PD3/May 2017

Professional diploma in procurement and supply

Strategic supply chain management

Date Thursday 18 May 2017

Time Start 14:00 End 17:00 Duration 3 hours

CASE STUDY

IMPORTANT

The examination format for this CIPS unit is open book

Please remember to take your case study into the examination with you

QP04
INSTRUCTIONS FOR CANDIDATES

The pre-released case study examination is designed to assess your ability to apply the relevant theories,
principles and techniques associated with the unit content to a realistic business situation.

The examination is a three hour open-book examination. The examination questions will test each of the
learning outcomes from the unit content.

You will be expected to demonstrate your knowledge and understanding of relevant theoretical principles,
concepts and techniques; to apply these appropriately to the particular situation described in the case
study and; above all, to make sound decisions. You will not gain marks by writing a general essay on the
topic. Prepared notes may not be included as part of the answer.

Please note that all work should be your own. Copying or plagiarism will not be tolerated and could
result in no marks being awarded. If quotes or short extracts are used they should be attributed or the
source of the information identified.

You should acquaint yourself thoroughly with the case study before the examination. You must take your
copy of the case study into the examination.

Page 2 of 24 PD3 Case Study May 2016

HOME DEPOT CASE

This case has been produced for assessment purposes only. It has been sourced directly from the articles
indicated within the bibliography, which are available in the public domain. It contains a number of direct
extracts and quotations, which have been referenced within the text.
The views and opinions expressed within the case are those of the authors of the reference material and
are not necessarily the views or opinions of CIPS or the companies mentioned. The case may not reflect the
actual situations of the specific companies mentioned.
The case was written in September 2016 and may not reflect the current situation. Candidates are advised
to base their answers on the situation depicted in the case.

Introduction
The Home Depot, Inc. (Home Depot) is the worlds largest home improvement retailer. The company
operates in the US, Canada and Mexico. It is headquartered in Atlanta, Georgia, and employs about 371,000
people. The companys retail stores stock about 30,000 to 40,000 different kinds of building materials,
home improvement supplies and lawn and garden products. Home Depot offers a wide range of national
brands, as well as lower-cost proprietary and exclusive products. Some 9,000 products are designated
as eco-friendly and are easily identifiable in-store. Home Depot also offers services such as installation,
plumbing, moving, equipment rental and loans.1

The company recorded revenues of $83,176 million in the financial year ended January 2015 (FY2015),
an increase of 5.5% over FY2014. The operating profit of the company was $10,469 million in FY2015, an
increase of 14.2% over FY2014. The net profit was $6,345 million in FY2015, an increase of 17.8% over
FY2014. Home Depot operates through a single division: home improvement retailing.2 Only about 10% of
its sales are generated from outside the US.3

In August 2016 Home Depot announced that it had achieved its highest sales and profit ever during the
second quarter of the year. The company is benefiting from home renovation ambitions across the US and
has been able to attract sales for home repairs and remodels even in a tough retail environment where
consumers are spending less on clothes and other items. Housing continues to be a tailwind for our
business, commented CEO Craig Menear in prepared remarks. Strength in the housing market has been
bolstered by low interest rates and declining unemployment, with the price of homes across the nation
continuing to climb higher.

In light of its positive results, Home Depot also increased its full-year forecast and is now calling for
earnings of $6.31 per share in 2016, up from its previous guidance of $6.27 per share. During the quarter,
net income rose to $2.4 billion, or $1.97 per share, compared with $2.2 billion, or $1.73 per share in
the same period a year ago. Revenue rose 7% to $26.5 billion and sales at existing stores climbed 4.7%.
Customers spent an average of $60.87 per trip to Home Depot, up slightly from the $59.42 they spent a
year ago.4

1
Home Depot Company Profile; Marketline; 5 February 2016.
2
Home Depot Company Profile; Marketline; 5 February 2016.
3
Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
4
Home Depot Points to Strength in Housing Market for Record Profits; www.forbes.com; 16 August 2016.
Page 3 of 24 PD3 Case Study May 2016
Strategy

The foundation of Home Depots strategy is epitomised by its three-legged stool strategic framework,
which focuses on creating value to customers and shareholders by connecting the business end-to-end.
The framework is centred on three legs: (i) customer experience; (ii) product authority; and (iii) capital
allocation driven by productivity and efficiency.

Customer experience: this is much more than customer service it is about providing a seamless,
frictionless experience no matter where customers shop, be it in the digital world, in the retail stores,
at home, or on the jobsite.

Product authority: Home Depot continues to strive to be the leader in product authority, balancing
the art and science of retail by consistently delivering the best and most innovative products at the
best value.

Capital allocation driven by productivity and efficiency: the company will continue to invest in order
to drive productivity and efficiency.

