Supply chain has never been Home Depot’s key strategic priorities in the past. Instead, the Atlanta-based home improvement’s management had always been focusing on expanding its stores. At the time, the company’s emphasis on expansion was appropriate considering the history of massive growth. What originally helped Home Depot’s growth was a decentralized business model where stores were populated with highly knowledgeable sales persons with backgrounds in various building trades.
Regional and store-level managers, those closest to the customer, were empowered with decisions of merchandising and inventory mix instead of the people at the head quarters. IT also played a significant role. Home Depot relied heavily on home grown systems. By building its own applications, it didn’t get bogged down in customizing off-the-shelf software and didn’t invest time and money in endless enterprise wide implementations.
In addition, a standard database design and an application architecture that reused software components allowed the IT staff to develop applications, such as the company’s mobile ordering system (a cart equipped with a computer and printer that clerks could wheel around the store to reorder products and change prices). Average store revenues in prime geographical markets were roughly $60-$80 million, which could justify high levels of de-centralization. The direct-to-store model made sense to Home Depot in the past because of its high sales in each store.
With network expansion and competition, per store sales dropped and a decentralized ordering model caused high inventory problems for Home Depot. The majority of supplier shipments flowed directly to the stores and resulted in the Home Depot being the single largest less-than-truckload shipper in the United States, since about 80% of goods were flowing direct to store on half-empty trucks, which was inefficient, lead to poor inventory turns, poor in-stock and high logistics cost.
Meanwhile, most retailers, such as rival Lowe’s and discount powerhouse Wal-Mart, ship to distribution centers that can serve up to 100 stores. There, they break down larger shipments into smaller ones that are parceled out to stores. Home Depot’s individual stores were their own stocking centers and store associates had to spend more time in unloading trucks than serving customers. The business model became compromised as to who had the most stores in the most locations vs. superior customer service.
After 30 years in business — and taking pride in towering shelves of in-stock items — Home Depot is taking the largest initiatives to move to a more traditional supply chain. In 2006, Home Depot hired Mark Holifield, formerly with Office Depot, as senior vice president of supply chain to modernize the company’s supple chain. Part of this new initiative is to get the forklifts out of stores and reduce the amount of inventory piled up in stores. The move to centralized ordering means suppliers now have just one order to process instead of a hundred POs from individual stores.
In addition, suppliers now ship their products in truckload quantities to the RDCs instead of sending LTL shipments to individual stores. The combined savings have enabled Home Depot to negotiate better prices with its vendors, which further reduced overall costs. Although all of these changes have helped streamline its supply chain operations, Holifield emphasizes that the overarching goal is to make Home Depot a better place to shop. The whole network is about is providing on-time and accurate service to individual stores so that they can focus on the customers.