, are the main ones that should drive operations strategy for Target.
The trend, in general, is in using data, automation and robotics to generate ever-greater efficiencies. If Target can hold the line on pricing for a good over an extended period, that will reflect well on the company in the eyes of consumers. Because operations management is so critical to the company, it must be at the front end of these trends, right in line with its major competitors. Those competitors define what consumers want in terms of pricing, merchandising and customer service, and Target will always have to match the leaders in the field, or be the leader itself. The further the company falls behind, the more likely it is to lose market share, and ultimately that would challenge its ability to be profitable, given the high fixed costs associated with running its massive stores.
Thankfully, Target’s leadership fully understands this. The company has sought to be progressive is as many aspects of its business as possible, because that approach is a business imperative. This is why it has built a culture of constant change and improvement on the operations side – it has to in order to survive. If Target fails to make adequate investments in emerging technologies, or fails to hire the people who can execute on strategies in that domain, the less likely this company is to succeed in the long run. In fact, leadership is correct in assessing that it cannot afford to start to slip – it must maintain positive momentum at all times because negative momentum is something that could build and ultimately ruin the company, as happened to Kmart.
All told, Target is very much subject to trends, especially on the operations side. While people might think that fashion trends are important, the trends in automation, robotics and data science are what really drives Target’s business, and puts the company in the advantageous position in which it finds itself in the marketplace.
References
Bhattacharyya, S. (2018) Cost of doing business: Target’s e-commerce sales growth means higher logistics costs. Digiday UK. Retrieved April 1, 2019 from https://digiday.com/retail/target-e-commerce-sales-growth-higher-logistics-costs/
Lopez, E. (2018) Why 2018 is the year of modernization for Target. Supply Chain Dive. Retrieved April 1, 2019 from https://www.supplychaindive.com/news/data-target-optimizes-supply-chain-inventory-logic/524971/
Target (2017) Investing to grow: Target commits more than $7 billion to adapt to rapidly evolving guest preferences. Target.com. Retrieved April 1, 2019 from https://corporate.target.com/article/2017/02/financial-community-meeting