The seat of the stool is the concept of interconnecting retail practices, which is the strategy of
collaborating more closely internally and externally as part of an end-to-end approach. The aim is to drive
growth, value and productivity for customers and shareholders.5

Customers

Home Depot distinguishes between two broad categories of customer: retail and professional.

The retail portion can be further broken down into two distinct types of customer. Do-it-yourself (DIY)
retail customers prefer buying raw materials and completing their projects independently. At the other end
of the spectrum, so-called do-it-for-me (DIFM) retail customers are less likely to undertake projects on
their own. As such, they are more likely to pay extra for installation services.

Professional customers can be individual contractors such as repairmen, small business owners and
tradesmen, but also construction managers. Their needs require more complex services, such as the ability
to have orders delivered directly to construction sites.6

Home Depot has a loyalty programme for professional customers, Pro Xtra, which provides additional
member benefits such as purchase tracking, exclusive offers and rewards points. According to Bill Lennie,
Home Depots executive vice president of Outside Sales and Service, professional customers who have
signed up for the Pro Xtra programme tend to spend about 18% more in the first year. Pro Xtra members
also tend to transact over twice as much as non-members. The company currently has about 3.4 million
members on the programme.

Home Depot also has a private-label credit card programme in collaboration with Citigroup that is available
to both DIY and professional customers. Sales on the credit card accounted for about 23% of Home Depots
sales in fiscal year 2015 on about 11 million accounts. In 2016, Home Depot expanded the financing services
available to professional customers. In addition to regular benefits, it is offering professional customers the
option of 365-day returns, fuel discounts and a credit period of 60 days.

The DIY customer has traditionally been the mainstay of home improvement retailers such as Home Depot
and makes up the bulk of its customer population base. However, although sales to DIY customers have
increased, the contribution from this segment has declined and Home Depot is expending significant effort
to attract the professional customer.7

5
www.homedepot.com; accessed September 2016.
6
Home Depot vs Lowes: The Home Improvement Battle; www.investopedia.com; 7 July 2015.
7
Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
Page 4 of 24 PD3 Case Study May 2016
Acquisition of Interline Brands

In 2015 Home Depot completed a $1.7 billion acquisition of Interline Brands, a broadly based distributor
of products to the facilities maintenance end-market. With Interlines network, Home Depot can target
business-to-business opportunities by providing service, product and installation sales to larger property
managers, institutions and multi-family residences. The acquisition, besides providing a foothold in the
maintenance, repair and operations (MRO) market, has widened Home Depots opportunity set with the
professional customer.

The Interline acquisition also provides Home Depot with several operational synergies, including 1,600
employees to expand its business and over 100,000 products, some of which are not stocked at Home
Depot. Interlines distribution network also provides Home Depot with another 90 distribution points across
the United States, enhancing its supply chain and fulfilment capabilities.8

China

Home Depot only operates in the US, Canada and Mexico. In 2004 the company expanded into China but
withdrew in 2012. According to statements made by a Home Depot representative to foreign media, the
lack of a DIY (do-it-yourself) culture in China was behind the company's failure to succeed in the country.
However, a much more fundamental problem for Home Depot was the incompatibility of its business
approach with the local market.

According to www.globaltimes.cn (2012), most well-established big-box retail stores in the West are centrally
managed and offer a variety of brands all mixed together, similar to a supermarket. Under this model,
which has proven successful in many North American and European markets, suppliers must submit to the
conditions and requirements set down by the retailer in order to access the market. In China, however, large
retail stores are more like showrooms and suppliers are given much more freedom to operate.

Most large domestic suppliers of home improvement supplies in China have their own well-developed sales
networks and have proven capability of delivering competitive prices and reliable after-sales services on
their own. Selling through a big-box retail store like Home Depot would only hamper their performance,
as the commissions these retailers would charge for the sale of their goods would make them much more
expensive and thus drive away customers.

In contrast to this strategy, most successful Chinese retailers focus instead on merely providing domestic
suppliers with a platform for sales. Suppliers usually only pay a rental fee to the retailer and in turn are
allowed to conduct their business and set prices as they see fit. This kind of model is commonplace in China
although it is rarely used by overseas brands that prefer to exert more control over their suppliers. Given
Chinese suppliers' long-standing history of independence, as well as local customers habit of dealing directly
with vendors, Home Depot had little to offer the local market.9

The Supply Chain

Home Depot currently operates 2,269 retail stores, of which 1,977 are located in the US, 181 in Canada and
111 in Mexico. The Home Depot retail stores average about 104,000 square feet of enclosed space, with
approximately 24,000 additional square feet of outside garden area.

