This Is How Target Is Solving Its Out-of-Stock Problems

Out-of-stocks have long been a bête noire for major retailers.

They disappoint customers and deprive stores of sales. Yet running short on a popular item has long been seen as inevitable given the complexity of a national retailer’s supply chain and the obligation to offer a wide assortment of sizes and formats.

But Target (TGT) thinks it has found the solution: shrinking the variety of sizes, flavors and even brands on store shelves to reduce the complexity of its operations.

The discount retailer, the third largest U.S. store chain, is deploying workers to pore through the many categories of products its sells to see how many different formats and pack sizes of products like bottled water or soap it really needs to stock in its stores.

For Target Chief Executive Brian Cornell, it’s a matter of being more efficient in what are staples for the retailer so it can focus more on categories it has made a priority, like wellness, stylish home goods, apparel, and baby products.

“We will never be famous for selling bottled water or laundry soap,” Cornell told Wall Street analysts in New York on Wednesday. “We have to always have to be in stock because we know these items are key.” At the same time, Target has to excel at those priority categories, he added.

Target, which last year reported a 2.1% increase in comparable sales and told investors it is aiming for growth of up to 2.5% this year, and then 3% in 2017 and beyond, didn’t detail which products it would cull. But Target is proceeding carefully.

The store will start by removing some items at one location, and then roll out to other stores in its 1,800-store fleet if it doesn’t face customer feedback. “We are not taking a blunt instrument approach to this,” Cornell said.

The efforts mirror those of Walmart (WMT) which has also grappled with out-of-stocks and wants to reduce the expense and time of having workers constantly restock shelves. By October, Walmart had eliminated about 15% of its assortment by doing things like offering a ranch dressing in one size rather than six, the Wall Street Journal reported at the time.

Many consumer and packaged goods companies seem to have been expecting this development. Former Procter & Gamble CEO A.G. Lafley told fellow industry leaders last June that consumers are put off by too much choice.

Last year, to address the out-of-stock problems, Cornell named former finance chief John Mulligan to the new job of Chief Operating Officer, to fix supply chain issues and inventory management. Those have become radically more complex because of the integration of e-commerce and stores.

Target’s efforts have shown early signs of success. Out-of-stocks were down 40% during the holiday season quarter, its fifth straight period of shopper traffic increases.

Other steps Target is taking include putting more product on the sales floor rather than stockroom by redesigning shelves. Under Mulligan’s aegis, Target is optimizing case pack sizes to reduce the number of times a store employee has to move stuff about. Mulligan evoked the example of a Target store getting 24 jars of peanut butter, but its shelves can only take 18. That prevents Target from simply putting the case onto a shelf from the truck since workers have to take the extra six jars out and put them in back. Ultimately, in this example, the merchandise has been touched by a Target worker three times rather than once, adding to costs.

So Target is telling suppliers to adjust case size to account for how quickly items sell and how much space they’ll get. This leads back to Target’s ultimate goal of better inventory management and neither having too much inventory, nor too little.

“The number one pain point (for customers) is that we’re out of stock,” Mulligan said.

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