1. A critical analysis of Target’s current Supply Chain
Strategy and Recommendations for improving in
Store Stock levels while reducing DC Inventory.
INFO 340 - 502
April 24, 2013
Josh Nutter, Ray Hernandez,
Brent Triplett, Brian Jones, and Amit Patel
3. I.!Introduction!and!Background!
Today,!Target!Corporation!is!considered!one!third!of!the!“Big!3”!in!U.S.!retailing!
along!with!Wal?Mart!and!Kmart.!With!net!earnings!totaling!nearly!$3!billion!in!2012!alone!
as!well!as!totaling!more!than!1,778!stores!with!361,000!employees!5.!However,!Target!has!
quite!a!humble!beginning!dating!back!to!one!man!over!a!century!ago.!!
!
In!1903,!John!Dayton!got!his!start!in!the!retailing!business!in!Minneapolis,!
Minnesota!by!buying!shares!of!the!R.S.!Goodfellows!Company!that!had!been!recently!
renting!out!his!six!story!tall!building.!Once!Dayton!had!procured!the!company!he!had!it!
renamed!to!Dayton!Dry!Goods!Co.!and!the!foundation!for!Target!was!planted.!Daytons!
business!thrived!in!Minneapolis,!surviving!the!Great!Depression!and!only!gaining!fiscal!
strength!in!the!process.!It!was!finally!in!1962!when!Dayton!Company!opened!its!first!Target!
store!as!it!started!its!move!into!discount!merchandising.!It!only!took!till!the!end!of!the!year!
before!this!new!store!became!its!own!Dayton!subsidiary!company.!During!the!trial!years!of!
this!new!subsidiary!there!were!only!four!stores!that!were!all!located!in!Minnesota,!but!
before!the!decade!was!over!they!were!already!expanding!south,!opening!up!two!stores!in!
St.!Louis,!Missouri.!In!1969,!Target’s!parent!company!Dayton!and!the!JL!Hudson!Company!
headquartered!in!Detroit,!merged!together!forming!the!Dayton?Hudson!Corporation.!After!
the!merger,!the!new!Dayton?Hudson!Corporation!started!a!rapid!expansion!primarily!on!
the!west!coast!by!not!only!opening!new!stores!but!acquiring!stores!and!rebranding!them!as!
their!own.!However,!this!rapid!expansion!was!a!little!too!much!too!soon,!with!a!lack!of!
proper!management!and!experienced!executives,!the!corporation!reported!a!drop!in!sales!
in!the!early!seventies.!Since!then,!the!Target!brand!has!flourished!and!has!continued!to!
improve!its!footprint!well!into!the!new!century.!Being!by!and!far!the!Dayton?Hudson!
Corporations!best!contributor!in!terms!of!sales!year!in!and!year!out,!this!caused!the!
Corporation!to!change!its!name!in!2000!to!the!Target!Corporation!as!we!know!it!today.6!
!
Over!the!half!century!since!the!Target!Stores!name!was!first!established!it!has!truly!
gone!through!an!evolution!especially!regarding!their!supply!chain!and!the!way!they!
distribute!their!products.!It!started!in!1969,!just!seven!years!after!the!very!first!Target!
Store!opened,!when!their!first!distribution!center!opened!in!Fridley,!Minnesota!as!a!quicker!
and!more!efficient!way!to!provide!the!different!stores!located!throughout!Minnesota!their!
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4. products.!Not!too!long!after,!Target!began!modifying!its!product!placement!methods!inside!
their!own!stores!by!developing!plan?o?grams.!Which!are!diagrams!or!models!that!indicate!
the!proper!placement!and!disbursement!of!products!on!the!shelves!to!maximize!the!sales!of!
each!product!and!product!groups.!Not!only!did!these!changes!benefit!the!stores,!it!also!
made!the!shopping!experience!easier!and!more!enjoyable!for!the!consumer,!which!is!
Targets!main!goal.!Continuing!to!make!things!easier!for!the!consumer,!in!1975!Target!
broadened!its!visibility!by!introducing!coupons!and!sales!opportunities!into!to!the!Sunday!
paper.!At!that!point!in!history,!the!world!wide!web!didn’t!exist!and!televisions!were!not!as!
popular!as!today;!so!the!newspaper!was!the!main!mode!of!communication!for!the!whole!of!
America,!and!getting!Target!that!kind!of!publicity!was!a!huge!stride!in!developing!the!brand!
nationwide!5.!!
Not!only!did!Target!under!the!Dayton!Co.!develop!better!customer!service!and!
supply!chain!management!by!adding!uniqueness!to!their!company!strategy,!they!also!made!
changes!in!their!management!structure.!Previously,!the!Dayton!Co.!and!their!subsidiaries!
were!managed!by!the!Dayton!family,!Donald,!Wallace,!and!Douglas,!but!in!1977!the!three!
brothers!stepped!down!from!their!positions!which!paved!the!way!for!new!more!qualified!
leadership.!Not!long!after!the!change!in!management!the!Target!Stores!celebrated!a!
company!milestone!in!1979!by!breaching!the!one!billion!dollar!number!in!annual!sales!5.!!
Target!Stores!never!stop!trying!to!improve!their!effectiveness!as!retailers,!always!
trying!to!be!innovative!in!any!way!the!can.!With!that,!they!look!towards!technology!to!help!
them!lead!the!industry!in!customer!service!and!supply!chain!management,!and!in!1988!
they!became!the!first!mass!merchandiser!to!install!UPC!bar?code!packaging!to!all!of!its!
stores!and!distribution!centers.!This!is!a!system!that!each!product!a!specific!bar?code!and!
corresponding!number!where!as!it!can!be!scanned!by!a!designated!scanner!automatically.!