Home Depot procures products directly from manufacturers worldwide. In addition to the sourcing
operations at its Store Support Centre in Atlanta, Georgia, the company has seven sourcing offices located
in Shanghai, China; Shenzhen, China; Taipei, Taiwan; Gurgaon, India; Rome, Italy; Monterrey, Mexico; and
Toronto, Canada.
8
Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
9
Home Depot Business Model a Poor Fit for China; www.globaltimes.cn; 20 September 2012.
Page 5 of 24 PD3 Case Study May 2016
The company currently operates 34 distribution centres (DCs) in the US and Canada; 21 stocking DCs in the
US, Canada and Mexico; and 10 speciality DCs, which include offshore consolidation and returns logistics
centres, in the US and Canada. Additionally, it operates 18 rapid deployment centres (RDCs) in the US.
RDCs allow for aggregation of product needs for several stores to a single purchase order, and then rapid
allocation and deployment of inventory to individual stores upon arrival at the centres.10

According to www.dcvelocity.com (2009), Home Depot virtually ignored its supply chain for the first 30
years, a period in which the company set all kinds of retail growth records. Even its top supply chain
executive freely acknowledges this. Supply chain had not been the focus of the company for many
years, says Mark Holifield, who joined Home Depot as its 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 Home Depot, 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 centre of
the action.

One challenge was the downturn in the housing sector. As construction and credit began to decline, 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 challenge was the realisation that Home Depot could no longer afford to ignore the logistics side
of the business. After nearly three decades of operation, the company had little in the way of a formal
distribution network. Vendors and suppliers shipped merchandise directly to Home Depots cavernous
retail stores. Such was the size of the facilities, they were easily able to accommodate vast inventories of
building materials and supplies.

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 were not 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.

Although it was clear that they were looking at a complete supply chain remodelling project, 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 controlling costs by centralising operations. That would
be a big change for Home Depot, which had traditionally left many key decisions to the individual retail
stores. For example, in 2006 about 70% of items were ordered by retail store managers; only 30% were
ordered centrally.

The retailer's transportation model was equally decentralised. About 80% of products were shipped directly
from vendors to stores. The remaining 20% moved through a variety of distribution channels, including
company-owned lumber (timber) handling facilities, import warehouses and centres known as carton DCs
that were designed to handle bulky items. In addition, a small percentage of orders moved through Home
Depot-operated consolidation points, known as transit centres.11

10
Home Depot Company Profile; Marketline; 5 February 2016.
11
Home Depot's Supply Chain Remodel; www.dcvelocity.com; 1 August 2009.
Page 6 of 24 PD3 Case Study May 2016
Supply Chain Remodelling

According to www.mmh.com (2015), the supply chain remodelling project began in 2007. Scott Spata,
vice president of supply chain direct fulfilment, recalls that each retail store was tasked with ordering,
replenishing and managing inventory, which consumed as much as 60% of labour time. There was so much
work that took associates (employees) away from the customers, Spata says. We thought it would be great
if we could turn all that labour into customer-facing hours.

Figures 1 and 2 below show the distribution network in 2007 and the planned remodelled situation.

Fig 1: Home Depots 2007 Distribution Network (COGS cost of goods sold)12

Fig 2: Home Depots Planned Remodelled Distribution Network13

12
Supply Chain Transformation Presentation, Home Depot Investor & Analyst Conference, 2008.
13
Supply Chain Transformation Presentation, Home Depot Investor & Analyst Conference, 2008.
Page 7 of 24 PD3 Case Study May 2016
The supply chain team set about building a replenishment algorithm that took stock management
responsibilities away from individual stores and placed them with a centralised inventory and
replenishment department. The company was ultimately able to achieve 99% inventory in stock in the retail
stores on top-selling stock-keeping units (SKUs) while improving inventory turns, but not before it took a
hard look at its supply chain. Replenishment turned out to be the catalyst for transformation.

If you move to a just-in-time replenishment model, then you need a supply chain that can support those
activities, Spata says. We could have gone with a traditional stocking distribution centre, load it with safety
stock, then start dropping orders and shipping out truckloads. We decided to take it one step further.

Instead of stocking a lot of domestic product, Home Depot built a series of RDCs. Suppliers and vendors
no longer ship thousands of orders to Home Depot retail stores, but create 18 aggregate orders bound
for 18 North American RDCs. In turn, these facilities disseminate items through the rest of the companys
network. Spata says that the economies of scale have dramatically improved logistics costs, both into and
out of the RDCs, and suppliers are better able to manage production runs. Figure 3 below demonstrates the
concept of the RDC.

