Kearney leaders talked about how the retail supply chain is being remade at the NACDS Total Store Expo.
As the leader of the global logistics practice at the management consulting firm Kearney, Michael Zimmerman often gets asked when supply chains are going to get back to normal.
The short answer, as he put it to attendees of the National Association of Chain Drug Stores Total Store Expo on Saturday in Boston: They’re not.
“That 2018-2019 period where logistics capacity was abundant and prices were pretty low – you shouldn’t expect that again,” he said.
While unexpected events could intervene, data laid out by Zimmerman and Kearney digital practices lead Todd Huseby from the 2022 State of Logistics Report by the Council of Supply Chain Management Professionals and Kearney outlined a period of massive change and rising costs that continues to reverberate. Given that global economic uncertainty continues, preparing for more swings ahead is the logical conclusion.
The last three years have rewritten how logistics professionals understand supply chains.
In the industry, there’s an often-used term called the bullwhip effect. It refers to the big impacts that small changes in consumer demand can have when they are out of sync with retail forecasts and capacity. During the pandemic, this took on new meaning.
At the onset of COVID-19 in the first half of 2020, consumer demand dropped off, as businesses stopped investing in people and pulled back. Demand for supply chain capacity went down.
When the first round of stimulus arrived, however, economic energy reignited, but it was all toward one segment of spending. With in-person activities and travel shut down, people wanted physical goods. That led to a spike in demand for supply chain capacity. It sent a shock to the system.
“You had a tremendous, unprecedented surge of demand which had met a substantial shutting down of capacity. The bullwhip effect was amplified,” Zimmerman said. “…That asteroid hitting the ocean reverberated throughout supply chains all over the world as providers scrambled to provide capacity and supply chains were disrupted, which further destroyed capacity.”
While the COVID lockdowns and other localized conditions that led to bottlenecks have eased, the period has resulted in change at all levels of the supply chain that brings goods around the world from manufacturers to retailers, and ultimately to consumers.
In 2021, US logistics business costs grew 22% to $1.8 trillion. That took logistics’ share of GDP from 7.4% in 2020 to 8% in 2021.
“This is the most dramatic and unprecedented rise in logistics costs in history,” Zimmerman said, saying conditions are even worse for shippers now than they were during World War II.
It's reverberating across the highways, shipping channels and warehouses where goods are transported. Zimmerman and Huseby shared the following examples in the following modes:
Road freight, primarily made up of trucking, grew 23.4% to $831 billion. Top carriers saw profits rise 50-100%. This is the largest logistics segment. Rates have started to soften in 2022, but costs are continuing to go up. Shippers are reevaluating their relationships based on the experiences of the last few years. In considering capacity, shippers should pay close attention to the experience at their distribution centers. One quick way is to take the pulse is to read Google Maps reviews from truckers.
Water and ports shipping saw container rates spike as high as $25,000 in 2021, and US water shipment costs in turn rose 23.6%. Carriers earned more profit in 2021 than the previous 20 years combined. While container costs have moderated from their late-2021 peak in the first half of 2022, capacity in this area remains a challenge following a year when shippers had to marshal private fleets to get goods to shelves to meet demand. Still, Zimmerman said there may be an opportunity for shippers to renegotiate rates ahead as carriers look to reset relationships in 2023.
Parcel and last mile delivery surged with the rise of ecommerce, as well, with FedEx and UPS seeing 9% year-over-year increases in revenue per package. The surge of demand led to new players entering the space, offering the opportunity for retailers to diversify the companies they work with, and even collaborating with others to pool resources and advance negotiating positions.
Warehousing capacity reached its limit in 2021, as vacancy rates dropped to the lowest in history and the cost per square foot rose to the highest ever. With goods becoming more difficult to get, retailers stocked up from different sources to ensure they would arrive on shelves.
“We’ve moved from a world of just-in-time to a world of just-in-case,” Zimmerman said. “One of the reasons all of these supply chains suffered from the bullwhip effect is because inventories got sapped.”
There are continuing efforts to seek additional space, even though supply is still limited. At the same time, retailers are seeking ways to move excess inventory, whether through writedowns, donations or other means. This underscores how the inventory glut is not just a phenomenon in the apparel industry, but also for chain drug store categories like health and beauty, as well.
While the challenges are many, the remade landscape has brought some improvements within logistics teams that they can take forward. Merchandising and supply chain teams are working together better than ever before, Zimmerman said. The tight labor market has led to a rise in salaries among truckers, and made taking care of employees and retention a priority for logistics professionals. With optimization in supply chains, there are opportunities to celebrate sustainability wins. The need for capacity will continue to advance automation and other technology that can make work more efficient.
Change will continue. While supply chain chaos has given way to relative calm in the middle of 2022, it’s by no means a time to take an eye off the horizon. After all, supply chains take 18-24 months to add capacity. Plus, strong macro forces shaping the supply chain continue to exert themselves. Geopolitical shocks like the war in Ukraine and trade conflicts with China are pushing talk about the future of production to shift from nearshoring to “friend-shoring,” where exchange of goods flows only between allies. Interest rate hikes by the Federal Reserve are increasing the likelihood of an economic slowdown. Natural disasters could bring literal storm clouds.
“You’ve probably heard the expression, ‘Hope is not a strategy,’” said Zimmerman. “This is a perfect example of that. Get your supply chains ready.”
Sortation centers are helping the retailer build on its stores-as-hubs strategy.
Loading a van at a Target sortation center. (Photo courtesy of Target)
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.
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.”
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.
