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 (TGT.N) 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 reported another big quarterly loss in its Canadian operation on Wednesday, has said little about what went wrong with its supply chain in Canada. 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.
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.
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. SCC.TO or Hudson Bay Co’s (HBC.TO) 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.
Reporting first quarter earnings, Target said it was seeing “early signs of improvement” in Canada. It disclosed a $211 million loss before interest and taxes, on $393 million in sales. The operation’s gross profit margin was 18.7 percent, compared with 29.5 percent in the United States.
Target is not the first retailer to stumble in an international push.
In 2012 home improvement retailer Home Depot Inc (HD.N) 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.
With additional reporting by Solarina Ho and Susan Taylor; Editing by Jeffrey Hodgson and Ross Colvin