Fig 3: Home Depots Rapid Deployment Centre (RDC) Concept of Operations14

14
Supply Chain Transformation Presentation, Home Depot Investor & Analyst Conference, 2008.
Page 8 of 24 PD3 Case Study May 2016
Once the product enters the RDC, flow-through is processed almost entirely in the same day, Spata
says. Instead of a less-than-truckload hub to last-mile delivery, we can do that even faster with the core
network. Upon arrival at the RDC, products might be cross-docked and allocated to stores based on
real-time demand. Spata says that the speed of replenishment is greatly improved, so that even if a big
customer comes into a store and buys all of a particular SKU, the total time it spends out of stock is much
less than before RDCs.

The new RDCs are a valuable complement to the companys legacy network of DCs, which often included
antiquated infrastructure and materials handling equipment. Because the older DCs were not geared toward
speed of processing, online orders might ship in one to three days at best. Spata began looking at solutions
that could enable an entirely new facility design to achieve same-day shipping not to be confused with
same-day delivery of orders from a website or in a retail store. He knew such a facility would need to take
on faster-moving SKUs that were going vendor-direct in addition to a longer tail of slower-moving SKUs as
merchants complement in-store inventory with a more diverse range online. As Home Depot began working
on this initiative, they dubbed the new facilities direct fulfilment centres (DFCs).

While designing a new type of facility built for speed, Spata considered his existing bricks-and-mortar
footprint. With more than 2,000 stores in the United States, each with about 35,000 SKUs, geographically
located in just about every major metropolitan area, the new DFCs could leverage store inventory with
algorithms to greatly improve speed of delivery or pickup of goods based on the customer needs in an
interconnected environment. As a result, Spatas team chose a target service level from DFCs of no more
than two-day parcel delivery to 90% of e-commerce customers in the United States. Leveraging store-
stocked SKUs for same-day pickup of buy online or pick-up-in-store capabilities, the maths suggested three
regional DFCs as the optimum number of locations.

Page 9 of 24 PD3 Case Study May 2016

Three-Phased Approach

The supply chain remodelling project was undertaken in three phases. Phase one involved the creation
of centralised replenishment. Phase two saw the building of Home Depots RDC distribution network
for store replenishment. The companys new DFCs were the third phase, targeted squarely at meeting
the e-commerce challenge. The most challenging aspect of the three new facilities was the complete
uncertainty of their future activity.

The beauty of the RDC build was that we already knew the SKUs and attributes of what people were
buying in stores. We knew how to run that play, Spata said. For the DFCs, we had to build tremendous
flexibility for what we would get, which was entirely unknown. We knew what we had for e-commerce
volume at that time, but we also knew we would double, triple or quadruple that in coming years. This is
not just growth, but hyper-growth.

The uncertainty, combined with the dimensional irregularity of home improvement products, led Spata
away from an investment in heavy automation. We just dont have enough flow of small, slow-moving
products to justify shuttles or a goods-to-person solution, he said. At least not yet. However, the DFC
facilities were large at over one million square feet. Inside are proven, state-of-the-art technologies
including conveyor systems, voice-directed batch-picking, radio frequency (RF) scanning for picking and put-
away, light-directed put walls (the operator is directed by a light source to the correct storage location),
and about 17 different storage solutions. Although our product is on average much bigger and bulkier than
in a traditional e-commerce site, we still handle plenty of smaller items, Spata said. We want to be ready
no matter which category grows the fastest.

In evaluating potential workflows for the new DFCs, Spatas team looked at a number of models. Are we
going to pick an order to a tote so it has to travel the whole building? Or, do we bring the order together
at the end? There are pros and cons with both, Spata said. Then we had to complement conveyable
orders [conveyables are orders consisting of cartons that are of the right size and shape to be handled on a
conveyor system, or not] with bulk floor space, since the non-conveyable play is just as important for us.

The team decided on a consolidation approach where single-line and multi-line orders might be picked
from pallet flow rack, pallet selective rack, piece-pick modules or bulk storage before they are conveyed
to a pack station (single-line orders) or married together at put walls (multi-line orders). Multi-line orders
that include both non-conveyables and conveyables are married together in the shipping area. Spata said
this design leverages the vertical cube of the building while preserving the flexibility to reassign labour and
react to seasonal and daily peaks.

Compared to its traditional DCs, the new facilities achieved a 50% improvement in speed of order
processing. This also halved the time of standard delivery to customers, who receive parcel products in one
to two days for regionally stocked SKUs instead of three to five days. At the same time, the facilitys pick,
pack and ship costs were better than expected.15 Faster inventory turnover was another advantage. The
initiatives resulted in the companys inventory turnover ratio rising from 4.4 in 2012 to 4.9 in 2015, and is
planned to improve to 5.7 over the next three years.16

Home Depot Builds an Omni Channel Supply Chain; www.mmh.com; 1 February 2015.
15

Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
16

Page 10 of 24 PD3 Case Study May 2016

Taking the E out of E-Commerce

Spata emphasises that Home Depots DFCs and e-commerce approach are not discrete channels, but
part of an interconnected retail environment. When stores, websites, DCs, RDCs and DFCs are unified,
customers have a range of options. A customer visiting the website simply to confirm an item is in stock
before heading to the retail store can also see the products location in an aisle and shelf. After researching
a product online, the customer can visit the retail store and ask for one to be delivered to a home or
jobsite. Alternatively, the customer might select a model in the retail store and order a different colour
online or through an in-store kiosk.