Having!these!installed!improved!Target!Stores!inventory!management!and!increased!
automation!in!both!the!individual!stores!as!well!as!the!distribution!centers,!while!also!
making!the!shopping!experience!more!pleasant!for!consumers!by!decreasing!the!wait!time!
at!the!checkout!lane!5.!
During!the!next!decade!Target!Stores!made!several!strides!to!improve!the!shopping!
experience!for!the!consumer.!While!continuing!to!spread!the!Target!footprint!to!more!cities!
and!states!across!the!nation,!they!began!implementing!new!methods!to!attract!more!
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5. business.!In!1995!Target!Stores!began!offering!credit!to!its!customers!in!the!way!of!store!
credit!cards!which!allow!the!customers!to!buy!products!and!pay!for!them!over!a!period!of!
time.!Also!that!year,!the!first!SuperTarget!opened!in!Omaha,!Nebraska.!The!SuperTarget!
made!it!more!convenient!for!shoppers!by!not!only!including!the!merchandising!from!the!
retailing!department,!but!also!including!a!fresh!produce,!meat!and!dairy!department.!With!
the!popularity!of!the!internet!growing,!Target!introduced!online!shopping!that!allowed!
customers!to!buy!products!from!the!comfort!of!their!own!homes.!This!was!a!huge!step!in!
supply!chain!management!because!it!cut!out!the!middleman,!which!were!the!actual!retail!
stores,!and!shipped!from!the!distribution!centers!5.!!
Since!the!turn!of!the!century!Target!Stores!have!continued!their!growth!in!the!
retailing!industry!increasing!sales!year!in!and!year!out.!For!example,!they!reached!a!new!
milestone!in!2005!by!exceeding!$50!billion!in!sales!for!the!first!time!in!their!history.!While!
the!rest!of!the!country!suffered!through!a!severe!recession!in!the!past!few!years!Target!
fulfilled!and!exceeded!its!brand!promise!to!“Expect'more.'Pay'less.”'and!we!can!only!assume!
that!this!will!continue!into!the!future!5.!
!
II.!Topics!Analysis!
i.!Store!Locations!
The!closer!stores!are!to!distribution!centers!the!better!it!is!for!inventory!levels.!With!
stores!in!rural!areas,!we!may!want!to!maintain!a!larger!inventory!because!routes!may!not!
cross!smaller!towns!as!often,!so!it!would!be!harder!to!deliver!the!required!goods.!Keeping!
close!to!seasonal!levels!may!even!be!necessary!when!stocking!rural!stores.!With!urban!
stores!our!normal!reasoning!applies,!in!that!we!still!want!a!full!inventory!but!perhaps!not!
as!large!as!rural!areas.!!
!
ii.!Technology!!
More!“Robots/cranes!that!can!move!thousands!of!cartons!an!hour”14,instead!of!extra!
human!resources!at!a!distribution!center,!are!a!way!of!keeping!labor!costs!low.!RFID!tags!
are!used!to!collect!detailed!information!on!an!item!and!match!it!to!a!central!database.!This!
technology!directly!addresses!our!problem!of!keeping!the!stores!stocked.!It!gives!
immediate!information!regarding!products!that!leave!the!shelves!resulting!in!quicker!
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6. replenishment.!Not!only!does!this!help!with!stores,!but!it!also!assists!the!distribution!
centers!as!well!due!to!the!fact!that!shipments!are!coming!in!automatically.!This!method!
enables!a!reduction!in!lead!time.6!Reduction!in!lead!times!leads!to!a!quicker!supply!chain!
and!makes!it!more!efficient.!According!to!Erin!Saunders,!it!creates!a!“perfect!flow!having!
items!go!from!the!truck!straight!to!the!store’s!sales!floors....achieved!through!distribution!
performance!management:!where!products!go!in!and!out!of!the!distribution!centers,!
headquarters!receive!information!so!they!can!track!sales!in!stores!and!in!turn!replenish!
them!just!In!time.”!
!
iii.!Competitors!
!
Wal?Mart!is!one!of!Target’s!largest!competitors.!Although!Wal?Mart!promises!the!
lowest!price!on!most!products,!their!products!are!often!found!to!be!of!less!quality.!Wal?
Mart!plays!to!a!lower!income!level!than!that!of!target;!however,!the!two!companies!do!
share!a!common!market!segment!that!each!is!always!fighting!for.!Target!typically!has!
higher!quality!products!and!the!name!of!the!company!itself!it!associated!with!quality!at!a!
great!price!as!oppose!to!a!“value”.!!
Wal?Mart’s!stores!are!usually!pretty!hectic.!Space!is!a!commodity!that!every!store!seems!to!
run!short!off,!as!customers!are!often!squeezed!together!in!tight!spaces.!Wal?Mart!uses!all!of!
it!space!mainly!for!product.!The!company!does!this!because!it!reduces!the!space!needed!for!
a!stock?room!which!allows!there!to!be!more!products!on!the!sales!floor.!!
Wal?Mart!has!a!formidable!supply!chain!and!is!one!to!envy!given!its!complex!nature.!
The!company!handles!this!complexity!through!applied!technology!and!collaboration.!
Similarly!to!Target,!Wal?Mart!uses!an!RFID!system!along!with!the!addition!of!smart!tags!to!
closely!monitor!and!track!products!through!their!supply!chain.!Wal?Mart!was!a!pioneer!in!
implementing!Cross?docking.!Cross?docking!is!an!attempt!to!reduce!the!amount!of!labor!
used!to!unload!a!truck!onto!another!truck.!As!oppose!to!unloading!the!trailer,!the!truck!
drops!the!trailer!allowing!another!truck!to!pick!up!the!trailer!and!reduce!lead!times.!
