October 3, 2008
SCDigest: Home Depot Makes Progress on Ambitious Supply Chain Transformation
By SCDigest Editorial Staff
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.
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There are valid reasons for both the DC and DSD distribution models, but neither should determine the store assortment which depends on the consumer.
The Distribution Center model makes sense when you have many prepackaged products which are continuously replenished and require little in-store servicing. With the facility justified, you can also add seasonal and holiday “in and out” products which can share the distribution network. The key is to manage the time supply of inventory in the warehouse and distribute it efficiently.
The Direct Store Delivery model can be implemented purely as a distribution method or also allow the manufacturer to manage some of the in-store merchandizing. I don’t see any advantage of using DSD simply to deliver merchandise. Although it may help the “mom and pops” that are on the same route as a large retailer, the DSD model must be more expensive. Once the big drops are removed, it will become more costly to reach the independent retailers but the larger retailer must benefit. If DSD is used to support in-store merchandising, then you have a different story. The manufacturer’s representative can give their products the individual attention that increases their sales. The bad thing is that they can also load up the store with inventory if no one is watching.
The root cause challenge that is forcing HD to transform their supply chain from DSD back to a centralized DC model is they have no accurate and truly timely data coming out of the store with which to truly drive their business. Since they are relying on POS information which is neither timely or accurate in many cases–how many times have we seen front desk people take an item, then bang the bar code with the gun and then type x4 into the register even when there are differences between the 4 items?.
So when you start with marginalized data and start pumping that up through your enterprise and into their corporate inventory systems, forecasting systems and planning systems the snowball affect begins. They mask the out of stock problem by over stuffing the store (the look up principal) and that involves real cash money. 1/10 of a turn = $150M x 1500+ stores…well you do the math. The solution is accurate real time inventory of data on what is available for sale, which they can not do.
I don’t know how many times I’ve gone into my local HD store here in Minnesota, knowing what I want and it’s OOS. The DC says there are 18 in the store and 24 in the DC but alas none in the display and none above. And their solution? Well let’s look up another store and see how many they have and you can drive over there. Right. Across the street from my local HD is a Menards. How long do you think the drive will take?
It’s all about Actionable Intelligence which they can not do because they truly don’t know what’s for sale in the stores. Except for those 35 years of John Deere tractors in Prescott, AZ.
I wish Home Depot could cure its problems with a change in the distribution system. However, the primary product problems at Home Depot aren’t related to logistics. Home Depot’s primary problem is product selection. Home Depot offers about 20% FEWER choices than Lowe’s. Go into HD and try and buy a water heater. You have few choices, the primary one being GE. Well GE is not a water heater manufacturer, they use a contract manufacturer so you are assured of getting a higher price and fewer features for your money.
The rest of the store pretty much follows this pattern. With gas prices where they are I have opted to scratch HD from my shopping pattern and stick to Lowe’s and Ace where I find great prices and a better selection. Let HD know they are worrying about things that don’t matter to consumers. Tell them to focus on issues that do matter to consumers–selection, price and service.
We recently moved to a new area and the home improvement chains are beginning to build new stores close to us. The first store was Menards followed by Home Depot. Lowe’s hasn’t made it yet and they needn’t hurry on my account. The only good I ever received from Lowe’s was when I was a stock holder. They have very clean, well-stocked stores, good service, and the highest prices in the area by far. Menards has the biggest inventory and selection and easily the lowest prices. They also have ample, knowledgeable sales people to help you. And did I mention that also have a real lumber yard instead of the home handyman selection that HD and Lowes have? I have had HD match Menards prices on a few things but why bother when you can just get it cheaper at Menards without the hassle?
I do like HD’s tool brands better and we have bought plumbing items there such as toilets and lavatories. One thing that I like about HD is that if they are out of a popular seasonal item like they were recently with Japanese Beetle traps that they know exactly when they will get fresh supplies and it was accurate too. I don’t know if they are already on the new warehouse program or not.
Service has improved at my HD too. I have hopes that HD will be able to return to former levels of customer service as I have always liked them. Being a little more competitive in price would help too.
It’s amazing how an entire supply chain can be brought to its knees by inaccurate perpetual inventories. Am I really reading that HD is changing its entire method of distribution primarily because it can’t keep its inventory straight?
This doesn’t sound like a sales forecasting issue, although sales forecasts could be a contributing factor. The giveaway is the “look up” problem, excess inventory sitting there to cover for inventory errors in the system. Going from DSD to DC sounds like an attempt to consolidate some of that excess centrally, but will still leave the stores exposed to out-of-stocks.
You can do all the things HD is talking about (implement supply chain analytics, install improved demand forecasting tools, improve central replenishment, improve merchandise financial planning processes ans improve transportation management), but it doesn’t mean a thing if the inventories aren’t right.
This comes down to store level execution, at point-of-receipt, during quarterly counts and most especially, at point-of-sale.
I agree there are pros and cons for both DSD and DC logistical methods. Most of the pros and cons are executional in nature. The real issue at hand is the demand forecast at store level by product segment. I would suggest that just because most stores have gone from $80 million to $40 million that the ratio is not consistent across all product segments.
What I really like is that Home Depot is not choosing to put all of its eggs in either logistical method, rather they will maintain a mixture just more weight on the DC method. They need to use product segment demand frequency at the store level indexed for each month or even better each week to determine the best mix of products in either logistical method. As always, it starts with understanding your consumers and applying fact based strategies from there.