The shopping experience often starts online, and were seeing that it drives footfalls in the stores, Spata
says. But that approach also decreases the burden on floor space inside the stores. Instead of a huge
assortment of appliances in the showroom, we can offer a much deeper selection online. Most importantly,
the supply chain allows customers to transact how they want to.

This includes returns and reverse logistics. Home Depot offers buy online, pickup in store and buy online,
ship to store, but Spata says the buy online, return to store option is consistently at the top of customer
satisfaction data. The idea that they can go to any store and get credit for something they bought online is
the number one thing they love about our customer service, he says.

The fastest-growing segment is customers who want items delivered to them. Spata says Home Depot has
always offered deliver from store for walk-in customers, but the company is working to build the capability
to buy online, deliver from store.

Omni-channel17 is about starting to look at global inventory, Spata suggests. Using stores as fulfilment
centres is an interesting idea, but at the same time fulfilling in a store is probably the highest cost model to
do that. They are not designed or staffed like a DC. If the customer chooses free shipping because they can
wait five days for the delivery, Spata says it often makes the most sense to fill the order in a DC. But if the
customer says they need it in one day, it might be better to ship from the nearby retail store.18

Sales Forecasting

As well as enhancing productivity via channel and marketing optimisation, Home Depot is also using an
improved sales forecasting tool at stores, ensuring that the optimal number of associates are on hand to
help customers. Sales forecast variance at individual stores was brought down to less than 2% in 2015, from
5% in 2010.19

System Suppliers

A number of suppliers were used by Home Depot to achieve its supply chain remodelling project:
Intelligrated (integrated material handling systems)
Manhattan Associates (warehouse management and yard management software)
Honeywell (voice-picking technology)
Frazier Industrial (rack and pick modules)
Raymond Corporation (lift trucks)
Motorola Solutions (mobile computing and barcode scanning)
Nestaflex (accumulation conveyors for floor-loaded parcel lines).20

17
Omni channel is a multichannel approach that seeks to provide the customer with a seamless shopping experience, whether
shopping online from a desktop or mobile device, by telephone or in a bricks-and-mortar store.
18
Home Depot Builds an Omni Channel Supply Chain; www.mmh.com; 1 February 2015.
19
Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
20
Home Depot Builds an Omni Channel Supply Chain; www.mmh.com; 1 February 2015.
Page 11 of 24 PD3 Case Study May 2016
Inventory Management

As online shopping increases across the retail sector, companies must try to figure out ways to serve
profitably the growing needs of online shoppers while making their network of retail stores less of a
financial burden. It is important to predict whether demand will come from the Internet or a retail store
visit, and whether they will ship online orders from a distribution centre or a retail store. Every move of
inventory is an added cost that eats away at already thin margins. Online shopping has forced the industry
to rethink not only the maths and science behind the inventory pool, but also the strategy, says Scott
Fenwick, a senior director at Manhattan Associates.

According to www.wsj.com (2016), Home Depot wants fewer items on its retail store shelves and it wants
them to be within customers reach, instead of filling its warehouse-style racks to the ceiling with products.
Get comfortable with days of inventory, not weeks, Tom Shortt, Home Depots senior vice president of
supply chain, says is the message going out to retail stores. The company is targeting sales growth of nearly
15% by 2018, but wants to keep inventory levels flat or slightly down.

Inventory is one of retailers highest costs. Any reduction in the level of capital tied up in unsold goods
frees up resources to invest elsewhere, such as building online operations or covering wage increases. But
destocking is not without risk. Bare shelves are a major annoyance to shoppers who take the time to go
into retail stores to shop.

When retailers first started selling online, they set up distribution centres to service their e-commerce
operations, but that ran the risk of doubling inventory. Then they tried to make their stores double as online
fulfilment centres and merged the systems that manage their online and retail store inventory pools. While
that helps lower shipping costs by storing products closer to customers, it means more work for store
employees. Ideally, you put less inventory in the stores, but replenish more frequently, said Brian Gibson, a
supply chain professor at Auburn University. Youd rather fulfil based on demand than based on a forecast.21

Home Depot has weathered the shift to online shopping habits better than most, with sales at existing
stores up at least 5% in each of the past three years helped by the continuing rebound in the housing
market. However, its push to lighten inventory levels will be a challenge, especially as it seeks to increase
annual revenue to $101 billion in 2018 $12.5 billion higher than 2015 without opening more US stores.

