SCDigest: Home Depot Makes Progress on Ambitious Supply Chain Transformation
Through a special arrangement, presented here for discussion is an excerpt of a current article from Supply Chain Digest.
In the first quarter of 2007, Home Depot announced ambitious plans to transform many elements of its supply chain. A key element was a transition from a logistics model that favored direct store delivery from suppliers to a model that moved most products first through Home Depot distribution centers. In the past, as much as 80 percent of products went direct-to-store; the goal is to cut that number to just 25 percent by 2010.
Home Depot, in fact, is the country's largest Less-than-Truckload (LTL) shipper - a crown not many companies would like to wear, given the relative expense of LTL shipping.
The move to DC/flow-through shipment will result in a variety of inventory, transportation and store labor efficiencies, according to Mark Holifield, a respected supply chain executive from Office Depot who was hired in 2006 to lead the effort at Home Depot. The move, he added, was necessary in part due to store expansion, which ultimately led to lower sales at each individual store location.
"The inventory strategy for a $40 million store is different than the one that worked for an $80 million one," he said in a presentation to financial industry analysts in February 2007. Some Home Depot Stores now have just $10-20 million in annual sales - still a huge number for most retailers, but well down from levels in the 1990s.
"Our stores, candidly, have way too much inventory in them," Mr. Holifield recently told The Atlanta Journal-Constitution. "A common reaction here to something being out of stock is to look up. But nothing good happens in 'top stock'," referring to merchandise high up in store racking locations.
Mr. Holifield also said back in 2007 that the company would improve its supply chain technology in several areas:
- Implement supply chain analytics
- Install improved demand forecasting tools
- Improve central replenishment
- Improve merchandise financial planning processes
- Improve transportation management
The planned reductions in inventory levels can free up as much as $1.5 billion (with a "B") in working capital, Home Depot says. That's because for every one-tenth improvement in inventory turns, the company will free up about $150 million in working capital.
Home Depot is taking a page out of the traditional retail playbook, including the supply chains of competitors such as Walmart and Lowe's, building large, flow through type facilities that will each serve approximately 100 stores. A prototype of this new DC was built in Braselton, GA last year, as was another Regional Distribution Center (RDC).
Mr. Holifield is simultaneously working on a range of other issues. "The root of the problem has been poor forecasts, late shipments and inaccurate "perpetual inventory" at the stores, he told the Atlanta paper.
Discussion Questions: What is your take on Home Depot's supply chain transformation? When does DC flow through versus direct store delivery make sense? How should inventory and other strategies change when store growth reduces the sales levels of existing stores?
[Author's commentary] An anecdote from current CEO Frank Blake illustrates the retailer's supply chain challenges. A couple of years ago, while visiting a store in Prescott, AZ, he saw a pyramid of John Deere tractors.
As told at a recent Cobb County, GA Chamber of Commerce meeting, Blake said he looked around the desert landscape and thought to himself, "It doesn't look like [Prescott] has seen a blade of grass, ever."
He asked the store manager whether he sold a lot of tractors.
"I sold one last year," the manager told Blake.
"Well, you've got 35 years of supply then," the CEO replied.