LM Group News Editor Jeff Berman recently spoke with Tim Hotze, Senior Vice President Operations Planning, Network Steering and Optimization, for Target, at the SMC3 Connections conference in Salt Lake City last month. Hotze provided a detailed overview of key facets of Target’s supply chain and logistics operations, including: sourcing, tariffs, AI, and Peak Season, among other topics. Their conversation follows below.
Logistics Management (LM): Global trade and tariffs have kind of been the talk of the town when it comes to freight transportation and logistics operations. That said, in recent months, how has Target handled all the uncertainty created by the focus on tariffs.
Tim Hotze: I think from a scenario planning standpoint, it’s around what do you anticipate? From a broader kind of supply chain management approach, what are the risks and what are kind of the degrees of flexibility you want to do? And several years ago, we looked at kind of a more diversified global sourcing strategy, because we have a lot of the national brands, but then we have our own [Target] brands—specifically our own brands, where we create our own products, and we source them globally, but then we only sell them in the U.S., so the consumption market is the U.S., but the sourcing is global.
With this in mind, it starts with the actual product design itself. And then we overlay the manufacturing strategy, in terms of what are the most kind of capable locations or geographies in the world actually to manufacture that specific item and how do we look at the raw material supply chain, and then also we look at diversification to supply. And if you can do single-sourcing or do all-sourcing, then where does this land you, in terms of geographies and importance? That’s actually more on the commercial side, in terms of how we build the product assortment and then we overlay the transportation strategy, when it comes to kind of familiarity. With this in mind, several years ago, there was definitely a focus related to sourcing from China. But over the last several years also and pre-pandemic, we started to diversify. Specifically, if you look at apparel as an example, a lot of the apparel manufacturing 10 years ago did come out of China. But then a lot of this moved more into Southeast Asia and countries like Vietnam, Cambodia, Bangladesh, and others have picked up quite a bit of manufacturing capacity. We also diversified the origin ports we work with a focus on how do we overlay the ocean transportation capacity and the needed flexibility to get the inventory into the U.S.?
LM: What are the things you focus on or need to do in order to keep your supply chain operations running smoothly amid all the noise and confusion?
Hotze: Before anything probably physically moves or comes out of the factory, we do a lot of different scenario planning, and we actually do the overlay, which I just alluded to—and we know the country of production, and the vendor—which we call the vendor manufacturing points. Physically, we can do an overlay related to how many units do come out of what location. And then we overlay the different strategies, in terms of when does it need to be in the U.S. and ready for the stores?
As an example, if you go into the Target stores here in the next couple of weeks, you will see a lot of back-to-school and back-to-college goods. That’s exactly the kind of the inventory we have and also the kind of scenario planning with a focus on when you land it in the U.S., do you wait or do you actually land it early? What is the arbitrage around the duties and the accessorial fees you have to pay, because when you land and when your customs clear, the goods and the kind of volatility we’ve seen in the last couple of weeks actually does make a difference in terms of your duty outlay. So, we played that out in terms of, what do we expect, and what is the most likely scenario and then we make a decision for when we physically start to move inventory. Because then we kind of can plan from a cycle time angle when it would land in the U.S., using a free trade zone or customs bonded warehouses as needed so when you release it into the U.S., do you optimize a little bit the cash flow component to it as well? But you kind of try to game plan a little bit of all of the different scenarios, and working backwards from wanting to stand for a certain assortment and wanting to have enough of a certain assortment in the stores. Some of this actually is then also what we call the guest experience, kind of overlaying all of the harder kind of supply chain planning and financial planning components to it.
LM: On a more practical level, if you’re a Mom or Dad in today’s audience, what would be your advice for the holiday season? Buy now, or just make your purchases as usual later in the year?
Hotze: The first thing I will say is I think things are normalizing quite a bit in recent weeks. What everybody hates is uncertainty. If you look at the U.S.-China component, toys do have a long lead time. They are very kind of focused in terms of where the global manufacturing footprint sits. I do expect that for certain items, you probably see a little bit of an impact.
But generally speaking, I think there will be plenty of inventory, plenty of choices, when it comes to holiday shopping. Generally, actually, what we have seen outside of terrorism and the pandemic is that the holiday season really does start quite a bit earlier. Maybe people start shopping for Christmas in October, early November, and then the beginning of the season is more like, ‘let’s find a good deal,’ and time is not all that relevant. And then the closer you get to the Christmas holiday, and basically, the procrastinators, maybe among us, basically, then say, ‘I still have to do all of my Christmas shopping,’ and then kind of time is of the essence. But generally, I do expect that the freight flows into the U.S. actually are normalizing more and more. We already see that there’s not really a lot of port delays right now—what we see is the kind of the global trade and global ocean vessel repositioning, is actually happening right now. I don’t expect anything like what saw in 2021, when there were 100 vessels trying to get into the ports of Los Angeles and Long Beach and disrupting the global vessel positioning and so forth. I don’t see that actually happening this holiday season.
LM: Let’s shift over a bit towards the topic of sourcing diversification. Can you break down for us how Target is diversifying and sourcing amid all the ongoing uncertainty?