To tackle the issue, Home Depot is overhauling a big part of its bricks-and-mortar supply chain. It has
instituted Project Sync, a series of changes that include developing a steadier flow of deliveries from
suppliers into its network of 18 sorting centres. Instead of being inundated with five trucks twice a week,
for instance, Home Depot now wants to have suppliers send two trucks five days a week.

The savings from the synchronised inventory flow are a key part of getting Home Depots operating margin
up to 14.5% by 2018, from the current 13%, and also boosting the return on invested capital, a closely
watched industry metric. The more frequent deliveries also help improve in-stock levels, even as
Home Depot tries to keep a lid on inventory growth.

When the shipments get to retail stores, workers move them straight to the lower shelves, eliminating
the need to store and retrieve products from upper shelves using ladders and forklifts. Those activities are
some of the most expensive parts of the supply chain, Home Depot executives say. Savings can be used
to employ more workers on the floor or finding orders for shoppers who are picking them up. You could
stack it high, says Jessica Thibodeaux, manager of a Home Depot retail store just outside Houston, but it
wouldnt fly.21

21
Retailers Rethink Inventory Strategies; www.wsj.com; 27 June 2016.
Page 12 of 24 PD3 Case Study May 2016
Supply Chain Synchronisation

Home Depot also plans on launching supply chain synchronisation to ensure more predictable freight flow
into stores, which will benefit associates and customers and enhance productivity. Freight management
initiatives are expected to reduce 90 miles of walking for each receiving associate per year. Home Depot
also plans to implement software called Directive Pack Out, which guides associates on the order in which
merchandise is to be placed on shelves. This initiative is expected to reduce associate walking time by 12
feet per carton.

Besides the cost savings these programmes are expected to generate, they are valuable, inasmuch as they
will free store associate time for more customer interaction, which will enhance customer service. 22

Responsive Supply Chains

Many of Home Depots retail stores are located in hurricane-prone regions of the US. The companys
mission is to be the last store to close and the first to reopen in the region, keeping in mind the safety of its
associates and the prevailing storm conditions. A complex effort is required from the merchandising, supply
chain and operations teams to achieve this.

Before: it starts with the supply chain and merchandising teams. There are four DCs that support hurricane
response. Home Depot monitors inventory and places orders early for emergency supplies such as water,
saws, generators and gas-guns. It then pre-stocks stores and keeps a number of trucks loaded with supplies
so that the company can quickly deliver to affected areas if a storm moves in fast.

During: depending on the situation, Home Depot activates disaster command centres in hurricane-prone
areas. From there it tracks the weather and ensures that each store has what it needs, from supplies
to extra associates. Home Depot makes sure its team can get to and from work to help take care of its
customers. It has trucks staged outside the hurricane strike-zone so supplies are close by and ready to serve
stores as soon as the storm passes.

After: when communities start to pick up the pieces after a disaster, Home Depot mobilises emergency
support to aid relief and recovery efforts. Its stores often serve as command centres for first responders.
Team Depot volunteers arrive on the scene to ensure that communities have all the supplies and resources
they need to start rebuilding. 23

22
Home Depot: Potential and Prospects in 2016 and Beyond; www.marketrealist.com; 8 February 2016.
23
www.homedepot.com; accessed September 2016.
Page 13 of 24 PD3 Case Study May 2016
Supplier Performance Management

Supplier performance management was another area that Home Depot needed to improve in the early
2000s. According to www.supplychainbrain.com (2006), there was no central point of communication
between Home Depot and its army of suppliers, which numbered between 10,000 and 12,000. Julia Saia,
director of global supplier performance management, says that there was a minimum of 14 individual
touch points for suppliers to do business with the retailer. Home Depot had no easy way to keep track of
suppliers and monitor their compliance with rules for product quality, order fulfilment and delivery. For the
most part, fax and phone communications were the order of the day.

From the beginning, Home Depot laid out goals for improving the performance of its suppliers. They would
be held to strict standards, based on clear metrics and guidelines conveyed through streamlined, centralised
communications. The compliance programme would focus on three categories of excellence: (i) behavioural
helping Home Depot to protect the reputation of its brand while instilling social and environmental
responsibility in supplier relationships; (ii) manufacturing improving product quality, cost and innovation;
and (iii) supply chain reducing overall costs through process integration and standardisation.