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There are valid reasons for both the DC and DSD distribution models, but neither should determine the store assortment which depends on the consumer.
The Distribution Center model makes sense when you have many prepackaged products which are continuously replenished and require little in-store servicing. With the facility justified, you can also add seasonal and holiday “in and out” products which can share the distribution network. The key is to manage the time supply of inventory in the warehouse and distribute it efficiently.
The Direct Store Delivery model can be implemented purely as a distribution method or also allow the manufacturer to manage some of the in-store merchandizing. I don’t see any advantage of using DSD simply to deliver merchandise. Although it may help the “mom and pops” that are on the same route as a large retailer, the DSD model must be more expensive. Once the big drops are removed, it will become more costly to reach the independent retailers but the larger retailer must benefit. If DSD is used to support in-store merchandising, then you have a different story. The manufacturer’s representative can give their products the individual attention that increases their sales. The bad thing is that they can also load up the store with inventory if no one is watching.
The root cause challenge that is forcing HD to transform their supply chain from DSD back to a centralized DC model is they have no accurate and truly timely data coming out of the store with which to truly drive their business. Since they are relying on POS information which is neither timely or accurate in many cases–how many times have we seen front desk people take an item, then bang the bar code with the gun and then type x4 into the register even when there are differences between the 4 items?.
So when you start with marginalized data and start pumping that up through your enterprise and into their corporate inventory systems, forecasting systems and planning systems the snowball affect begins. They mask the out of stock problem by over stuffing the store (the look up principal) and that involves real cash money. 1/10 of a turn = $150M x 1500+ stores…well you do the math. The solution is accurate real time inventory of data on what is available for sale, which they can not do.
I don’t know how many times I’ve gone into my local HD store here in Minnesota, knowing what I want and it’s OOS. The DC says there are 18 in the store and 24 in the DC but alas none in the display and none above. And their solution? Well let’s look up another store and see how many they have and you can drive over there. Right. Across the street from my local HD is a Menards. How long do you think the drive will take?
It’s all about Actionable Intelligence which they can not do because they truly don’t know what’s for sale in the stores. Except for those 35 years of John Deere tractors in Prescott, AZ.
I wish Home Depot could cure its problems with a change in the distribution system. However, the primary product problems at Home Depot aren’t related to logistics. Home Depot’s primary problem is product selection. Home Depot offers about 20% FEWER choices than Lowe’s. Go into HD and try and buy a water heater. You have few choices, the primary one being GE. Well GE is not a water heater manufacturer, they use a contract manufacturer so you are assured of getting a higher price and fewer features for your money.
The rest of the store pretty much follows this pattern. With gas prices where they are I have opted to scratch HD from my shopping pattern and stick to Lowe’s and Ace where I find great prices and a better selection. Let HD know they are worrying about things that don’t matter to consumers. Tell them to focus on issues that do matter to consumers–selection, price and service.
We recently moved to a new area and the home improvement chains are beginning to build new stores close to us. The first store was Menards followed by Home Depot. Lowe’s hasn’t made it yet and they needn’t hurry on my account. The only good I ever received from Lowe’s was when I was a stock holder. They have very clean, well-stocked stores, good service, and the highest prices in the area by far. Menards has the biggest inventory and selection and easily the lowest prices. They also have ample, knowledgeable sales people to help you. And did I mention that also have a real lumber yard instead of the home handyman selection that HD and Lowes have? I have had HD match Menards prices on a few things but why bother when you can just get it cheaper at Menards without the hassle?
I do like HD’s tool brands better and we have bought plumbing items there such as toilets and lavatories. One thing that I like about HD is that if they are out of a popular seasonal item like they were recently with Japanese Beetle traps that they know exactly when they will get fresh supplies and it was accurate too. I don’t know if they are already on the new warehouse program or not.
Service has improved at my HD too. I have hopes that HD will be able to return to former levels of customer service as I have always liked them. Being a little more competitive in price would help too.
It’s amazing how an entire supply chain can be brought to its knees by inaccurate perpetual inventories. Am I really reading that HD is changing its entire method of distribution primarily because it can’t keep its inventory straight?
This doesn’t sound like a sales forecasting issue, although sales forecasts could be a contributing factor. The giveaway is the “look up” problem, excess inventory sitting there to cover for inventory errors in the system. Going from DSD to DC sounds like an attempt to consolidate some of that excess centrally, but will still leave the stores exposed to out-of-stocks.
You can do all the things HD is talking about (implement supply chain analytics, install improved demand forecasting tools, improve central replenishment, improve merchandise financial planning processes ans improve transportation management), but it doesn’t mean a thing if the inventories aren’t right.
This comes down to store level execution, at point-of-receipt, during quarterly counts and most especially, at point-of-sale.
I agree there are pros and cons for both DSD and DC logistical methods. Most of the pros and cons are executional in nature. The real issue at hand is the demand forecast at store level by product segment. I would suggest that just because most stores have gone from $80 million to $40 million that the ratio is not consistent across all product segments.
What I really like is that Home Depot is not choosing to put all of its eggs in either logistical method, rather they will maintain a mixture just more weight on the DC method. They need to use product segment demand frequency at the store level indexed for each month or even better each week to determine the best mix of products in either logistical method. As always, it starts with understanding your consumers and applying fact based strategies from there.