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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  June 11, 2009  
     
  Aggressive Supply Chain Transformation at Home Depot  
 

How do you rapidly transform a supply chain culture and pack 10 years worth of system, network and process changes into just three?

 

That’s exactly what Home Depot is in the process of doing, and so far the effort is working just fine.

 

In April, Home Depot’s public relations group reached out to SCDigest to see if we were interested in better understanding the massive transformation the company was making in its supply chain. The general story is pretty well known, and we have reported on it ourselves several times, from when Mark Holifield, Sr. Vice President of Supply Chain for the retail giant, made a presentation unveiling the strategy in Q1 2007 as part of the company’s quarterly earnings report.

Gilmore Says:

If Home Depot can get that inventory turn number up by just 1, from 4 to 5, it means $1 billion in annual cash flow improvement.


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I subsequently sat down with Mark once in Atlanta and, then again, by phone a couple of weeks ago to dig into the details.

 

Interesting and related side note: I was first introduced to Mark when he had a similar role at Office Depot.  He wrote a feedback letter on my column on “The 50% problem,” which, in quick summary, argues that most companies believe their performance is better than it is. Holifield agreed, and sent a link to a magazine article supporting the same principle. I intersected with him a few times after that at the Georgia Tech Supply Chain Executive Forum.

 

That feedback letter is related, because Holifield was very frank about Home Depot’s supply chain position in 2007.

 

“We knew we were behind, and the supply chain was a competitive disadvantage for Home Depot,” Holifield told me. “We looked at how quickly we could eliminate that gap and ultimately make the supply chain a true competitive advantage for us.”

 

Home Depot’s challenges, as is often the case, in general resulted from a supply chain that was built to fit one mission and set of realities, but which hadn’t evolved as Home Depot’s world had changed.

 

At the beginning and middle of Home Depot’s massive growth, stores often did as much as $80 million in sales per location. Now, as a result of store expansion and competition, stores may do $40 million in sales. That’s still a giant number, but one that changes the inventory dynamics substantially.

 

The other factor was that the focus on rapid growth in the store network ultimately slowed, as it inevitably must for all retailers. That means the focus has to evolve, at least in part, from expansion to execution – and that meant the supply chain model had to change.

 

“About 75 percent of our inventory two years ago was delivered direct to store from suppliers,” Holifield says. That included about 60 percent truly direct to store, and then another 15-20% through LTL-type pool points that operated much like direct store delivery. Only 20% or so went through Home Depot DCs.

 

Combine that with a very store-centric ordering and replenishment process, and the results were high transportation and inventory costs, and some issues with out-of-stocks.

 

“The rumor when I got here was that 37,000 people at Home Depot could place orders to send inventory to the stores, and I think that was about right,” Holifield says.

 

So, plans for a massive transformation. First, a network optimization study, performed in just a few months using a commercial tool but with just in-house talent.

 

That study clearly showed the opportunity to rethink Home Depot’s massive network, which even with all the direct store delivery included dozens of facilities for the LTL pooling mentioned above, lumber DCs, import warehouses, and more.

 

“For a company with 75 percent direct store delivery, we sure had a big logistics infrastructure,” Holifield says.

 

The analysis showed the opportunity to “flip the ratio totally on its head” – move to a DC-centric model in which some 75 percent of goods would be shipped to stores through a new generation of flow-through DCs, or what Home Depot calls “Rapid Deployment Centers” (RDCs).

 

Of course, there is nothing new about flow-through in retail distribution, although unlike most, these RDCs do nothing but flow-through. A relatively small amount of non-flow through replenishment will be performed at some of the existing “carton DCs” that had been in place for some time.

 

“We were late, but I think we have some last mover advantage, leveraging today’s technology, to actually do some leap-frogging,” Holifield told me.

 

In parallel, the company is moving to a much more centralized inventory management and replenishment model, with some 70% of inventory being handled that way, versus the de-centralized model of the past.

 

The real story, however, is the speed and urgency with which this program has been tackled.

 

“It’s the most aggressive supply chain transformation program I have ever seen,” Holifield says. “Fortunately, we have some tremendous assets here at Home Depot, some very talented people, and we now have the real drive to make this happen.”

 

From one pilot RDC in 2007 to work out the details, the company has now rolled out six in the past 15 months, the latest one just recently in Valdosta, GA. Incredibly, the goal is to commission some 14 more RDCs, or about 20 in total, by the end of 2010, serving 100% of Home Depot’s North American stores.

 

That is quite a pace, facilitated by three full-time teams working on the roll-outs, which are of course all in various stages.

 

“I tell people we are looking to hire that if you are interested in being an RFID leader or use the latest wiz-bang technology, you aren’t going to find it here,” Holifield says. “This is a place you are going to learn about making a radical supply chain transformation in a huge, established company, with a culture very store-centric, in a way that services stores well, and to manage a big time growth spurt in supply chain thinking and execution in very short time. You can apply that to any business.”

 

The payoff will be huge. First, Home Depot’s inventory turns right now are about 4 per year, largely due to the massive inventories each store needs. Some 70% of items average less than one sale per store per week.

 

“You might have some consultant say “Cut those SKUs,” but they don’t understand our mission is to be in stock in every little part you need to complete your project, and if we get to a mass merchant view of inventory, we would have lost that mission.”

 

The challenge is to keep that strategy, but do it much more efficiently. If Home Depot can get that inventory turn number up by just 1, from 4 to 5, it means $1 billion in annual cash flow improvement. That’s a big number even for a company with some $70 billion in annual sales. However, the tough economy, which has been even tougher on home improvement retailers, isn’t helping.

 

“I can tell you we will get there [inventory turn improvement], I just can’t tell you when yet,” Holifield says, because of the uncertainties on the economy.

 

As always, the cultural change is the hardest part of the transformation. Executive management and the board have been exceptionally supportive, Holifield says. “I had a real mandate to make substantial supply chain improvements.”

 

As for the troops, “It was a constant battle early on. You win one heart and one mind at a time,” Holifield added. The key is showing results, especially to the stores. “When you demonstrate you can reduce out-of-stocks while improving inventory turns at the same time, you make believers,” he says.

 

In fact, Holifield believes “Home Depot is really on its way to becoming “a supply chain company,” which is a big shift for us,” he says. “Now, we are reaching parity, but we are confident we can move to being truly advantaged with our supply chain.”

 

Any reaction to the Home Depot story? What are the risks from this type of rapid transformation and network change? What does it mean to become a “supply chain company?” Let us know your thoughts at the Feedback button below.

 
 
     
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