Home Depot's list of expectations held no surprises for its veteran suppliers. The retailer was demanding
the highest possible levels of product quality, innovation, availability, on-time delivery, safety in production
and shipping, compliance with laws and codes of conduct and sensitivity to brand reputation. What was
different was Home Depot's strategy for ensuring compliance. The company would now issue clear and
concise guidelines for supplier conduct. Such guidelines would be communicated through its Supplier
Centre website. It would become Home Depot's sole means of communicating expectations and
critical information.

Previously, says Saia, Home Depot had sent out 8,000 paper versions of its buying agreement to suppliers.
There was no good way of tracking who actually received it. All of that changed in May 2005 with the
launch of the online Supplier Centre. It features continuously updated information on how to do business
with Home Depot, including the corporate performance policy, updates, news, information on events and
training, and scorecards. Saia says the new Supplier Centre is useful for information on hurricanes in the
south-east of the US, a region which is susceptible to this weather pattern. Suppliers were told how to
reroute shipments to avoid the hardest-hit areas.

Included in the list of expectations is Home Depot's social and environmental responsibility (SER)
programme. It covers a wide range of issues relating to proper treatment by suppliers of their workers and
the environment, including age requirements, wages, working conditions, emergency planning, health
and safety and controls against forced labour, fraud and discrimination. The programme combines regular
audits of factories with extensive education to help suppliers understand the retailer's expectations.

More recently, Home Depot has begun piloting online supplier scorecards, providing graphical
representations of performance levels. Each participating supplier is rated on criteria such as compliance
to shipping-platform standards and import on-time delivery. Trends are viewable over a 13-month period.
Green, yellow and red traffic-lights for each category let suppliers see their ratings at a glance.

The scorecards are only as good as the data they contain, so accuracy is essential. We will not approve a
scorecard where the data does not pass a measurement system analysis, says Saia. Home Depot carefully
compares data from its own sources with that submitted by suppliers. It uses Six Sigma quality guidelines to
sample data for accuracy, coupled with rigorous piloting processes before the system was up and running.
Home Depot initially trialled the scorecard approach with just 44 of its biggest suppliers before rolling out
the concept.

Page 14 of 24 PD3 Case Study May 2016

Suppliers Come Together

Supplier relationships are aided by a Supplier Council, consisting of the retailer's 15 most strategic
suppliers, who collaborate on multiple initiatives. They meet with Home Depot a minimum of four times a
year, in day-long sessions. Recently, Council members spent a full morning with merchandising executives
in a question-and-answer session. They also participated in a store walk to see how a retail store is laid
out and where their goods are stocked or displayed. Home Depot also hosts regular supplier workshops
throughout the world. Presentations are held in the local language so that factory leaders can attend.
The idea, says Saia, is to teach vendors how to do business with Home Depot, and how to be a better
supplier overall.

Collaboration takes places on multiple levels. First, Home Depot meets with internal managers to define
requirements and performance metrics. Expectations are validated through focus groups with key members
of the supplier base, as well as during workshops and merchandising meetings. Soliciting the voice of the
supplier is essential to the success of Home Depot's performance management efforts, claims Saia. Most
suppliers want to do business with Home Depot the right way, she says. This will truly help them become
more effective.

Once the performance standards are established, they are communicated via the Internet and various
training programmes. Scorecards follow, moving through a pilot phase as both parties validate the data.
Not until all of those elements are in place does Home Depot initiate a workable compliance programme.

The technology underlying Home Depot's scorecard concept was provided by Ontario-based Cognos,
Inc. Home Depot had a formal Six Sigma programme in place, by which defects were identified then
progressively reduced to minuscule levels, but it lacked the tools to communicate status information
to suppliers. The answer: a web-based supplier scorecard, similar in appearance to a management
dashboard, which could be easily viewed by all interested parties.

Home Depot deployed the Cognos 8 Scorecarding software, part of the Cognos 8 Business Intelligence
suite. The company had the system up and running in pilot form with a select number of suppliers within
a matter of months. The site opens with a log-in screen, allowing users to drill down into a series of
performance metrics, charts, graphs and reports. The actual number of metrics varies from user to user,
says Patricia Waldron, Cognoss retail industry director; Home Depot employs around half a dozen metrics
to track the performance of its supplier base.

The scorecard can draw on data from a variety of sources, including warehouse management systems,
purchase orders and a repository of contract terms. Actual performance is measured against established
targets in order to grade suppliers. Home Depot's intent, says Waldron, was to acquire a tool that could
receive data from any relevant system, regardless of source or platform.

