Supply chain challenges loom with smaller stores

It is a good thing Target has been experimenting with smaller stores in the United States. The experience, limited as it is, will come in handy when the company begins opening stores in former Zellers locations in early 2013.

The Zellers locations the company will be converting to Target stores are expected to average about 85,000-sq.-ft. compared with the typical U.S. store, which is well in excess of 100,000-sq.-ft. In addition to smaller store sizes with limited backroom capacity for safety stock, sales velocities are expected to be higher due to the urban locations of the majority of the real estate creating the potential for problematic in-stock situations to arise.

Ensuring satisfactory in-stock levels is difficult enough under normal circumstances, but the challenge is compounded in Canada because it is a new market for Target. That means the company has no prior experience on which to base demand forecasts and will have to balance the need to have high in-stock levels with the potential for significant markdowns if inventories are excessive and uptake of the “expect more, pay less” value proposition is slower than expected north of the border.

And if that weren’t enough, there is the replenishment challenge of serving a store base spread across an incredibly wide and narrow strip of land parallel to the United States where 80% of the country’s population lives within 100 miles of the border. Plans currently call for Target to serve its stores with three distribution centers, two in the Ontario province cities of Cornwall and Milton and the third expected to be located in the Calgary area, but those facilities will be managed by a third party while grocery distribution is outsourced to Sobeys. The bottom line for Target suppliers in Canada is they will be working with longer lead times to ensure satisfactory in-stock levels at smaller stores with limited holding capacity and potentially higher sales velocities than their U.S. counterparts.