How Target Is Rebuilding Its Supply Chain

Target is not the most obvious company to study if you want to understand where retail supply chains are going. Amazon sets the pace on fulfillment. Walmart has the scale to automate everything. Costco has the inventory turn model everyone quietly envies.

But Target might be the most instructive.

In 2022, they destroyed roughly $5 billion in operating income in a single year, triggered by an inventory crisis that caught one of the most experienced management teams in retail off guard. Their stock fell 25% in a single day - worst single-day performance in 35 years.

I've been going through everything Target put out publicly since 2017, earnings calls, 10-K filings, executive interviews, and import shipping data, and what I found is a company making genuinely interesting bets, some of which worked, some of which are still being proven, and one of which worked so well it created a new problem.

Here's what I mean.

Between 2017 and 2025, Target:

That last one is worth sitting with. Eight years of systematic sourcing diversification, executed in near-total silence, disclosed only after the transformation was essentially complete. If you're running a supply chain right now and wondering how to think about tariff exposure, that sequencing is one of the most useful things in this piece.

The central thesis driving every decision: 1,900 stores within 10 miles of 75% of the American population are worth more as supply chain infrastructure than as retail destinations alone. Everything else - the sortation centers, the AI investments, the membership program - is downstream of that belief.

The model worked. It also, eventually, broke things.

By 2025, loading every store with both retail and fulfillment duties had strained operations enough that Target had to rebalance the whole network. That tension - between a strategy genuinely working and the second-order costs of executing it at scale - is what makes this worth your time.

Five forces hit Target's supply chain over the last decade. They didn't arrive together. They came in waves, each one exposing a vulnerability the previous wave had masked.

By 2015, same-day and next-day delivery expectations were migrating from novelty to baseline. BOPIS was growing faster than anyone modeled. Customers were placing smaller, more frequent orders and using phones, not store visits, as the front door to retail.

For Target, this created an existential question. Their entire physical infrastructure, 1,900 stores averaging 125,000 square feet, positioned within 10 miles of 75% of the American population, was built for a shopping behavior that was visibly eroding. The asset that had been a competitive advantage for decades was at risk of becoming a liability.

The answer they landed on starting in 2017 was not to build warehouses. It was to turn stores into fulfillment nodes.

Every one of these decisions was a direct response to the consumer behavior shift, a bet that proximity to the customer, not warehouse automation, was the durable competitive advantage.

Section 301 tariffs on Chinese goods arrived in waves between July 2018 and September 2019. List 4A, covering apparel, footwear, and toys, Target's highest-margin owned brand categories, went into effect September 2019. For a company with roughly 60% of owned brand production concentrated in China, this was a direct hit to the cost structure of the most profitable third of the business.

Brian Cornell, Target's CEO, called for tariff relief and kept earnings call language carefully vague about actual China exposure. The private response was the opposite. The sourcing team began systematically shifting production. Apparel moved to Guatemala and Honduras. Hardlines moved to Vietnam, Indonesia, and Cambodia. Quiet, deliberate, and never disclosed.

By the time Rick Gomez, Target's Chief Commercial Officer, stood at an investor day in March 2025 and told analysts that China's share of owned brand production had fallen from 60% to 30%, the shift had been underway for eight years. Execute first, communicate after. It's one of the more deliberate strategic sequencing decisions I've seen in a public company's supply chain record.

Digital sales grew 145% in FY2020. Drive Up grew more than 600%. Revenue grew $15 billion in a single year - more than the prior eleven years combined. The stores-as-hubs model, which analysts had been skeptical of, suddenly looked prescient. Stores fulfilled more than 90% of digital orders. Fulfillment cost per unit fell 30% year over year in Q2 2020.

But COVID also seeded the crisis that followed.

To meet surging demand, Target ordered inventory earlier and in larger quantities. By Q3 2021, ending inventory was 31% above 2019 levels. Michael Fiddelke, then CFO, warned publicly that the ROIC of 23.5% was "artificially high." The team was building for a level of demand they believed, reasonably, was durable.

It was not.

In early 2022, consumer spending shifted rapidly away from the discretionary categories Target had been loading inventory into for two years. At exactly that moment:

The Q1 FY2022 earnings call delivered the number that defined the crisis: freight and transportation costs came in hundreds of millions of dollars above already-elevated expectations, with the full-year freight bill running approximately $1 billion above what had been forecasted just three months earlier. Combined with inventory write-downs, FY2022 gross margin fell from 28.3% to 23.6%, a 4.7 percentage point collapse. Operating income fell 57%.

The freight story has a second chapter that matters as much as the crisis. When rates normalized in FY2023, the Drewry World Container Index fell approximately 78% year over year, essentially back to pre-COVID levels. Target's gross margin recovered 2.9 percentage points. The 10-K is explicit: the recovery was driven primarily by a significant decrease in freight costs.

