Will Home Depot Achieve Its inventory Goal Through Supply Chain Transformation?

I just read two articles regarding Home Depot supply chain transformation. Home Depot’s supply chain overhaul to free up cash, improve inventory by Rachel Ramos at Atlanta Journal-Constitution dated Sep, 2008. Another article Aggressive Supply Chain Transformation at Home Depot by Dan Gilmore, editor of SupplyChainDigest, dated Jun 2009.

Both articles discussed that high inventory at Home Depot stores forced the company to transform its supply chain network from the previous direct-to-store model to a traditional RDC model. 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 aggressive supply chain transformation started in early 2007 and should be able to help Home Depot improve their current inventory turn from 4 to a higher number.

Out of curiosity, I looked up the financial reports of both Home Depot and Lowes to get their inventory turns data. I used the standard formula of inventory turn of COGS/average inventory. The below table shows the result:

HDInvTurn

What can those numbers tell me?

First of all, there was not much improvement in last two years compared to 2006. In the first two quarters of 2009, Home Depot had inventory turn lower than 1 in both quarters, which can translate to an annually turn lower than 4. It can be explained due to current economy downturn. The RDC model didn’t seem to fix the inventory problem. So, if inventory is not in stores, they might be accumulated in RDCs.

Second, we see a declined number from Lowes. Same story for first two quarter of 2009, Lowes even had a lower inventory turn number than Home Depot did. Lowes has had the traditional RDC model since the beginning. So, I can conclude that the RDC model will not be the only fix to improve its inventory turn.

Supply chain network remodeling to RDC model can definitely help Home Depot to improve the right level of inventory at stores and offer consumers a cleaner shopping environment. It will also help to improve forecast accuracy at an aggregate level. However, Home Depot seems to have more to do in order to increase their inventory turn from 4 to 5. From my point of view, there are at least two more things that Home Depot should do beside supply chain network redesign:

1. Inventory optimization through SKU ABC classification.

70% of 35,000 SKUs having a lower than one sales one store per week represents an opportunity. Even though Home Depot doesn’t plan to cut any SKU to meet customer satisfaction, it can use traditional ABC classification and establish different inventory turn targets for different types of SKUs. Those 70% of SKUs normally will represent about 20% of sales for Home Depot. They should be classified as B or C SKU, which can be allowed a lower inventory turn to reduce ordering administration. However, for A SKU, which normally account for 20% of SKU but about 80% of revenue, should be closely monitored to meet a much higher inventory turn target. From SKU ABC classification, Home Depot can focus on their key SKUs to improve overall inventory turn and at the same time to satisfy customers’ needs.

2. Supply chain technology enhancement.

I agree with what Mark Holifield, SVP of SC, said that the biggest challenge is culture change. However it might be a good time for Home Depot to invest on a robust supply chain system to accurately reflect customer demand at each store in a timely manner and hence result in a better demand driven forecast. Wal-Mart had a surprising inventory turn of 8.8 in 2008 and looks like to be able to achieve the same level based on the number of tuns in the first two quarters of 2009. As we all know, Wal-Mart is a huge pusher for supply chain technology and RFID. I’m a believer that utilizing technology will drive workflow automation and thus drive process and culture changes. An advanced supply chain information system will give Home Depot the competitive edge in the competition.

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3 Replies to “Will Home Depot Achieve Its inventory Goal Through Supply Chain Transformation?”

  1. I think in addition to having an ambitious plan and a strong strategy, rapid technology implementation and flexible supply chain that can adapt to market conditions are also important to improve inventory turns and reduce COGS. I think HD is slow in implementation and by the time all said and done with their RDC implementation, their supply chain may not be sized appropriately for the market demand, especially with dwindling sales.

    This is just my $0.2.

  2. I agree that SC tech enhancements will help HD, but find the comparison to Wal-Mart misleading. Wal-Mart has tremendous leverage with suppliers. They have 56K of them with $200 billion in purchases in 2007. I doubt HD has that clout. Wal-Mart has enough clout to negotiate having their suppliers absorb RDC assembly costs and influence which vendors their suppliers use as well, which ultimately lower their inventory $s dramatically.

    Along with the ABC analysis, HD should then filter some of that information to their suppliers to partner on driving down costs if they haven’t already. They may be in contracts with suppliers with less than optimal terms that drive up inventory $s. If they have been using a direct to store model, this is probably the case.

    Just my $0.02

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