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.
The cost of the transformation effort and new technology is not trivial, even by Home Depot standards. Blake said the bill will be as much as $118 million this year and some $260 million through 2010.
But the payoff may be huge – 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. Improving inventory management by just one full turn per year can therefore generate that $1.5 billion in annual cash flow.
In 2007, Home Depot had an inventory turn level of 4.9. That’s up slightly from the 4.8 turns in 2006, in a year when turns were probably under pressure from the massive slowdown in the housing industry in 2007.
Home Depot is taking a page out of the traditional retail playbook, including the supply chains of competitors such as Wal-Mart and Lowes, 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). But since then, additional DCs have been pushed back a bit, as Home Depot absorbs the lessons of managing the first two and corresponding supply chain processes.
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.
The challenge is substantial. Although less than the 100,000 SKUs Wal-Mart Supercenters handle, Home Depot stores typically carry a still massive 35,000 items.
What is your take on Home Depot’s supply chain transformation? Why is it so hard just to improve inventory turns by 1 per year? Do you have any advice for Holifield and his quest? Let us know your thoughts at the Feedback button below.