For a company importing at Target's scale, freight rates are not a logistics cost. They are a P&L event.

By 2023, AI had arrived in supply chain operations in a way that went beyond vendor pitches. Demand forecasting accuracy, real-time inventory visibility, last-mile routing optimization, and generative AI tools for store operations were all moving from experimental to deployable.

For Target, the 2022 crisis had exposed a specific gap. Their systems didn't know about half of their out-of-stocks. The Inventory Ledger, an event-driven real-time system capable of processing 360,000 inventory transactions per second, was the direct response. Store Companion, a GenAI chatbot for store employees, went from conception to deployment across 2,000 stores in six months. An OpenAI partnership was announced in January 2025. Conversational commerce through ChatGPT was announced in Q3 FY2025.

These are early-stage deployments, not proven at scale. But the direction is clear and the pace is accelerating.

What these five forces produced, taken together, is a supply chain under continuous reconstruction. The consumer behavior shift forced the stores-as-hubs bet. Trade policy forced the sourcing diversification. COVID validated the fulfillment model and seeded the inventory crisis. Freight volatility delivered the crisis and then rewarded the recovery. Technology is now reshaping what precision means across inventory, fulfillment, and store operations.

Everything Target did in response is in the next section.

In 2017, Brian Cornell stood in front of investors and laid out a supply chain strategy most of the room was skeptical of. Seven years later he called Target a $106 billion growth company and said the strategy was working.

What happened in between is worth understanding in detail.

But before that - one experience explains why every major supply chain move between 2017 and 2025 was tested carefully before being scaled: the Canada failure. Between 2013 and 2015, Target opened 133 stores in Canada and closed all of them within two years, writing off billions. Distribution centers couldn't replenish stores reliably, shelves were perpetually understocked, and the guest experience never recovered. John Mulligan, then COO, inherited the cleanup and distilled the lesson into a philosophy that governed every subsequent decision:

"We don't have a rigid road map. Instead, we use a highly repeatable process to test concepts, refine them, test them again, until we can replicate them with confidence, efficiency and scale. And then and only then do we ask ourselves what's next."

That discipline was learned from a multi-billion dollar mistake.

In 2017, Target committed approximately $7 billion to rebuilding its store network - not to improve the shopping experience, but to operationalize stores as fulfillment infrastructure.

The counterargument to the consensus was geographic: 75% of Americans live within 10 miles of a Target store. That proximity, if operationalized, was worth more than any warehouse network a competitor could build, because it was already paid for.

The remodel program delivered. Each completed store generated 2-4% sales lift in year one. By Q4 FY2018, stores were fulfilling three of every four digital orders - "effectively doing the work of 14 fulfillment centers," as Mulligan told analysts. His follow-on calculation: "That means we didn't have to spend nearly $3 billion on new warehouses over the past few years." By 2023, Target had completed more than 1,100 full store remodels. The capital avoidance math only got more powerful as digital volume scaled.

Stores still fulfill more than 97% of all sales. As of March 2026, Target operates nearly 2,000 stores and is planning more than 30 new openings in FY2026, nearly all full-sized, along with 130+ full-store remodels. Fiddelke's framing at the Q4 2025 earnings call was direct: "Store investment is supply chain investment for us because of the role the stores play."

Target built or acquired every piece of the last-mile stack in roughly three years starting in 2017.

Drive Up launched to Minneapolis customers in October 2017. By August 2019 it had reached all 50 states - the first retailer to offer nationwide curbside pickup. By FY2020 it was growing over 600% year over year. By FY2025, same-day services had grown to more than $14 billion in annual sales, accounting for two-thirds of total digital sales.

The economics became the foundation for everything that followed:

The 90% reduction exists because there is no last-mile delivery cost. The customer absorbs it.

One data point that gets at why this model is durable: when a customer who has never used Drive Up tries it for the first time, the intuitive assumption is that it cannibalizes store visits. The data says the opposite. Drive Up users end up spending 20-30% more at Target in total, and their in-store spending goes up, not down. The same-day service saves time on replenishment runs; customers reinvest that time in discovery trips.

Shipt was acquired in December 2017 for $550 million. Cornell framed it as closing "the last-mile gap from days to minutes." The deeper logic: Target had tried Instacart, started that relationship in 2015, ended it, and learned the lesson - you cannot build a same-day delivery product on infrastructure you don't own.

Two acquisitions completed the stack:

Together they gave Target proprietary routing software owned internally rather than licensed. That distinction would matter enormously when the sortation center network scaled.

In 2018, Target opened its first flow center in Perth Amboy, New Jersey. It doesn't come up much. It should.