Technology!is!widely!utilized!by!Wal?Mart!to!create!an!efficient!supply!chain!by!creating!
information!that!is!communicated!continuously.15!Continuous!communication!allows!for!
constant!checks!on!inventory,!demand,!lead!times,!and!management!of!the!randomness!
that!is!constantly!forcing!adjustments!within!the!supply!chain.!
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7. !
iv.!Product!
Managing!the!product!mix!is!essential!to!maintain!adequate!lead!times!within!the!
supply!chain.!Stores!order!different!quantities!of!different!products.!This!fact!creates!a!
troublesome!problem!because!different!products!require!different!handling!procedures!
and!different!amounts!of!space!within!a!shipment.!Some!may!take!longer!to!receive!due!to!
varying!lead!times!associated!with!the!products.!Others!may!require!differing!packaging!
techniques.!Also,!it!is!often!noted!that!products!come!in!different!batches!from!vendors.!
Product!mix!must!be!communicated!efficiently!from!retailers!to!their!distribution!centers!
and!at!the!same!time,!distribution!centers!must!communicate!just!as!efficiently!with!their!
suppliers!in!order!to!maintain!lead!times!and!customer!service!levels.!
!
v.!Vendors!
!
Closer!cooperation!is!achieved!through!buying!locally.!Lower!total!costs!occur!
through!consolidated!transportation.!“Just!in!time”!is!also!achieved,!due!to!shorter!lead!
times!and!reductions!in!inventory.!Social!responsibilities!to!the!community!are!fulfilled!
because!of!the!growth!in!jobs.2!Buying!from!the!manufacturer!is!suggested!because!there!
will!be!no!need!of!special!services,!for!simple!commodities,!as!long!as!the!manufacturer!
provides!the!essential!distribution!functions.2!!Erin!Saunders!stated,!that!“store!delivery!
goes!out!and!looks!for!vendors!close!to!stores!and!picks!up!freight!on!the!way!back!to!save!
money”,!showing!that!Target!communicates!effectively!with!its!vendors!to!reduce!lead!
times.!Also,!this!saves!money!by!not!contracting!an!outside!company!to!ship!products!from!
vendors!to!the!distribution!centers.!
!
vi.!Trends!
A!third!of!Americans!own!a!phone!with!access!to!the!internet!and!a!solid!portion!
would!not!mind!having!the!option!to!make!purchases!on!the!spot!using!mobile!phones.!!As!
smartphone!usage!increases!among!the!population,!this!trend!will!increase.!To!
accommodate!these!purchases,!we!need!to!ensure!that!the!mobile!phone!ordering!process!
runs!smoothly!and!treat!these!transactions!with!the!same!customer!service!level!as!any!in?
store!transaction.!Due!to!this!trend!a!multi?channel!approach!is!required,!meaning!taking!
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10. the!products!they!want,!exactly!at!the!time!they!want!them.!To!be!able!to!meet!this!
standard,!Target!must!apply!strategies!that!keep!top!selling!items!such!as!paper!towels,!
detergent,!and!diapers!on!the!store!shelves!at!all!times.!Target’s!current!supply!chain!
method!for!meeting!this!goal!works!extremely!well!and!efficiently,!but!of!course!there!are!
still!areas!that!can!be!improved!upon!in!order!to!create!the!best!system!possible!and!
minimize!costs.!
!
High!quality!and!Guest!Friendly!Stores!
Target!strives!to!provide!its!customers!with!high!quality,!clean!and!spacious!stores.!
They!want!the!shopping!experience!to!be!as!easy!and!convenient!as!possible!for!their!
customers!while!presenting!a!well!laid!out!and!calm!shopping!atmosphere.!Target!makes!it!
evident!that!they!make!an!effort!to!keep!all!of!their!stores!as!clean!as!possible.!Competitors!
like!Wal?Mart!are!often!tagged!as!being!a!hectic!shopping!atmosphere!along!with!some!
locations!being!filthy!and!an!inconvenient!shopping!experience.!Target!stores!are!built!to!
fit!in!seamlessly!with!the!lifestyle!of!its!customers!.!This!increases!customer!loyalty!as!well!
as!satisfaction!and!motivates!people!to!come!back.!!
!
Able!to!keep!top!selling!items!in!stock!
Target!works!hard!to!be!able!to!keep!the!top!selling!items!such!as!paper!towels,!
detergent,!and!diapers!in!stock!for!its!customers!at!all!times.!In!order!to!accomplish!this,!
Target!must!have!a!very!efficient!supply!chain!that!can!get!the!product!from!the!DC’s!to!the!
stores!as!quick!and!cost!effectively!as!possible.!!!
Target!has!a!very!efficient!and!successful!system!in!place!that!is!currently!able!to!get!
the!products!to!the!stores!and!keep!them!in!stock!for!its!consumers.!Target!has!worked!
very!hard!over!the!years!at!improving!this!system!and!continues!to!improve!upon!it!as!they!
see!necessary.!Overall,!Target!is!one!has!one!of!the!best!and!most!efficient!supply!chains!in!
the!industry!and!they!continue!to!set!new!standards!for!their!competitors.!!
ii.!Weaknesses!
Increased!labor!costs!
Providing!these!three!top!selling!items,!among!others!as!well,!does!not!come!at!a!
cheap!price.!Since!Target!strives!to!keep!these!items!on!the!shelves!at!all!times,!they!have!
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11. to!implement!strategies!that!often!drive!up!labor!costs.!Paper!towels,!detergents,!and!
diapers!are!all!considered!top!selling!items!that!really!drive!Target’s!customer!loyalty.!If!
these!items!are!consistently!in!stock!at!the!stores,!customers!will!keep!coming!back.!
