SMC3 Connections Q&A: Target supply chain executive Tim Hotze

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 supply chain management approach, what are the risks and what are the degrees of flexibility you want to achieve? Several years ago, we started to look at a more diversified global sourcing strategy, because we have a lot of the national brands in our portfolio, but then we have our Target Own Brands —where we create our own products, and we source them globally, but we only sell them in the U.S., meaning the consumption market is the U.S., but the sourcing is global.

With this in mind, it starts with the product design itself. We then overlay the manufacturing strategy, in terms of what are the most capable locations or geographies in the world to manufacture that specific item and how do we look at the raw material supply chain as well as the diversification of supply. And if you can do single-sourcing or do multi-sourcing, then where does this land you in terms of geographies? That cycle actually happens more on the commercial side, in terms of how we build the product assortment and then operationally we overlay the transportation strategy.

With this in mind, several years ago, there was definitely a focus related to sourcing from China. But over the last several years and already pre-pandemic, we started to diversify. 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 as a focus on how do we overlay the ocean transportation capacity and the needed flexibility to move 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 physically moves or comes out of the factory, we do a lot of different scenario planning, and we plan through the overlay, which I just alluded to. 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 want right now coming out 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, i.e. when do you best land and when do you customs-clear the goods? With the kind of volatility we've seen in the last couple of weeks it 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 made a decision for when we physically start to move inventory. Because from a cycle time angle we can then plan 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 try to game plan 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 then drives what we call the resulting guest experience, kind of overlaying all of the supply chain planning and financial planning components into what our consumers experiences at the stores.

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 rather concentrated  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, what we have seen outside of trade impacts and earlier on with the pandemic is that the holiday season really does start quite a bit earlier. Maybe people start shopping for Christmas in October, early November. At the beginning of the season for a lot of consumers it 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, then say, ‘I still have to do all of my Christmas shopping,’ and then time is of the essence. But generally, I do expect that the freight flows into the U.S. are normalizing more and more. We already see that there's not really a lot of port delays right now—what we see is that the global trade and global ocean vessel repositioning is actually happening right now and getting balanced. I don't expect anything like what we 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 are 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 dual-sourcing strategies in play. We have our product design, and then we work with our manufacturing partners, whom are best equipped to manufacture the product at a competitive cost. We then overlay a lot of the pre-manufacturing supply chain, so 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 monitor and track, like identifying, for certain products, where the fiber is coming from. You need to go more upstream to truly understand where the raw material being put into your product is coming from. All of this is a big Tetris puzzle. But at the end of the day, what we try to do focus on, is the right factory allocation, and then how do we create a redundancy, or needed0 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 is one of the biggest importers into the U.S. 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 to increase or adjust capacity? We run a long-term capacity planning cycle, not only to decide where we make the items, but also how we move them. And there's a cost-to-serve in terms of where you manufacture. Tariffs are volatile at this point in time, but there's ultimately a cost component to it. Even before we land the inventory in the U.S., we run what we call an inventory flow path optimization. As for the mode of transport, a lot of our import  volume 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 get it here? Then you go into middle-mile transportation planning. Do you do deconsolidation? Do you do transloading into surface modes? Do you run intermodal in the form of certain IPI moves? We play with all of these different components, and ultimately, it's a service level and cost-to-serve decision. The resulting reliability is around if you play it too tight in a just-in-time, just-in-sequence mentality, you're risking not building enough safety stock to react to demand fluctuations and 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, companies have been doing this for a long time. One of my teams is called Supply Chain Network Optimization. The team is deep in data science and actually pre-AI “hype”, used reinforcement and machine learning, building predictive data science or decision modeling into our overall optimization workflow. A lot of probability and what-if modeling  goes into this. But then what is AI actually doing? AI is probably the first time, where you have a transformative technology, where you don't need to have a computer science or coding degree, where you can 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 evolve? Think of it where more like a ChatGPT kind of interface you have for the end users. The users can query data, they can save their queries, and they pull the data in whatever type of format they want to do – all without coding. That's one of the applications we are doing more of.

And for our store team members, which are north of 300,000 team members strong, we have an AI supported workflow 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 supported by the AI workflow. In the past, they had to know where to find information, but Store Companion today makes it very simple for them to execute all of the different components and find information fast. On the guest-facing side, if you are a member of Target Circle, which is our loyalty program, you see a lot more customization for things like personalized offers and guest preferences. Running AI in the background allows us a high degree of 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 an “always on” mode. For the holidays, people are shopping earlier and earlier. But if you just look at the seasonality and how the Target business behaves, we have a couple of smaller seasons in the beginning of the year. In January, you have your Home and Storage organization, then you have Valentine’s Day and Easter. Right now, if you look at our Distribution Centers, they are full with back-to-school and back-to-college items like, futons, mini fridges, coffee makers, you name it—everything you need for a college dorm room. The amount of that specific type of inventory in these categories we currently have in the network is higher compared to what we carry in these categories, let's say, in November and December. You continuously plan for it and you try to scale up and down. We do have different planning techniques. We call it the on-peak/off-peak ratio. E-commerce is a good example. E-commerce in the retail space has heavy activity in the fourth quarter and then you need to basically answer the question on how do you create the operating capacity in the most efficient manner. Do you want to have always 100% of operating capacity available and not fully use it throughout the year? Or do you actually plan for 80 % or 90% and then you find operating solutions to manage through Peak? Let's say, the Peak surge is four to five weeks. What’s the best angle when it comes to a cost-to-serve optimization? But I think overall, to answer your question more broadly, our Peak operating mind is always on, considering the different merchandising seasons we have at Target.