Hotze: Using apparel as an example, we do see less dependency on China. A lot of this has gone into Southeast Asia. We also rolling out what we call a Western Hemisphere strategy, which is basically looking at all of the Americas, in terms of where we’re sourcing from there. There are also a lot of kind of dual-sourcing strategies. We have our product design, and then we work with our manufacturing partners, whom are best equipped actually to manufacture the product at a competitive cost. But then also we do overlay a lot of the pre-manufacturing supply chain, so kind of the manufacturing raw material, and anything that goes into the product. For apparel, you have a couple of sustainability and traceability items you need to do, like identifying, for certain products, where the fiber is coming from. You need to kind of go more upstream to truly understand where also the raw material being put into your product is coming from. All of this kind of is a big kind of Tetris puzzle. But at the end of the day, what we try to do focus on the factory allocation, and then how do we create a redundancy, or kind of flexibility, in case you have a jam somewhere in the world, so you can move the inventory. This is what we call supply planning.
LM: Taking that a step further, how do you juggle costs, quality and reliability when making those specific sourcing decisions?
Hotze: I think the key component is a trade-off. You need to have a certain reliability related to things like the size of the manufacturing system and the size of the transportation system. Target one of the biggest importers into the U.S., in between the other guys in Bentonville [Walmart] and in Atlanta [Home Depot]. We move a lot of containers, and when we go into the transportation planning for certain origin ports, the things we focus on include: What is the infrastructure there? What is the vessel rotation? Can we talk to the steamship lines, actually, to increase capacity? We go kind of into long-term capacity planning, not only to make the items, but also to move them. And there’s a cost-to-serve in terms of from where you manufacture. And tariffs are little bit volatile at this point in time, but there’s ultimately a cost component to it. When we land the inventory in the U.S., we call it an inventory flow path optimization. As for the mode of transport, a lot of the input is actually ocean freight. But if you want to have the item, let’s say, here in Salt Lake City, there’s not an ocean close by, right? So how do you kind of get it here? Then you go with the middle-mile transportation planning. Do you do deconsolidation? Do you do transloading into surface? Do you do intermodal in the form of certain IPI moves? We play with all of these different components, and ultimately, it’s a cost-to-serve, and then the reliability is around if you play too tight, kind of a just-in-time, just-in-sequence mentality, you’re probably not building enough kind of safety stock to kind of react to any type of demand fluctuations and any type of disruptions you see on the global transportation side, or maybe with port delays or any other type of disruption.
LM: Along with tariffs, a big theme or narrative of this conference obviously has been the role of AI within the supply chain. How is target using AI to ramp up its supply chain game?
Hotze: One wise person actually told me that if you invert AI and call it IA, IA means Intelligent Automation. And if you really look at it, we have been doing this for a long time. One of my teams is called Supply Chain Network Optimization. It’s really kind of deep in data science and is actually pre-AI machine learning, reinforcement learning, building predictive data science or decision modeling into this. A lot of probabilities go into it. But then what AI is actually doing? That’s probably the first time where you have a really transformative technology, where you don’t need to have kind of computer science or coding degree, where you can kind of interact with the technology. One of my teams is called Operations Intelligence, and what we’re doing is basically moving away from the traditional business intelligence analytics, where you need to have people who can visualize data and create your reports. Basically, how do you do this? And more, like a ChatGPT kind of interface where you actually you have the end user, they can query things, and they can save their queries, and they basically, kind of pull the data in whatever type of format they want to do. That’s one of the applications we are doing.
And for our store team members, which are north of 300,000 team members strong, we have an AI model called Store Companion. If you see the store team members, they have a small device, which we call My Device, in which they can run the whole store workflow on that little device, and with the AI workflow and where they had to normally know where information is, it makes it very simple for them actually to execute all of the different components. On the guest-facing side, if you are a member of Target Server, which is the loyalty program, you see a lot more customization for things like personalized offers and preferences. AI in the background allows us a lot of kind of that customization when it comes to marketing and product availability and so forth.
LM: What are your views on Peak Season today compared to three-to-five years ago?
Hotze: Peak Season is really probably always on. For the holidays, people are shopping earlier and earlier. But if you just look at the seasonality and just how the Target business behaves, we have a couple of smaller seasons in the beginning of the year. In January, you have your storage organization, home organization, then you have Easter and also Valentines. But right now, if you look at warehouses, they are full with back-to-school and back-to-college stuff like, futons, mini fridges, coffee makers, you name it—everything you need for a college dorm room. The amount of inventory in these categories we currently have in the network is actually, right now, very, very high compared to actually what we have, let’s say, in November and December. You continuously plan for it and you kind of try to scale. And we do have different planning techniques. We call in the on-peak/off-peak ratio. E-commerce is a good example. E-commerce is still in the retail space, with activity heavy in the fourth quarter and then basically, how do you create the operating capacity—do you want to have always 100% of operating capacity available? Or do you actually do it for 80 % or 90% and then actually you find solutions to move through. Let’s say, the peaks for like four or five weeks, because then it comes to a cost-to-serve optimization as well. But I think, to answer your question, it’s always on, just given the different seasons we have, even with the general business we see within Target.