In!order!to!do!this,!Target!maintains!a!larger!volume!of!these!specific!products!in!
their!distribution!centers.!This!does!make!the!products!readily!available!to!ship!to!the!
stores,!but!at!the!same!time!really!drives!up!the!labor!costs!because!the!products!must!be!
handled!multiple!times!before!they!actually!reach!the!store!and!hit!the!shelves.!With!paper!
towels,!detergent,!and!diapers!being!low!margin!products,!this!increase!in!labor!cost!really!
eats!away!from!potential!revenues.!
!
Paper!towels,!detergent,!and!diapers!take!up!a!lot!of!space!
Another!disadvantage,!or!weakness,!for!Target!is!the!fact!that!these!particular!
products!take!up!a!very!large!amount!of!shelf!space.!Space!is!money!in!the!retail!industry!
and!must!be!optimized!and!managed!as!effectively!as!possible.!Storing!these!products!in!
strategic!ways!must!be!implemented.!Target!must!find!ways!to!free!up!as!much!space!as!
possible!in!their!DC’s;!products!like!these!are!what!makes!that!goal!so!difficult.!These!three!
types!of!products!discussed!take!up!a!lot!of!space!not!only!in!the!DC’s!and!on!the!store!
shelves!but!also!in!the!trucks!that!ship!them!to!the!various!locations.!!
!
High!store!variability!
!
After!speaking!to!several!different!merchandise!managers!at!a!few!different!Target!
store!locations,!it!became!apparent!that!the!different!variations!from!store!to!store!could!
cause!inefficiencies.!It!seemed!as!if!we!were!being!told!different!things!as!far!as!store!
operation!procedures.!One!store!mentioned!it!is!a!nationwide!set!time!to!do!the!inventory!
records!in!the!morning,!and!one!mentioned!it!was!supposed!to!be!done!at!night.!Little!
discrepancies!like!these!cause!variability!which!causes!inefficiencies.!Along!with!this,!we!
were!also!told!that!sometimes!store!shelves!will!be!empty!when!the!employees!do!their!
“walk!arounds”.!It!is!very!important!that!shelves!stay!stocked!at!all!times!in!order!to!ensure!
the!store!has!as!much!inventory!on!hand!as!possible.!Each!minute!that!passes!with!a!shelf!
not!being!stocked!is!lost!revenues!and!a!missed!chance!for!inventories!to!be!taken!away!
from!the!DC’s!and!sent!to!the!stores,!which!is!the!ultimate!goal!at!hand.!
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12. !
In!addition,!another!talked!about!issue!in!the!stores!was!the!fact!the!the!computer!
system!will!sometimes!make!mistakes.!The!system!may!send!double!the!product!to!the!
store!it!was!supposed!to,!or!it!may!send!one!stores!product!to!another!one.!These!are!
variations!that!weaken!the!supply!chain!and!increase!inefficiencies!and!should!certainly!be!
addressed!and!mitigated!as!best!as!possible.!
!
!
iii.!Opportunities!
Target!currently!uses!technology!extensively!in!their!supply!chain!already,!but!there!
are!more!opportunities.!The!DC!warehouses!are!approximately!90%!automated!but!still!
require!some!human!interaction.!This!human!interaction!can!cause!some!variability.!!We!
see!opportunities!specifically!concerning!RFID!technology.!!Due!to!recent!developments!in!
technology,!RFID!is!cheaper!than!ever.!!There!are!3!primary!types!of!RFID!technology!
including!passive,!semi!passive,!and!active.17!Semi?passive!and!active!tags!require!power!to!
function.!!Active!tags!broadcast!signals!while!semi?passive!tags!require!the!reader!to!
supply!the!power!for!broadcasting!the!signal.!!Passive!tags!can!be!read!from!20!feet!away!
and!do!not!require!power,!therefore,!are!cheaper!to!produce.!!If!Target!can!implement!
technology!to!decrease!inventory!variability!!
iv.!Threats!!
!
The!single!largest!threat!to!Target!is!their!competitors.!The!biggest!competition!that!
Target!is!up!against!right!now!is!other!retail!chains!like!Wal?Mart!and!Costco.!Target!has!to!
be!sure!to!optimize!and!make!their!supply!chain!as!best!as!possible!so!that!they!can!stay!
ahead!of!the!competitors!and!keep!their!prices!down.!Costco!has!the!advantage!of!selling!in!
bulk!or!large!quantities!so!that!helps!them!drive!their!prices!down.!On!the!other!hand,!Wal?
Mart!is!a!huge!retailer!that!serves!as!a!significant!threat!to!Target.!They!offer!many!of!the!
same!products,!and!at!times!more!products!than!Target.!Target!must!find!ways!to!put!
themselves!ahead!of!Wal?Mart.!Inventory!Turnover!is!a!great!indicator!of!how!long!a!
company!holds!on!to!inventory!before!selling.!!Target!Corp’s!inventory!turnover!ratio!was!
6.45!in!January!2013.!!Wal?Mart's!inventory!ratio!was!8.34!as!of!January!2013!while!
Costco’s!was!13.14.19!The!higher!inventory!turnover!the!more!times!per!year!the!company!
sells!all!their!inventory.!!This!shows!that!although!Target!is!a!major!competitor!there!is!still!
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13. room!for!improvement.!!Target!can!achieve!a!higher!inventory!turnover!by!working!with!
marketing!to!offer!discounts!on!items!in!order!to!encourage!buying!in!bulk.!!Target!could!
also!work!with!vendors!to!reduce!order!quantities!and!wholesale!prices.!!
!
IV.!Recommendations!!
!
i.!MultiMechelon!Inventory!Optimization!
Objectives!