A flow center ships smaller, more frequent deliveries to stores rather than the large weekly replenishment loads that traditional regional DCs send. The result: less backroom inventory sitting in stores, faster turns, fewer out-of-stocks. The first flow center achieved 40% fewer out-of-stocks. By 2024, Target operated four, including a new one in Hampton, Georgia.

For a company whose entire digital fulfillment model depends on stores having the right inventory in the right place at the right time, flow centers are the infrastructure that makes the headline metrics possible. They just don't make headlines.

In 2017, approximately 60% of Target's owned brand production came from China. Section 301 tariffs arrived in waves between July and September 2018. List 4A went into effect September 2019. Cornell's public response was measured. The private response was systematic.

The sourcing team - 25 years of in-house capability, 20 offices across 14 countries - began shifting production category by category. The evidence of when this accelerated is visible in the 10-K language itself: FY2021 filings introduced specific references to "alternative sources of supply" and "vendors in other countries." By FY2022, language had expanded to "significant portions of products sourced from outside the U.S." The legal team was documenting what the sourcing team was already executing.

Apparel moved first and furthest. Guatemala and Honduras became the primary destinations for three reasons:

By Q4 FY2024, only 17% of Target's apparel production remained in China.

Hardlines and home shifted across a broader geography - Vietnam absorbed significant volume, Indonesia, Cambodia, and Bangladesh filled in. The Philippines, specifically Durus Industries handling baskets, wicker, home storage, and seasonal items, appears in multiple late-2025 shipping records, one of the clearer data points for where non-China home goods sourcing actually landed.

The owned brand portfolio was the enabler most competitors lack. At roughly $30 billion - approximately one-third of total merchandise sales, with approximately 12 brands exceeding $1 billion annually - Target had design-to-manufacturing control to move production without losing quality or speed. A retailer selling primarily national brands has two tariff levers: negotiate with brands that don't want to negotiate, or raise prices. Target had a third: change where things are made.

The design-to-basket timeline on the fastest calendar is now under eight weeks, with the fast apparel and accessories model cutting product development from over a year to, in some cases, weeks. That is not a logistics improvement. It is a financial one - roughly a 20% reduction in the inventory buffer needed to maintain the same service level.

The disclosure came at the March 2025 Financial Community Meeting, when Gomez told investors:

"In terms of our owned brand production, we've reduced what we source from China from roughly 60% in 2017 to around 30% today, and on our way to less than 25% by the end of next year - a goal we expect to achieve four years ahead of our schedule."

Eight years of work. Ten minutes of disclosure.

One caveat: the 60% to 30% figure covers only owned brand production. Target sells billions in national brand merchandise from Hasbro, Procter & Gamble, Unilever, and others whose China exposure Target doesn't control. The true total import exposure is likely higher and has never been disclosed.

By 2020, the stores-as-hubs model was working, but store backrooms were becoming bottlenecks. Associates were spending more time sorting and staging packages than serving customers. Target's solution, piloted in Minneapolis in April 2020, was to move the sorting and staging process out of stores entirely.

The model is straightforward. Stores pack orders. Target trucks collect packages from 30-40 local stores multiple times daily. Packages arrive at a dedicated facility, sorted by neighborhood. Last-mile delivery goes to Shipt drivers or national carriers, whichever is cheaper for each route.

Mulligan in November 2020:

"By moving the sorting and staging process out of the stores, it frees up backroom space, enabling additional throughput. Stores can simply focus on packing the orders, which are then transferred multiple times per day to the sortation center where they can be sorted and staged at a larger scale, driving per-unit efficiencies and potentially reducing the number of split shipments."

Average unit fulfillment cost dropped nearly one-third before any automation was added. The network scaled fast:

The defining architectural decision: these facilities are not automated. The intelligence is in the routing software, not the conveyor belts. This is a direct contrast to Walmart's deployment of Symbotic robotics across 42 regional DCs and Amazon's 750,000+ robot fleet. Target's bet: invest in software logic, keep hardware simple, scale faster. Zero to eleven facilities in four years.

"Consider our sortation centers, which are positioned downstream from our stores to provide speed and efficiency in support of last mile delivery. Our sort centers are not highly automated. Instead, they use technology and sophisticated process logic to sort packages and provide a faster and better guest experience at a significantly lower cost." - John Mulligan, COO, Q1 FY2023 Earnings Call, May 2023

In Q1 2023, approximately 65% of Target Last Mile Delivery shipments used larger vehicles, SUVs, minivans, high-capacity vans, compared to 0% a year earlier. High-capacity vans deliver roughly five times the packages of a sedan. That mix shift is where the economics live. By 2024, tens of millions annually in last-mile cost savings. Next-day delivery up 150%+ since launch. During the 2024 holiday peak, 400,000+ packages per day.

