By RACHEL TOBIN RAMOS
Sunday, September 28, 2008
When CEO Frank Blake first took the helm of Home Depot, he visited a store in Prescott, Ariz. There, he saw a pyramid of John Deere tractors.
He looked around the arid landscape and thought to himself, “It doesn’t look like [Prescott] has seen a blade of grass, ever.”
Vino Wong/vwong@ajc.com
Mark Holifield is charged with modernizing Home Depot’s supply chain. The company’s new ‘rapid deployment center’ in Braselton now serves more than 100 stores in Georgia, Alabama and South Carolina.Enlarge this image
Vino Wong/vwong@ajc.com
Brian Boots, general manager at the Braselton center, shows an item with a bar code that will send it to a particular store. The company plans to open 20 more rapid deployment centers.RELATED:
“I sold one last year,” the manager told Blake.
“Well, you’ve got 35 years of supply then,” the CEO replied.
Blake recounted this anecdote (to laughter) at a recent meeting of the Cobb County Chamber of Commerce to describe just how broken Atlanta-based Home Depot’s supply chain had become.
“The systems were very poorly adjusted to reflect differences in locales,” he said. For years, he said, 80 percent of the “cost of goods sold,” a measure of the product cost flowed through the company, have been shipped directly to stores.
The company’s goal is to reduce that to 25 percent by the end of 2010.
“We are the single-largest less-than-truckload shipper in the United States,” Blake said. “A lot of trucks are going to stores that aren’t full. It’s not efficient.”
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.
After 30 years in business — and taking pride in towering shelves of in-stock items — Home Depot is going to a more traditional supply chain. It’s one of the company’s largest initiatives. Home Depot will spend $118 million on it this year alone and $260 million through 2010.
Blake called it a “big exercise.” When it’s done in several years, it could free up $1.5 billion in working capital.
That hinges on getting better inventory onto shelves when customers want to buy it. The company says that every one-tenth improvement in turning over inventory equals about $150 million in cash. The company is hoping for one full turn of improvement.
“We’re spending a lot more time looking at what the competition and other great retailers are doing,” Blake said.
At Home Depot’s new “rapid deployment center” in Braselton — a prototype opened in 2007 that now serves more than 100 stores in Georgia, Alabama and South Carolina with goods from more than 100 vendors — products as diverse as rakes and boxes of light bulbs, drill bits and diamond-cut blades are stacked up to 7 feet high on pallets which are destined for just one store.
Home Depot hired Mark Holifield, formerly with Office Depot, as senior vice president of supply chain in 2006. It’s his job to modernize Home Depot’s supply chain.
“Our stores, candidly, have way too much inventory in them,” he said as he gave a tour of the Braselton facility. “A common reaction here to something being out of stock is to look up. But nothing good happens in ‘top stock.’ “
Stock there tends to get lost, dusty or broken, he said. And, he added, “It’s very difficult for associates to take care of customers if they’re always dealing with in-bound freight.”
The company now has three RDCs (Braselton, Dallas and Chicago), and plans to open 20 to serve the whole country in the next few years. Each one costs about $10 million to open.
In Braselton, the 550,000-square-foot facility has 125 bays for trucks, and 350 employees on two shifts sorting products.
Ironically, the process of storing extra inventory on the top shelves of the cavernous big box stores was one of the founding principles of Home Depot.
When Bernie Marcus and Arthur Blank founded the concept in 1978, they didn’t believe in renting out distribution centers.
By putting extra inventories right in the stores, Home Depot lowered its overhead and used the savings to drive down prices.
“The whole Home Depot idea is about do-it-yourself, and frankly, the stores even did it themselves,” said Dave Schick, the managing director of retail equity research at Stifel Nicolaus in Baltimore. “The company grew by setting up the store, then telling them, ‘You go run with it from a merchandising standpoint.’ What you got was this big powerful brand and dynamic company, but some things never got done, for example, a centralized merchandising and distribution system.”
The old model worked great when most Home Depot stores rang up $60 million or more in sales annually. Those stores could bankroll large inventories that wouldn’t sit on shelves getting dusty for too long, because of the high volume of products sold.
As Home Depot expanded, opening more stores per market, sales per store in some locations dropped to $10 million annually. It’s harder for those stores to bankroll the necessary inventory, Holifield said.
Plus, having that much money tied up in inventory is not a good use of cash.
“Home Depot has about $11 billion in inventory, across its chain worldwide,” he said. “That’s an incredible amount of cash.”
By contrast, Mooresville, N.C.-based Lowe’s has had a more modern supply chain, and is more than happy to siphon off frustrated Home Depot customers when items are out of stock.
“Home Depot admitted themselves that they are playing catch-up, not only with Lowe’s but with most other retailers,” said Brian Nagel, a retail analyst with UBS in New York.
“Home Depot stores are typically in a state of disarray, and they will admit that their stores need to be cleaned up.”
Part of this new initiative is to get the forklifts out of stores and reduce the amount of inventory piled up in stores, he said.
“Even high-volume stores end up looking cluttered. Conversely, you go to Lowe’s, which is a much cleaner shopping environment,” Nagel said.
Holifield, however, says the switch hasn’t been easy. The roll-out of two of the RDCs came last spring, right in the middle of Home Depot’s home improvement season.
Since then, Home Depot has slowed implementation of the project until they can get it right.
“I don’t envy that guy’s job,” said Doug Caldwell with ParcelPool.com, a Portland, Ore., logistics consultant. “They have a huge number of SKUs.”
Caldwell’s referring to the more than 35,000 “SKUs” — an acronym meaning “stock keeping unit” or unique products — that are stocked in each Home Depot store.
“That’s a huge number of items to have. It’s a very, very complex supply chain.”
By comparison, Costco has about 4,000 SKUs and Wal-Mart has more than 100,000.
Holifield is trying to make the transition without disrupting supply to the nearly 2,000 U.S. stores.
He said that live goods, like plants, will still go direct to stores. But he’s trying to find the right balance of which supplies should get broken down into smaller units. And the company is building better forecasting tools, to see what stores need.
“Our stores have plenty of inventory, just not the right inventory,” he said.
The root of the problem, he said, has been poor forecasts, late shipments and inaccurate “perpetual inventory.”
But making one purchase order from an RDC (as opposed to 100 stores), is helping accuracy and cutting shipping costs, he said.
Wall Street is watching the progress.
“The Street recognizes this has some opportunity to drive better margins,” said retail analyst Schick.
“It also knows this can get off track.”
But he praised Holifield for addressing the problem. “The proof’s in the pudding.”
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