!
Target’s!mission!statement!is!“delivering!outstanding!value,!continuous!innovation!
and!exceptional!guest!experiences!by!consistently!fulfilling”!!their!promise!of!expecting!
more!and!paying!less.10!In!order!to!move!towards!this!mission,!Target!has!become!
increasingly!more!guest?focused!as!the!years!have!progressed.!To!achieve!their!more!
guest?focused!approach,!Target!banks!on!being!consistently!in?stock!on!their!top?selling!
items!such!as!paper!towels,!laundry!detergent,!and!diapers.!The!company!achieves!this!
consistency!by!maintaining!a!large!volume!of!this!inventory!in!their!distribution!centers;!
however,!while!holding!large!quantities!of!these!products!increases!their!customer!service!
levels!it!also!drives!increased!labor!costs!due!to!the!fact!that!the!product!must!be!handled!
multiple!times!before!it!reaches!the!store.!This!system!of!high!inventory!levels!at!their!
distribution!centers!has!proven!to!be!cost?inefficient!and!at!times,!below!the!required!
customer!service!level.!Target!wishes!to!develop!a!better!“guest?focused”!supply!chain!
strategy!that!will!drive!better!in?stock!levels!of!their!top!selling!products,!reduce!inventory!
levels!at!their!distribution!centers,!while!simultaneously!reducing!or!maintaining!cost!at!
their!current!level.!
Problem!Analysis!
!
Target’s!guest?focused!approach!requires!them!to!be!consistently!in?stock!on!their!
top!selling!products:!paper!towels,!detergent,!and!diapers.!The!top?selling!brands!in!these!
product!categories!are:!Bounty,!Tide,!and!Pampers!respectively.12!These!brands!account!for!
a!large!portion!of!sales!in!their!respective!product!category.!All!products!are!manufactured!
and!distributed!by!the!same!company,!Proctor!and!Gamble.!!
!
In!2006,!P&G!developed!a!pilot!“multi?echelon!inventory!system”!(MEI)!for!their!
cosmetics!line.!This!inventory!system!was!initially!used!only!on!their!cosmetics!line!in!
12
14. order!to!see!if!the!MEI!system!had!the!potential!to!meet!their!goals!of!maintaining!their!
99%!customer!service!level,!improving!forecasting,!reducing!inventory,!and!reducing!cost.!
P&G!was!more!than!satisfied!with!the!results!of!the!pilot.!Implementing!the!MEI!system!
reduced!inventory!in!their!cosmetic!lines!by!5%!(10%!in!some!product!lines)!with!no!
deterioration!in!customer!service!levels.!A!more!stable!work?process,!decreased!inventory!
levels!across!the!supply!chain,!and!faster!more!accurate!supply!chain!analytics!and!support!
were!also!achieved7.!
!
Experts!claim!that!the!payback!period!for!implementing!the!MEI!system!is!under!a!
year!and!in!some!cases!less!than!six!months.!P&G!plans!to!utilize!this!multi?echelon!system!
company!wide.7!
MultiMEchelon!Inventory!Optimization!vs.!Sequential!and!DRP!Approach!
!
Inventory!is!a!function!of!supply,!demand,!time,!cost,!customer!service,!and!
probability.!Inventory!optimization!is!the!process!of!balancing!supply!with!the!probability!
of!demand!while!considering!customer!services!levels!with!optimal!cost.!Inventory!
optimization!is!approached!in!several!ways;!two!of!the!most!popular!are!sequential!
approach!(single?echelon!network)!and!Distribution!Requirements!Planning.!The!multi?
echelon!inventory!system!used!by!Proctor!and!Gamble,!as!mentioned!in!the!previous!
section,!is!a!new!and!less!common!approach!to!inventory!optimization.!!
!
In!a!sequential!approach,!the!objective!is!to!meet!immediate!inventory!needs!at!a!
minimum!inventory.!Demand!is!based!off!independent!forecasts!from!each!member!in!the!
supply!chain!and!passed!up!to!their!vendor,!or!is!based!off!of!historical!data.!This!can!lead!
to!a!shortage!or!surplus!of!inventory!across!the!supply!chain!since!there!is!a!lack!of!
visibility!upstream!due!to!the!fact!that!the!only!lead!times!considered!from!the!distribution!
center!are!the!suppliers;!lead!times!from!the!retailer!are!ignored.!Also,!the!lack!of!visibility!
downstream!can!distort!inventories!to!be!shipped!to!distribution!centers!from!the!supplier!
because!the!supplier!ignores!the!retailers!demand.!Cost!across!the!network!are!also!not!
evaluated!because!the!members!of!the!chain!form!independent!forecasts8!!
Distribution!
Requirements!Planning!(DRP)!has!an!objective!to!provide!product!requirements!to!their!
upstream!supplier!in!order!to!meet!their!demand;!therefore,!demand!is!based!off!of!the!
immediate!demand!of!the!downstream!member.!This!can!cause!lead!times!to!increase!
13
15. down!the!supply!chain!because!lead!times!upstream!are!ignored.8!The!bullwhip!effect!can!
also!be!intensified!because!the!demand!upstream!is!not!considered!downstream.!
!
Multi?echelon!inventory!optimization!(MEIO)!is!a!fairly!new!idea!to!the!market!and!
is!designed!to!combat!the!problems!associated!with!sequential!and!DRP!approaches.!
