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03/02/2022

Target Invests in Sortation Centers as Part of Its Strong Supply Chain Strategy

Target says it's "years ahead of others who just started using physical stores to meet digital demand." Learn how it plans to continue scaling its massive supply chain prowess.
Jamie Grill-Goodman
Senior Editor
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Target

Target won’t stop at curbside and coffee.

The big box retailer announced it will spend up to $5 billion to continue scaling its operations in 2022, a figure that includes investing in its upstream supply chain, sortation centers, and distribution center automation to further reduce store workload.

In 2019, before anyone had heard of Covid-19, CEO Brian Cornell said, “I think our decision years ago to put our stores at the center of our fulfillment strategy is paying off with accelerated growth.”

Fast forward to present day. Since 2019, Target's same-day fulfillment services have grown nearly 400%, accounting for more than half of the company's $13 billion digital growth.

“Although, the idea of leveraging stores to fulfill online orders is widely embraced across retail today, we are on our own when we introduced the concept five years ago,” John Mulligan, EVP and COO, noted during Target’s Q4 2021 earnings call.

“As a result, we are years ahead of others who just started using physical stores to meet digital demand. We know using stores as hubs would give guests more choice and convenience, while giving our operation more flexibility and capacity for future growth. That was true prior to 2020 and could not have been more essential since that time. Today, when our guests turn to Target, no matter how they choose to shop, those stores answer the call.”

Sortation Center Strategy

Target will continue enhancing its same-day services even more this year by adding Starbucks orders and easy returns to its Drive Up service in select stores ahead of the holiday season, while expanding its back-up item option for pickup orders to more categories.

To add speed, efficiency and capacity to its fulfillment operation, the retailer is investing in its sortation centers, which organize digital orders packed by local stores for fast neighborhood deliveries. These sortation centers also enable a next-day shipping capability in dense markets and allow the company to further scale its stores-as-hubs strategy.

It’s first sortation center opened in Target’s hometown of Minneapolis, MN, powered by technology from companies the retailer has acquired: Grand Junction and DelivNormally, with the ship-to-store method, a Target store receives an online order, and then the store assocaite picks the item, packs it in a box, and sorts that package into separate areas for each individual carrier. The sortation center process cuts out that sortation step so the store just focuses on the picking and the packing. Once a local store team packs up their online purchases for delivery, trailers sweep the packages off to the sortation center nearby. Once packages arrive at the sortation center, Target’s proprietary technologies acquired from Grand Junction and Deliv determine the most efficient way to sort, route and deliver to local neighborhoods. Sorting packages into batches by neighborhood makes deliveries easier.

Target announced it’s expanding this model beyond Minneapolis, and expects to have five more facilities operating across Dallas, Houston, Austin, Atlanta and Philadelphia by spring and another five planned to open later this year. Target also opened two new distribution facilities in 2021 to support the increased inventory flow to its stores. The retailer has another four facilities currently in development to expand supply chain capacity, with plans for several more in the next few years.

“The ability of our store teams to ship local orders out our back doors continues to increase our speed to guests, while delivering cost savings of more than 40% per unit versus upstream shipping,” said Mark Schindele, EVP and chief stores officer. “We are working closely with our supply chain partners, as we roll out more sortation centers across the country.”

Frequent sweeps of Target stores to a local sortation center frees up space in backrooms and centralizing the sorting process helps Target associates be more productive, Schindele explained.

“Our teams are focused on greater ease and efficiency with store staffing, especially when it comes to same-day options, so we can be ready to flex with guest demand,” he continued. “We are enhancing our technology to give store leaders an even clearer real-time picture of fulfillment needs and testing out new tools to help them better predict guest patterns in the future, helping us be even more efficient in staffing, the right teams at the right times, ready to do the work and deliver for our guests.”

Over the last three years, Target’s average per unit digital fulfillment costs have declined by more than 50%, according to Schindele, and the rollout of sortation centers presents an opportunity to further reduce the unit cost of last-mile delivery.

In the Twin Cities market, where Target has been piloting its first sortation center, average per unit last-mile fulfillment costs have gone down by nearly one-third, he said.

Target stores handled more than 95% of the $100 billion plus in sales the retailer did in 2021, including 12% more in-store traffic and most of Target’s digital demand, according to Mulligan.

“These [sortation] centers help us further scale our stores as hub strategy and create room for future growth,” he said.

Before the Minneapolis sortation center opened, Target’s store teams would fulfill online orders and palletize the packages in the backroom, waiting for one daily pickup from our carrier partners, Mulligan noted.

“Now Target trucks collect those packages at 40-plus Twin City stores throughout the day, keeping orders moving while giving stores more room to fill even more.”

During peak season, when most orders had a standard two-day promise, these packages were delivered in just over a day on average, while the average unit fulfillment cost dropped by nearly a third. “And that’s before we have added automation that will make these buildings more productive in the future,” he noted.

“Our Minneapolis pilot shows how sortation centers will make stores even more efficient as fulfillment hubs and allow us to roll out a next-day delivery capability at scale.

“This capability isn’t something we built overnight. It’s the result of many strategic decisions we have made over time, working together in a model that’s unique to Target.”

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