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After two years of supply chain chaos, small and medium-sized businesses are signaling that they want to keep their suppliers closer. It’s a shift that is happening more quickly than experts expected.
According to new research from software review platform Capterra, 88% of 300 supply chain professionals at small and medium-sized businesses surveyed said they plan to or currently are switching at least some of their suppliers closer to the US in 2023.
This gives credence to the talked-about trend of nearshoring, in which companies move their networks geographically closer. Capterra indicated that the shift was expected to happen over the course of five or more years, but the survey results indicate that it is being sped up.
“The biggest surprise in the research is that nearshoring is happening much faster than predicted at small businesses,” said Olivia Montgomery, associate principal supply chain analyst at Capterra, in a statement.
This comes as companies recalibrate following the supply chain bullwhip of the pandemic that left goods sitting on ships in 2021, only to see multiple seasons arrive at once and cause an inventory glut in 2022.
The bottlenecks have mostly eased, as the latest reports have indicated imports into the US are now falling. The famous line of ships off the major West Coast ports in Los Angeles is also gone, as carriers are now sending more cargo to the East Coast.
But complications remain. Extended COVID lockdowns in China have continued, while trade and political relations with the country at the center of global manufacturing remain tenuous. Meanwhile, the war in Ukraine showed the vulnerability of the global economy to sudden shocks, and inflation this year has driven up transportation costs. Climate change looms over all operations requiring significant energy spend, and that’s especially true of an area that requires long distance travel.
It all points to a shift in how the systems that bring goods to shelves are built.
“The ‘just-in-time’ supply chain worked perfectly and brought about unprecedented global prosperity in the late 20th and early 21st century,” Marne Martin, president of service management for EAM & Global Industries at enterprise software solution provider IFS, told The Current earlier this year. “But now these weak links are exposed and highlighted by geopolitical tensions, climate change, and lingering ripple effects from the pandemic, creating a domino effect that will wreak havoc to the stretched supply chain network.”
To be sure, making a change is a different prospect for small businesses than it is for global corporations. But Capterra’s research points to a number of reasons why nearshoring can be worth it. Proximity and time zone syncing make it easier to manage critical situations, while cultural disparities are likely to be fewer. At the same time, there are financial incentives and trade agreements in place to help businesses, both in bordering countries like Mexico and Canada and 11 other countries that are not as close, such as Australia.
“Macro factors, such as war and climate change, will continue to change the supply chain landscape,” Capterra writes in an anaylst’s note. “But as more and more manufacturing plants open in North and South America, it’s a safe bet to move your supply chain network closer to home sooner rather than later. Map out your current supply chain as far up the chain as possible and then research potential replacement suppliers that are closer to home.”
Trending in Operations
Sortation centers are helping the retailer build on its stores-as-hubs strategy.
Like many retailers, Target undertook a massive digital buildout during the pandemic as ecommerce demand spiked.
The new capabilities proved to be the launchpad for impressive growth. In 2020, store pickup grew 600%. Same-day fulfillment grew 400% from 2019 to 2021. By 2022, the company was ready to double down on digital. It announced plans to invest up to $5 billion to scale operations, with store-based fulfillment capabilities among the big areas that would receive a boost.
It was an example of how the pandemic’s digital shift left a lasting imprint that would change a retailer’s footprint well into the future. But it’s worth remembering that Target already had the strategy that shaped this operational transformation in place well before COVID-19 arrived.
In the mid-2010s, Target adopted a stores-as-hubs strategy that put brick-and-mortar at the center of all operations, including digital. This meant that ecommerce orders would run through the store, just like in-person shopping. This has remained in place, and only grown. In the first quarter of 2023, more than 97% of sales were fulfilled by stores.
Stores-as-hubs was a radical approach at the time it was introduced. CEO Brian Cornell faced criticism that the two channels would cannibalize each other, and was out-of-step with the massive warehouse-based fulfillment network that Amazon was building. But in the end, Cornell was vindicated. The strategy put Target not only in position to capitalize on the pandemic’s digital shift, but to continue to see its stores be a destination when consumers returned to in-person shopping when restrictions were lifted.
At this point, Target’s nearly 2,000 stores are cemented as the center of ecommerce operations. But as it seeks to gain efficiency and speed in delivery, the retailer is bringing additional facilities into the network.
Now, Target sees opportunity to build ecommerce from the inside out.
Scaling with sortation centers
This year, evidence is emerging in the form of Target’s sortation centers. Positioned downstream of stores, these facilities combine technology and process logic to triage packages for last-mile delivery by the Target-owned service Shipt. Orders are still picked and packed at the store, but the sortation centers serve as the staging grounds that get packages out the door for delivery.
On the company’s first-quarter earnings call with investors, Target COO John Mulligan stressed that these centers are not highly automated.
“In fact, it's because of the relative simplicity in the design of these buildings and the efforts of an incredibly innovative and energetic team that we've been able to scale the number of these buildings so quickly,” Mulligan said.
Target is placing a big bet on these facilities. In February, it announced plans for a further investment in the supply chain of $100 million, focused on the sortation centers. It is enabling rapid growth. In 2022, the company had three centers, and now has nine. By 2026, it expects to have 15 centers in place.
These facilities are also serving as testing grounds as Target seeks to scale the delivery network.
A new facility in the Atlanta area is serving as an extension of the sortation center that has enabled Target to reach 3 million customers with next-day delivery.
“With this new facility, online orders that have been packed by Atlanta area stores continue to flow to the sortation center, where they're sorted and delivered via our national carrier partners or a ship driver,” Mulligan said. “However, a portion of local orders falling outside the sortation center's last-mile delivery area can now be transferred to the Smyrna extension, where Shipt drivers can pick them up and serve additional neighborhoods.”
Target and Shipt are also refining the path that packages take to reach customers. Shipt vehicles are being shifted to high-capacity models such as SUVs and minivans. These were used in 65% of last-mile deliveries in the first quarter, compared with zero a year ago. The vans service nearly five times as many packages, and enable route optimization that increases the number of packages delivered per hour.
It all adds up to reduced service costs for Target, and the company is continuing to build and refine processes at the sortation centers.
“Based on the success of these efforts, we're developing plans to begin testing high capacity vans at a larger scale,” Mulligan said. “In addition, we're developing a standardized faster way to load those vans, enabling package containerization and easy identification of the correct packages at delivery. In addition to simplifying the load process for the drivers, this new process will enable us to safely move a larger number of Shipt drivers in and out of our sort centers in a given amount of time, expanding our last-mile delivery capacity in these markets.”
Improving the ecommerce experience
To expand this last-mile capability, Target won’t be building massive fulfillment centers like Amazon. It already has large stores that offer proximity to large swaths of the population. Those can be outfitted to serve the same functions as large warehouses, and sortation centers help to expand them. Add in a delivery network via Shipt, and the pieces are in place to continue expanding and optimizing capabilities.
A scaled logistics network on the backend could also improve Target’s ecommerce experience on the frontend. For instance, increasing fast delivery could also open up more opportunities to deliver items with a shorter shelf life such as groceries, which is an area where Target is looking to expand. As Amazon has shown, consumers are also more likely to buy if they receive items in a convenient manner. Target’s stores have long benefitted from customers associating the shopping experience with their affinity for a retailer, just as much as they do the products they buy. Through fulfillment and delivery, it can extend the Tarjay cachet online, as well.
Ecommerce has always held the promise of being able to bring the store home. Target’s logistics strategy is putting that idea into action in a very literal way.