MEIO’s!objective!is!to!minimize!inventory!across!the!supply!chain!while!meeting!end?
customer!service!goals.!The!system!accounts!for!the!total!customer!service!level,!lead!time,!
demand,!demand!probability,!transportation!cost,!holding!cost,!and!inventory!levels!at!all!
levels!of!the!supply!chain.!This!allows!a!company!to!have!complete!visibility!up!and!down!
the!supply!chain!resulting!in:!avoiding!independent!demand!forecasting,!accounting!for!
lead!time’s!across!the!system,!managing!as!opposed!to!responding!to!the!bullwhip!effect,!
synchronized!order!strategies,!and!the!ability!to!offer!differentiated!customer!service!levels!
at!different!distribution!centers.!MEIO!allows!for!many!different!scenarios!to!be!considered!
all!at!once!because!the!constraints!of!the!supply!chain!can!be!modified!within!the!program.!
A!company!can!build!a!supply!chain!that!is!resistant!to!changes!in!business!conditions,!
management!objectives,!and!moves!of!competitors!at!the!lowest!cost.!This!feature!allows!
for!the!generation!and!assessment!of!all!possible!alternatives!and!selection!of!the!best!
alternative,!resulting!in!an!optimized!strategy.!
Benefits!of!MEIO!
!
!In!2005,!Intel!implemented!a!MEIO!project.!Intel!defined!MEIO!as!a!system!that!
“incorporates!average!forecast!data,!forecast!error!variability,!average!and!standard!
deviation!of!throughput!time!per!production!stage,!unit!costs!per!production!stage,!
transportation!costs,!holding!costs,!and!customer!service!level!into!its!algorithm!to!provide!
differentiated!Safety!Stock!(SS)!targets!by!product,!by!site,!and!by!stage”4!(HSIEH).!Intel!
cited!a!11%!reduction!in!inventory!levels!across!the!entire!supply!chain!in!the!first!year!
and!maintained!aggregate!customer!service!levels!and!at!times!exceeded!those!levels!as!the!
below!figure!15!indicates.!There!was!also!a!7%!reduction!in!safety!stock!levels.!!
14
16. !
Implementation!of!MEIO!Cost!Analysis!
!
Experts!agree!that!there!is!an!average!of!10%?15%!reduction!in!inventory!levels.!
This!is!translated!into!cost!savings!by!multiplying!a!company’s!cost!of!sales(total!cost!of!
products!including!total!distribution!cost,!COGS,!and!Distribution!Center!costs)!by!the!
percentage!of!inventory!reduction.!SCMFocus!is!a!company!that!specializes!in!maintenance,!
consultation,!and!implementation!of!MEIO.!SCMFocus!charges!a!first!year!license,!
maintenance,!and!consulting!fee!of!.78%!and!a!second!year!maintenance!cost!of!.08%.!
Using!Target’s!2010!and!2011!cost!of!sales!data,!if!Target!were!to!have!implemented!a!
MEIO!at!the!start!of!2010,!then!the!estimated!total!cost!of!the!program!in!year!one!would!
have!totaled!$356,655!with!an!estimated!savings!of!$4,572,500.!Estimated!cost!and!savings!
for!year!2!would!have!totaled!$28,288!and!$4,786,000!respectively.!Over!the!two!year!
period,!cost!and!saving!of!the!launch!would!have!been!estimated!to!be!$394,943!and!
$9,358,500.!These!estimates!speak!for!themselves!in!terms!of!what!this!system!is!capable!
of.!
15
17. Conclusion!
!
The!potential!benefits!of!multi?echelon!inventory!optimization!far!outweigh!the!cost!
to!implement.!MEIO!has!been!shown!to!reduce!inventory!levels!by!10%?15%!across!the!
supply!chain,!reduce!costs,!and!to!also!have!the!ability!to!meet!or!exceed!required!customer!
service!levels.!Proctor!and!Gamble!has!already!successfully!implemented!this!system.!
Target!is!a!major!vendor,!not!a!competitor!of!P&G.!It!may!be!possible!to!receive!
consultation!on!MEIO!through!P&G.!Because!when!Target!sells!more!and!cuts!cost,!those!
benefits!are!translated!up!the!supply!chain!directly!to!P&G.!In!essence,!when!Target!wins!so!
does!P&G.!If!not,!a!potential!problem!for!Target!would!be!having!to!rely!on!either!in?house!
development!or!the!technology!of!a!third!party!software;!third!party!software!may!not!have!
been!proven!effective!yet!due!to!the!relative!newness!of!MEIO.!Development!of!in?house!
technology!would!raise!cost!substantially,!but!would!ensure!that!the!system!is!tailored!to!
Target’s!needs!and!is!reliable.!The!potential!benefits!of!MEIO!would!still!outweigh!these!
added!development!costs..!!
!
I!encourage!Target!to!explore!all!opportunities!associated!with!MEIO.!Wisdom!and!
understanding!can!only!be!achieved!when!knowledge!is!applied.!Knowledge!without!
application!can!never!be!wisdom.!!
!
!
ii.!Cross!Docking!Optimization!
We!believe!the!concept!of!Cross!Docking!could!be!an!extremely!beneficial!process!
for!Target!to!implement!at!their!distribution!centers.!Cross!docking!is!a!process!in!logistics!
where!products!are!unloaded!directly!from!inbound!trucks,!dispersed!in!the!proper!
manner,!and!loaded!directly!back!onto!outbound!trucks!that!take!the!product!to!its!final!
destination.!!In!Target’s!case,!the!trucks!coming!from!the!suppliers!would!arrive!at!Target’s!
distribution!center(s)!with!various!types!of!products!on!board.!Instead!of!these!products!
being!unloaded,!tagged,!and!stored!into!inventory,!they!could!simply!be!unloaded,!
accounted!for!using!the!proper!technology,!and!then!loaded!directly!back!onto!Target’s!
fleet!of!trucks!and!sent!out!to!the!various!Target!stores.!Once!implemented,!this!system!will!
streamline!the!supply!chain!from!point!of!origin!to!point!of!sale,!therefore!decreasing!the!
amount!of!time!the!product!is!handled!which!in!turn!will!decrease!handling!costs!incurred!
at!the!DC’s.!In!addition!to!reducing!handling!costs,!cross!docking!will!also!reduce!operating!
