Sunday, February 7, 2016

Gaming Target's Incentive Compensation Scheme

Canadian Business has a long and thorough article about Target's failed entry into Canada. Highly recommended. Buried inside is this little vignette.
A small group of employees also made an alarming discovery that helped explain why certain items appeared to be in stock at headquarters but were actually missing from stores. Within the chain’s replenishment system was a feature that notified the distribution centres to ship more product when a store runs out. Some of the business analysts responsible for this function, however, were turning it off—purposely. Business analysts (who were young and fresh out of school, remember) were judged based on the percentage of their products that were in stock at any given time, and a low percentage would result in a phone call from a vice-president demanding an explanation. But by flipping the auto-replenishment switch off, the system wouldn’t report an item as out of stock, so the analyst’s numbers would look good on paper. “They figured out how to game the system,” says a former employee. “They didn’t want to get in trouble and they didn’t really understand the implications.” Two people involved in the discovery allow that human error may have been a component, too. Like SAP, the replenishment software was brand new to Target, and the company didn’t fully understand how to use it. When Schindele was told of the problem, he ordered the function to be fully activated, which revealed for the first time the company’s pitifully low in-stock percentages. From there, a team built a tool that reported when the system was turned on or off, and determined whether there was a legitimate reason for it to be turned off, such as if the item was seasonal. Access to the controls was taken away from the analysts, depending on the product.

Sometimes, it is difficult to get the metrics right.

3 comments:

  1. This was a funny and interesting read about an organization’s negligence. The first problem that I identified was the purchase of a new system without having proper training procedures in place. Any time there’s a new system or new protocols within an organization someone internally or externally needs to be available to do some sort of training on new hardware and/or software. Regardless of the fact that analysts are experienced professionals or straight out of college without the proper training most systems are bound to fail. The second mistake of this organization is handing over too much power over to analysts without acknowledging the fact it may lead to severe operational repercussions. Organizations operate in a world where if an item is not available the consumer will not hesitate to buy the item from another competitor.

    If consumers speak with one another and through word of mouth an organization’s image and reputation can be damaged. Not having products in stock can lead to consumers believing a retailer is very unreliable. According to Mr. Klewes, in order to maintain a reliable reputation “Do what you say and say what you do”. It’s as simple as the aforementioned quote and failure to promise consumers what they want is one of the worst things you can do as a business.


    Klewes, J., & Wreschniok, R. (2009). Reputation capital: Building and maintaining trust in the 21st century. Heidelberg: Springer.

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  2. The opportunity cost includes both the implicit and explicit costs. The opportunity cost is what a customer give up when make that choice. According to Milton Friedman, who won the Nobel Prize for Economics, is fond of saying "there is no such thing as a free lunch." It means in this world everything has cost attached to it.
    I have observed that an opportunity costs are often overlooked in decision making. For example, assume a person has $10,000 that one could either invest in stocks or toward a graduate degree. Let’s say a person not choose the stock. The opportunity cost in this situation is the increased lifetime earnings that may have resulted from getting the graduate degree. Every time one make a choice, there is a certain value that we add on that choice. When we choose one thing over another, we value this more than another choice we had.
    http://www.referenceforbusiness.com/management/Ob-Or/Opportunity-Cost.html#ixzz405bAlESI

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  3. Target’s issues are far greater than its analysts gaming the system.

    Given the breadth and complexity of its business, it will always be a challenge to be in stock on every item in every store... but if Target is going to remain competitive ,Target needs to be consistent in delivering everyday essentials..

    Target's supply-chain problems have grown more acute as it has expanded its offering of consumable goods such as meat, fresh produce and dairy products, which in turn have brought customers back to their stores more frequently than in the past.

    Target's larger rival, Wal-Mart Stores Inc , has struggled to tackle the problem of running out of stock at its own stores for several years, despite having one of the largest and most sophisticated supply chain networks in the business. Target also has tried to order less inventory than rivals, striving to turn over inventory quickly and reduce capital needs.

    Analysts and industry consultants said that while Wal-Mart's problems revolve around insufficient employees to fill shelves, an issue the company is addressing, Target's issues stem from its reliance on external distributors.
    Products such as groceries, fresh produce, meat, dairy are replenished up to a 100 times or more every year, and when an outside wholesaler short-ships, Target's stores suffer.

    References:
    Bose, Nandita http://www.businessinsider.com/r-new-target-coos-headache-too-few-goods-to-keep-shelves-filled-2015-8

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