[May 21, 2014]By Allison Martell,
Solarina Ho and Susan Taylor
TORONTO
(Reuters) — A
pink Barbie-branded SUV that seats two toddlers offers a
surprising glimpse into the myriad problems that jammed
up Target Corp's supply chain when it set up shop in
Canada, and the challenge facing Target's new Canadian
head.
The toy was one of many products that piled up in bewildering volume
at Target's new distribution centers as it opened 124 stores across
Canada last year, said two former employees of the company's
Canadian logistics contractor.
Only a year ago, Target was touting its first store openings in
Canada. Then Chief Executive Gregg Steinhafel told investors he was
pleased with how his workers and systems were handling the launch.
But things were already going awry, said the sources, who worked at
two of Target's three distribution hubs and spoke on condition of
anonymity.
Goods were coming into the warehouses faster than they were going
out, in part because the barcodes on many items did not match what
was in the computer system. As shipments stacked up, Target flew in
dozens of red-shirted staff from the United States to shore up the
operation, the sources said.
This insiders' view, which has not been reported before, may
partially explain why shoppers have been disappointed by empty
shelves at some of Target's Canadian stores. It is a cautionary tale
for other U.S. retailers who may be considering a big push into
Canada.
Target, which is due to report its quarterly financial results on
Wednesday, has said little about what went wrong with its Canadian
supply chain. But on Tuesday it fired Tony Fisher, the president of
its operation there, and replaced him with Mark Schindele, a veteran
U.S. executive with deep experience in managing supply chains.
Target's launch into Canada, its first international venture, was
code-named Project Bacon, an apparently playful reference to
Canadian bacon sold in U.S. supermarkets. Instead of a slow
province-by-province rollout, the retailer clinched a big real
estate deal, locking itself into a rapid, coast-to-coast launch that
later magnified supply chain problems.
The company said in February it had "dramatically reduced"
congestion in the supply chain but did not give details. Asked to
comment on the sources' depiction of overflowing warehouses, Target
said it did not discuss vendor relationships.
"We have been very clear that we need to improve operations and our
guest experience in Canada," spokeswoman Dustee Jenkins said in an
emailed statement. She said Target was taking its challenges
seriously and making changes.
MISSING THE MARK
Target does much of its own distribution in the United States, but
it hired Eleven Points Logistics, a subsidiary of Pittsburgh-based
Genco, to run its three warehouses in Canada.
Neither Eleven Points nor Genco responded to requests for comment.
Located near the Quebec border, outside of Toronto and near Calgary,
each warehouse covers some 1.5 million square feet, or about 26
American football fields.
As goods arrived at the warehouses, workers found errors, 12 shirts
per box when the computer system expected 24, for example, the two
former Eleven Points employees said.
It is not clear whether these errors were caused by Target's buyers
entering bad data, vendors making mistakes, some glitch in Eleven
Points' warehouse computer system or all three.
The inconsistencies between goods and computer records caused a
chain reaction of delays. Problem shipments needed to be unpacked
and cataloged, a time-consuming process. They piled up instead of
going out to stores, taking over large parts of the massive
warehouses, on a scale the sources said they had never seen at
previous jobs.
Finding the source of this type of error can require a long and
complex audit, said Marc Wulfraat, president of logistics consulting
firm MWPVL International, who has analyzed and written about
Target's supply chain.
"The Target Canada story will go down in the history books as one of
the great supply chain disasters of Canadian history," he said,
pointing to the Canadian operation's $941 million loss before
interest and taxes last year.
While Eleven Points ran the warehouses, teams of workers and
managers, sometimes 30 or more at a time, would arrive from Target's
U.S. distribution centers to help resolve the choke points, the
sources said.
"They'd send a big sea of red shirts," said one source. But the U.S.
workers were used to different computer systems and stocking
procedures, limiting the amount they could help.
Many of the products that made it through processing and into the
warehouses did not seem to sell, like the Barbie SUVs. These goods,
selected by Target's buyers, further clogged up the distribution
system, the former Eleven Points employees said.
BIG TARGET
Target decided early against gradual expansion in Canada, where
competition for prime retail space is fierce. It concluded that the
best way to get into key markets was to do a deal with either Sears
Canada Inc. or Hudson Bay Co's ailing discount chain Zellers,
according to a British Columbia Labour Relations Board decision that
drew on testimony from the company.
The company decided that a Zellers deal offered the quickest route
to "critical mass".
"It was a unique opportunity to get that big parcel of real estate,"
said Antony Karabus, president of Hilco Retail Consulting, who has
worked with retailers on both sides of the border. "In a sense, they
were compelled to grow very fast."
That was a problem because Canadian supply chains are complicated.
Goods have to travel huge distances, and tastes vary between
regions.
"How could you possibly stock 120 big stores with an assortment that
probably need to vary meaningfully by region, and not make a ton of
mistakes, operationally?" Karabus said.
Target is not the first retailer to stumble in an international
push.
In 2012 home improvement retailer Home Depot Inc closed its big box
stores in China after running into tough competition and misjudging
local tastes. In 2006, Wal-Mart sold stores and exited South Korea,
saying it would be difficult to reach the scale it required.
New Target Canada president Schindele has his work cut out for him.
More than a year in, some stores are still visibly under-stocked. At
three Toronto stores that Reuters visited over the last week, there
were still some empty shelves. One location had two cereal sections,
and in some places boxes of Cheerios were lined up in single rows on
shelves.
($1 = $1.09 Canadian)
(With additional reporting by Solarina Ho and Susan Taylor; Editing
by Jeffrey Hodgson and Ross Colvin)