16
19. !!!!
iii.!Ergonomics!
!
Visibility!is!the!placement!of!key!items!in!places!that!attract!attention;!placing!paper!
towels,!laundry!detergent,!and!diapers!in!easy?to?find!locations!will!increase!their!visibility.!
This!usually!involves!setting!these!particular!items!on!the!front!(or!side)!shelf!of!an!aisle!
visible!to!the!most!“naked!eye”;!this!is!product!placement!at!its!best.!This!technique!can!be!
implemented!at!a!distribution!center!as!well!as!in!stores.!We!could!place!products!at!lower!
shelves!for!easier!access!and!quick!removal,!especially!with!common!products.!The!goal!is!
for!the!DC!handlers!to!touch!the!top!selling!products!as!little!as!possible.!The!longer!it!takes!
to!move!these!high!demanded!products!the!more!the!operating!and!handling!costs!
increase.!If!you!place!these!products!in!locations!close!to!the!loading!docks,!or!in!“easy”!
locations,!it!will!minimize!handling!time!and!decrease!costs.!
!
This!is!a!very!simple!concept!but!could!definitely!be!a!source!to!help!cut!costs!and!
save!significant!amounts!of!money!in!the!long!run.!It!is!very!easy!to!implement!and!will!
definitely!be!cost!effective.!!
iv.!Concentrated!Products!
!
Space!is!a!huge!factor!when!trying!to!reduce!inventory!and!operating!costs.!If!the!
size!of!items!can!be!optimized!or!made!smaller,!more!room!will!become!available!on!the!
trucks,!in!the!DC’s,!and!in!the!stores.!We!believe!there!are!possible!ways!that!Target!can!cut!
down!on!the!size!of!their!products!or!make!the!products!more!efficient!for!their!size.!We!
realize!that!Target!cannot!control!the!vendor’s!products!or!products!outside!of!their!
ownership,!but!they!can!however!control!the!size!of!their!own!in?house!Target!brands.!!
One!way!to!put!this!idea!into!effect!would!be!to!concentrate!the!Target!brand!
detergent!into!a!more!concentrated!chemical!that!could!be!packaged!into!a!smaller!
container.!It!would!be!very!simple!for!customers!to!either!use!less!of!the!detergent!or!dilute!
it!with!water.!Similarly,!Target!could!produce!stronger,!more!durable!paper!towels,!which!
Target!could!sell!for!more!and!increase!the!low!margins!per!square!inch.!Customers!would!
be!able!to!use!less!of!the!product,!which!would!create!more!value!in!the!eyes!of!the!
consumer.!!
v.!Condense!Product!Variation!according!to!Demographics!
18
20. Target!currently!offers!a!wide!variety!of!brands!and!size!in!paper!towels,!detergents,!
and!diapers.!!A!new!outlook!on!maximizing!in!store!stock!levels!would!be!to!decrease!
product!variation!according!to!the!local!demographics.!When!products!are!condensed,!
demand!becomes!easier!to!forecast!due!to!less!variability.!!Dr.!Pappu!always!uses!the!
example!of!a!store!always!selling!5!different!colored!soaps.!!Instead!of!forecasting!for!each!
color!of!soap,!it!is!simply!easier!to!forecast!the!aggregate!demand!of!all!soaps.!!In!order!to!
implement!this!approach,!Target!could!research!the!general!surrounding!demographics!of!
stores!and!find!the!most!popular!of!our!three!focus!product!groups.!!For!example,!Jenna,!a!
manager!at!the!Cedar!Hill!Target,!stated!that!customers!in!rural!areas!like!Waxahachie,!
Texas,!prefer!to!purchase!large!quantities!of!paper!towels!versus!customers!in!high!
metropolitan!areas!whom!usually!preferred!to!purchase!a!few!single!rolls!at!a!time.!!
Obviously,!it!is!unrealistic!to!completely!condense!all!products,!but!with!accurate!research!
at!a!few!stores!it!could!heavily!impact!demand!forecasts!and!as!a!result!in!stock!levels!in!
stores!as!well.!
vi.!Drive!Better!In!Stock!Accuracy!
Target’s!EOQ!model!is!excellent!due!to!its’!almost!accurate!forecast!decisions.!!
According!to!Brad!Moore,!Logistics!Team!Leader!at!the!Target!in!Waxahachie,!store!sales!
volume!has!one!of!the!biggest!effects!on!the!EOQ!for!each!store.!Looking!critically!at!
Target’s!forecast!system!and!due!to!limited!information!provided!in!that!area,!we!assume!
that!Target!is!highly!efficient!in!that!area.!!However,!there!is!still!variability!in!the!system.!!
Variability!is!always!a!concern!in!a!supply!chain!because!that!increases!safety!stock,!hence,!
overall!inventory!required.!!Specifically,!this!variability!is!found!at!the!store!level!when!
inventory!records!do!not!match!the!physical!quantity!found!in!store.!This!can!happen!in!a!
variety!of!ways.!Several!Target!managers!contributed!most!inventory!quantity!errors!to!
incorrectly!labeled!pallets!from!the!DC,!especially!for!commodity!products!discussed.!Other!
minor!ways!these!errors!can!be!caused!include!shrinkage!and!incorrect!record!
modification!of!damaged!goods.!These!slight!variations!do!not!look!very!important!on!a!
store!level,!but!when!combined!they!can!cause!serious!issues!for!the!EOQ!system.!If!an!
inventory!record!shows!a!store!has!5!of!one!product,!but!physically!has!0!then!that!store!
may!not!be!getting!a!shipment!from!the!DC!when!it!should!be.!The!key!to!the!solution!is!
minimizing!the!variability!at!store!to!store!level.!We!have!several!proposed!