By June 2022, DC capacity was running at over 90%. The balance sheet showed approximately $15 billion in inventory, $6 billion above 2019 levels. The decomposition matters:

Cornell's decision: take the hit now. The specific moves:

His framing of the alternative:

"We could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time."

The cost was real.

Q2 FY2022 operating margin fell to 1.2%. Full-year operating income fell 57%, from $8.9 billion to $3.8 billion. EPS fell from $14.10 to $5.98. DC capacity was back below 80% within two months. By Q3 FY2023, supply chain facilities were at or below target capacity all 13 weeks of the quarter. The year before: 3 out of 13.

Running alongside the inventory crisis was a parallel P&L emergency that doesn't get enough attention: shrink. In FY2022, organized retail crime cost Target $700-800 million in operating impact. In FY2023, Cornell disclosed shrink would reduce profitability by more than $500 million versus the prior year. Violent thefts had increased 120% in the first five months of 2023. Nine stores closed in October 2023 across New York, Seattle, the San Francisco Bay Area, and Portland.

The connection to inventory strategy is underappreciated. Shrink is inventory that disappears from Target's system entirely. The lower inventory approach of 2023-2024 had a secondary benefit: less inventory on shelves means less inventory available to steal. By FY2025, shrink had become a meaningful tailwind, delivering approximately 90 basis points of gross margin benefit and bringing the shrink rate back to pre-pandemic levels.

The 2022 crisis exposed a specific gap: Target's systems didn't know about half their out-of-stocks. A company processing billions of dollars of inventory through 1,900 stores was blind to half the gaps on its shelves. Every invisible out-of-stock was a failed digital order waiting to happen.

The Inventory Ledger was built to fix this. It processes 360,000 inventory transactions per second and handles 16,000 inventory position requests per second at peak. Event-driven rather than batch-updated, which matters: you need to know what's on the shelf right now, not six hours ago. When a customer places a Drive Up order, the app promises availability based on what the system shows. If the system is wrong, the order fails. The Inventory Ledger is the fix at the infrastructure level.

RFID is the physical foundation. Target deployed chain-wide to all 1,795 stores in 2016, ahead of most competitors. When 95%+ of digital orders are fulfilled from stores, inventory accuracy is the gating factor for the entire digital business.

Target also partnered with Algo, an AI demand planning platform running on Microsoft Azure, to improve forecasting across fashion, toys, home entertainment, books, technology, homewares, and health and beauty. One system predicts what will be needed. The other tracks what is actually there.

By Q4 FY2024:

Beyond inventory:

One number worth anchoring on: Target spent $4 billion annually on capex from FY2021 through FY2024, and has approximately $5 billion planned for FY2026. This is a company that absorbed a $5 billion operating income loss in FY2022 and kept spending $4 billion on capex that same year.

The investment didn't pause during the crisis. It accelerated.

By 2023, the stores-as-hubs model had been running for nearly a decade. Over 97% of online orders were still fulfilled from stores. But eleven consecutive quarters of flat or declining comparable sales coincided with store associates being asked to simultaneously serve customers and run what Fiddelke described as "a fulfillment business that's gotten pretty big." Out-of-stocks were up. Store cleanliness scores were under pressure. Guest satisfaction was softening.

The problem was structural.

Target had built a model that treated all 1,900+ stores as equivalent fulfillment nodes. They are not. Some have large backrooms, lower foot traffic, and the physical capacity to handle high-throughput fulfillment without degrading the in-store experience. Others are in high-traffic urban locations where every backroom square foot has a higher opportunity cost. Loading both types with identical fulfillment burdens was operationally inefficient and experientially damaging.

The Chicago pilot was the response. Some stores were designated as built to fulfill, concentrating ship-to-home volume. Others had their pack stations removed, refocusing on Drive Up and in-store experience.

Results disclosed by Gretchen McCarthy, Target's Chief Supply Chain and Logistics Officer, in September 2025:

Fulfillment stores: 

Experience stores: 

Fiddelke's framing at the March 2026 earnings call: "By having some stores really lean in to specialize for fulfillment in the market, they've got big back rooms and the capacity to specialize and equipping the team to be trained and support that volume well, and then having some other stores sit it out... we're seeing benefits on the fulfillment side and we're seeing benefits across stores as their role becomes more clear."

Jim Lee added the financial logic: "As we expand the Chicago test, that's one of the big unlocks for us to do next day fulfillment. You drive scale within a couple of core nodes in the stores and allows us to fulfill that next day and cheaper."

The Chicago approach is actively expanding to more markets through 2026. Target has assessed all 1,900+ stores and identified approximately 300 locations as initial built-to-fulfill candidates. The stores-as-hubs model was not being abandoned. It was being differentiated.