I heard a management team being honest with itself and with the financial community... a bit less common than might be hoped.
What they discussed-aloud is similar to the issues a wide variety of retailers are facing.
Here are some excerpts:
We expect to invest $2 billion to $2.5 billion in capital expenditures per year, focused on technology, supply chain investments to modernize our operations and to support flexible fulfillment...
Over time, we've been adding stress and complexity to systems that frankly were built for another time to keep pace with our changing guests, to consistently deliver what our guests expect and position Target for the future, we must zero in on critical pieces -- supply chain, stores, technology -- and put our guests at the center of all of it.
For 50 years, we were working off a pretty linear system. It started by moving product from our vendor partners into distribution centers and then out to our stores. The whole system moved from the left-hand side of the page to the right. Today, the world couldn't be more different. Today, guests can still shop our stores to get the products they need and even pick up a few they didn't know they wanted. But they can also shop online and have the order delivered to their home...
We continue to send product to stores to support an in-store shopping experience. But we are also shipping directly to guests from stores, DCs, even vendors and we are sending products to stores for online order pickup. In fact, the number of Target.com orders our guests chose to pick upin stores grew by 60% in the past year, almost double our full-year digital sales growth. And sure, overall digital demand is growing, but this also reflects our guests' increasing desire for the convenience of picking up their orders in store, usually within the hour.
All these changes are in the name of making sure we can deliver the products our guests want fast. In our stores, they are more important than ever. They've become showrooms, fulfillment centers and pick-up locations. And the people inside them are there to help.
Sounds great, right? But here's the rub. We can't continue to add this kind of complexity without ensuring the foundation can support it. Earlier, you heard a little bit about our guest immersion experiences and I can tell you from my own guest conversations that Brian's summary was right on. Hearing from guests was both uplifting and humbling to realize how much they love us and how much work we still have to do to deliver the experience they expect...
So in the past year, we've put a lot of thought into tackling these challenges and we found it doesn't necessarily require investing in new, but often entails using what we have, like systems and talent, more effectively to deliver a better experience to our guests. To reduce back-room inventory, we are redesigning shelf presentations to put even more product on the sales floor and surgically reducing the number of SKUs in particular categories. We are also optimizing case pack sizes to get down on the number of times our teams are touching a product.
Imagine for a minute that a store receives 24 jars of peanut butter in a case, but the shelf only holds 18. So instead of being able to pull a case pack directly from a delivery truck to the sales floor, teams have to break open the package and store the extra six jars in the back room. And as soon as we sold through the shelf, they have to make an extra trip to the back to replenish. You don't need an advanced degree to see the math on that scenario is not good. Three times the touches and a huge drain on payroll productivity. So we are working with vendors to send case-pack sizes that match each product's rate of sale and allotted shelf space...
When you talk to our guests, the number one pain point is that we are out of stock and when it's for an item we've promoted, it's a double whammy in disappointment. We've offered a great deal, they came to the store and when they got there, they couldn't buy what we said we would sell them.
So we established an action team last summer that has been digging category by category into the root causes of persistent out-of-stock challenges and the results have been very positive. We finished 2015 with out-of-stocks 40% lower than the year before. And for a set of focus items we've designated in essentials, our out-of-stocks are better than we have ever measured.
On top of that, those results came from process changes that are simple, repeatable and sustainable. So in many cases, we can apply the same fixes across the business. What we've done to reduce out-of-stocks in paper towels, for instance, is working for us in diapers, given they are both high frequency, large pack size products. The solutions we've started to put in place are helping to address some of the fundamental issues, but we've uncovered other parts of our operations that need more fundamental change.
It was clear we needed a dedicated team that could focus on transforming our supply chain to lay the foundation for tomorrow without the burden of the all-consuming responsibility of running day-to-day operations. As a result, we carved out a small team last fall comprised of functional experts from across the organization and we asked Karl Bracken to head up this effort. He had led several parts of our supply chain and merchandising functions and set up our flexible fulfillment capabilities.
After identifying a long list of work we could tackle, the team narrowed on a focused set of priorities that would have the biggest impact. For example, work is already underway to solve for the variability of when our products arrive in our distribution center. Some products arrive late, some products arrive early and in general, the windows we specify for our vendors are far too wide. That inconsistency upstream makes it harder to keep our stores in stock or provide tight shipping windows downstream.There's much more, most of it applicable to any consumer-facing supply chain.
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