19
22. Works!Cited!
1 "Appendix!A!Economic!Effects!of!Transportation:!The!Freight!Story!Final!
Report."Transportation'Infrastructure,'Freight'Services'Sector'and'Economic'Growth:'A'
Synopsis.!U.S.!Department!of!Transportation!Federal!Highway!Administration,!n.d.!Web.!
22!Apr.!2013.!
<http://ops.fhwa.dot.gov/freight/freight_analysis/improve_econ/appa.htm>.!
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ed.!Boston:!McGraw?Hill!Irwin,!2010.!Print.!(Pages!256?58).!
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Blog.!Adexa,!n.d.!Web.!23!Apr.!2013.!<http://web.adexa.com/adexa?
blog/bid/30030/Multi?Echelon?Inventory?Planning?Demystified!
4 Hsieh,!Min!Fang.!"Applying!a!MEIO!Approach!to!Manage!Intel's!VMI!Hub!
Supply."DSpace@MIT.!MIT,!n.d.!Web.!24!Apr.!2013.!
<http://hdl.handle.net/1721.1/66075>.!(Page!32).!
5 "History."!History:'Target's'Shopping'Experience'Over'Time.!Target!Brands!Inc.,!n.d.!Web.!
23!Apr.!2013.!<https://corporate.target.com/about/history/Target?through?the?years>!
6 !"The!History!of!Corporate."!''Target'Corporation'by'.!N.p.,!n.d.!Web.!23!Apr.!2013.!
<http://www.thehistoryofcorporate.com/companies?by?
industry/traderetail/target?corporation/>!
7 "The!Impact!of!RFID!on!Supply!Chains."!—'Research'With'Impact.!PennState!Smeal!
College!of!Business,!n.d.!Web.!22!Apr.!2013.!!
<http://research.smeal.psu.edu/news/the?impact?of?rfid?on?supply?chains>.!
8 Kerr,!John.!"P&G!Takes!Inventory."!Procter'Gamble'Tries'to'Optimize'Inventory'Pdf'Q'P(1)'
Q'SearchQDocument.com.!N.p.,!n.d.!Web.!23!Apr.!2013.!<http://www.search?
document.com/q_search3.php?q=procter?gamble?tries?to?optimize?inventory>!!
9 Lee,!Calvin.!"Multi?Echelon!Inventory!Optimization."!Evant'White'Paper'Series!(2003):!n.!
pag.!Evant.!Web.!24!Apr.!2013.!
10 "Mission!&!Values."!Target'Mission,'Values'&'Stories'Behind'Them.!Target!Brands,!Inc.,!
n.d.!Web.!23!Apr.!2013.!<https://corporate.target.com/about/mission?values>.!
11 Saunders,!Erin.!"Optimizing!Our!Guest?Focused!Supply!Chain."!Telephone!interview.!23!
Apr.!2013.!
21
23. 12 "Search."!Detergent'at'Target.!Target!Brands,!Inc.,!n.d.!Web.!23!Apr.!2013.!
<http://www.target.com/s?searchTerm=detergent>.!
13 Sherrod,!Elizabeth.!"First!Look!?!Forces!Changing!the!Supply!Chain!and!Retail!
Sector."Commercial!Real!Estate!Development!Association!2012.!NAIOP.!21!Apr.!2013!
<http://www.naiop.org/en/Magazine/2012/Fall?2012/Business?Trends/Forces?
Changing?the?Supply?Chain?and?Retail?Sector.aspx>.!
14 "Target!Distribution!Center!Careers!Video!Transcript."!Target'Distribution'Center'
Careers.!Target!Brands!Inc.,!n.d.!Web.!23!Apr.!2013.!
<https://corporate.target.com/Videos/Transcripts/4362/distribution?centers>.!
15 Traub,!Todd.!"Wal?Mart!Used!Technology!to!Become!Supply!Chain!Leader."!Arkansas'
Business.!N.p.,!n.d.!Web.!23!Apr.!2013.!
<http://www.arkansasbusiness.com/article/85508/wal?mart?used?technology?to?
become?supply?chain?leader?page=all>.!
16.!Anderson,!George.!"Will!RFID!Take!Off!Now!That!Tag!and!Hardware!Prices!Have!
Dropped?"!RetailWire.!N.p.,!n.d.!Web.!24!Apr.!2013.!
<http://www.retailwire.com/discussion/16719/will?rfid?take?off?now?that?tag?and?
hardware?prices?have?dropped>.!
17.!Bonsor,!Kevin,!and!Wesley!Fenlon.!"How!RFID!Works."!HowStuffWorks.!N.p.,!n.d.!Web.!
24!Apr.!2013.!<http://electronics.howstuffworks.com/gadgets/high?tech?
gadgets/rfid.htm>.!
18.!Lacy,!Stephen.!"How!Procter!&!Gamble!Created!$1!Billion!in!Value!With!
Waste."Greentech'Media.!N.p.,!n.d.!Web.!24!Apr.!2013.!
<http://www.greentechmedia.com/articles/read/How?Proctor?Gamble?Created?1?Billion?
in?Value?with?Waste>.!
19.!"Target!Corp."!Growth,'Profitability,'and'Financial'Ratios'for'(TGT)'from'
Morningstar.com.!MorningStar,!n.d.!Web.!24!Apr.!2013.!
<http://financials.morningstar.com/ratios/r.html?t=TGT>.!
!
!
!
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22
