Home Depot's supply chain remodel

The remarkable story of the Home Depot has many chapters. But supply chain excellence never made the book.

For its first 30 years, a period in which the company set all kinds of retail growth records, the Atlanta-based home improvement giant virtually ignored its supply chain—a fact even its top supply chain executive freely acknowledges. "Supply chain had not been the focus of the company for many years," says Mark Holifield, who joined Home Depot as senior vice president of supply chain in 2006. "Management instead had [its] focus on growing its stores."

Holifield defends the company's emphasis on expansion as right for the time, which is hard to argue with given the retailer's history of double- and even triple-digit annual growth. But by the time he arrived at Big Orange, times—and market conditions—had changed. Home Depot was confronting several challenges that were about to thrust the supply chain into the spotlight and put Holifield at the center of the action.

One was the downturn in the housing sector. As construction and credit began to dry up, Home Depot moved swiftly to cut expenses by streamlining its operations. As Chairman and CEO Frank Blake puts it, "A downturn is a terrible thing to waste."

Another was the realization that the retailer could no longer afford to ignore the logistics side of the business. After nearly three decades of operation, Home Depot had little in the way of a formal distribution network. Vendors and suppliers shipped merchandise directly to the retailer's cavernous warehouse stores, which served as their own distribution centers. At an average of more than 100,000 square feet, the facilities were easily able to accommodate vast inventories of building materials and supplies.

But as the business evolved, that model began to fall apart. Over the years, the retailer, which had saturated the major metropolitan markets, had turned its sights on secondary markets, where it had begun building smaller stores that were more in keeping with the markets they served. But the smaller stores lacked the space to house vast inventories, making them particularly vulnerable to stock-outs and other forecasting errors. Eventually, customers began to notice that items weren't always available when they came looking for them. And that was something Home Depot was unwilling to tolerate. "In-stock is a key issue with any retailer," Holifield says.

Old versus new
Although it was clear they were looking at the supply chain equivalent of a total rehab, Holifield and his team were undeterred. After conducting a distribution network study, they came up with a strategy for rebuilding Home Depot's distribution process and reining in costs by centralizing operations. That would be a big change for Home Depot, which had traditionally left many key decisions to the individual stores. Take ordering, for example. When Holifield came on board in 2006, about 70 percent of items were ordered by store managers; only 30 percent were ordered centrally.

The retailer's transportation model was equally store-centric. At the time of Holifield's arrival, about 80 percent of products were shipped directly from vendors to stores. The remaining 20 percent moved through a variety of distribution channels, including company-owned lumber handling facilities, import warehouses, and centers known as "carton DCs" that were designed to handle bulky items. In addition, a small percentage of orders moved through Home Depot-operated LTL consolidation points, known as transit centers.

That will all change under the new strategy. While in the past, only 20 percent of goods moved through company-run DCs, the new plan calls for half of the goods sold by the company (by value) to move through Home Depot facilities.

At the core of the new strategy is construction of 24 rapid deployment centers (RDCs). The RDCs, which will be strategically located throughout the country, will each serve approximately 100 stores. These will be flow-through distribution facilities engineered for the swift cross-docking of large volumes of merchandise, so very little will be stored in them. Most products will ship within 24 hours of arrival, according to Holifield.

The RDCs will receive freight in pallet loads that can be broken down for case-level shipments, but they will also have the flexibility to accommodate limited split-case picking. Some— but not all—of the facilities will be automated. The first automated facility, which features print-and-apply systems as well as a sliding shoe sorter, opened in April in Valdosta, Ga. Right now, eight RDCs are operational. All 24 are expected to be up and running by the end of 2010. As the facilities come on line, responsibility for ordering is being transferred from the stores to the RDCs. The plan calls for 75 percent of items to be centrally ordered through these centers.

Items not suitable for cross-dockingat the RDCs will continue to move through other channels. These include lumber, which will continue to flow through the lumber DCs; imports; and bulky domestic products like lawn tractors. About 20 percent of items will still ship directly from vendors to stores. These include products supplied by regional vendors and items like trees and other live plants that require specialized handling.

With the RDCs in place, the transit facilities will no longer be needed. They will close as the RDCs serving their areas come on line, Holifield says.

The ripple effect
Although only a third of the RDCs are up and running at this point, Home Depot is already seeing some benefits. One is increased flexibility. With products now flowing through the centers, decisions on which products to ship to which stores can be postponed until the last minute. As a result, the company is doing a better job of store replenishment, according to Holifield. In addition, forecasting errors have dropped significantly. "It is far easier to be right with forecasting for 100 stores, than [for] one store as it was before," he says.

Out-of-stocks have been reduced by half, and customers find product available 98.8 percent of the time, says Holifield. And because replenishment functions have migrated closer to stores, overall inventory has also been reduced by $1 billion on a year-over-year basis, he adds. Holifield expects to see further inventory benefits as more RDCs come on line. It's not just Home Depot that's profiting from the new initiative. The benefits are filtering down to its vendors as well.

"It's huge for our suppliers," says Holifield. For example, the move to centralized ordering means suppliers now have just one order to process instead of a hundred POs from individual stores, he says. In addition, suppliers can now ship their products in truckload quantities to the RDCs, which is much cheaper than sending LTL shipments to individual stores. The combined savings have enabled Home Depot to negotiate better prices with its vendors, which further reduces overall costs, Holifield says.

As one of the world's biggest users of transportation services, Home Depot has also been able to negotiate better deals on outbound transportation, Holifield says. The retailer is also doing a better job of carrier selection and controlling its overall transportation spend, he adds.

Although all of these changes have helped streamline its supply chain operations, Holifield What the whole network is about is providing on-time and accurate service to our stores so that they can focus on the customers," he says.