Page 15 of 24 PD3 Case Study May 2016

B2B Exchange Transformed

Home Depot already had a business-to-business exchange for dealing with suppliers, but the nature of
the electronic exchange environment has changed significantly over the years. The original exchange
was implemented as a value-added network (VAN) for the transmission of messages and documents via
electronic data interchange (EDI). That process typically involved the exchange of data in batch mode, with
the VAN acting as intermediary. More recently, Home Depot realised that the technology was insufficient
for its needs, particularly in light of the growth of EDI over the Internet. The company therefore upgraded
its B2B infrastructure for handling electronic exchanges with suppliers with the help of Ohio-based Sterling
Commerce. Sterling had developed the Gentran Integration Suite (GIS), a hosted platform for connectivity
and data translation that allows for a true B2B electronic exchange, regardless of the technological
sophistication of its many users.

According to John Stelzer, Sterlings director of retail industry marketing, a modern-day exchange is not just
about getting information from one party to another: It's about what is done with the information. Today's
systems must be able to execute special processing depending on the type of product and whether it is
sourced domestically or internationally. The challenge facing Home Depot, as with any major retailer, lies
in building a system that allows for automated and highly integrated links with all suppliers, and is flexible
enough to adjust for the unique characteristics of each, Stelzer says.

Such a tool can also be used to drive supplier compliance, he says. One component of GIS, dubbed Visibility
Manager, monitors a supplier's track record in transmitting and receiving all necessary documents,
including purchase orders, advance shipment notices and invoices, in a timely manner. A system of
exception-based alerts flags up any supplier who is falling short in that regard. The software is also able to
grade the accuracy of each message, a critical part of any supplier-compliance programme. Reconciliation
across document content is clearly the next step, he says.

A key feature of modern B2B exchange software is its accessibility by all levels of an organisation. No longer
is the content intended only for IT staff. Individuals from sales, marketing, logistics and customer service
can make use of information about supplier performance, including the real-time status of orders
and shipments.24

Data Risk

Home Depots supplier exchange has many advantages, but it also represents a potential risk. In 2014 the
company suffered a data breach when 53 million email addresses were stolen along with 56 million credit
and debit card details. Criminals used a supplier's username and password to enter the perimeter of Home
Depot's network. These stolen credentials alone did not provide direct access to the company's point-of-
sale devices, but the hackers then acquired elevated rights that allowed them to navigate portions of Home
Depot's network and to deploy unique, custom-built malware on its self-checkout systems in the US
and Canada.

Home Depot's recent disclosure that a stolen vendor password was used to gain access into Home Depot's
systems is yet another example that the biggest breaches are happening from the inside, says Eric Chiu,
president and co-founder of HyTrust, a data security provider. Insider threats are not only the number one
cause of breaches, but also lead to the biggest damage; this is because once on the network, an outside
attacker looks like any other employee and can take their time siphoning off data without being seen.25

24
Home Depot Turns Its Attention to Supplier Performance Management; www.supplychainbrain.com; 1 June 2006.
25
Home Depot: Massive Breach Happened via Third-Party Vendor Credentials; www.infosecurity-magazine.com; 7 November 2014.
Page 16 of 24 PD3 Case Study May 2016
Going Back to School

In bringing suppliers up to speed, Home Depot wanted to do much more than offer a website. A
programme called Supplier University provided in-depth training for vendors. Merchandising suppliers
could take online courses covering the supply chain, manufacturing and behavioural categories of
excellence. Individual topics included logistics, store operations, finance, inventory management,
manufacturing quality and safety. In addition, suppliers would have access to various electives, including a
point-of-sale data glossary, acronyms used by Home Depot, and a complete rundown of relevant personnel
within the organisation.

A separate set of courses was aimed at other suppliers: those who sell office supplies and other items
used in Home Depot's corporate operations. They would cover such topics as customer service, financial
compliance, quality assurance and strategic sourcing. Electives would be essentially the same as those
offered to merchandising suppliers.

Saia insisted that Home Depot's compliance programme was focused on education instead of the punitive
approach. However, there would be a price for not meeting the company's strict requirements. Fines for
non-compliance would amount to $10,000 for the first violation of Home Depot's shipping standards,
and $25,000 each time thereafter. In any case, said Saia, compliance by suppliers has been trending up,
especially in China.

China is a prime target for growth in sourcing. Each Home Depot sourcing office in China employs experts
in quality control and sourcing to keep a close watch on local suppliers. It has also moved to broaden the
scope of Chinese suppliers from a geographical standpoint. Like many other US retailers, the company
started out shipping most of its Chinese-sourced goods through Hong Kong, but then expanded into other
parts of the country, including the entire Pearl River Delta and the Yangtze River region. The company also
intends to move west into less congested areas of China, a strategy that is likely to increase the supplier
base while raising new issues of compliance and vendor quality.26

Cultural Change

The supply chain remodelling and supplier performance projects in the early 2000s were parts of a broader,
company-wide reorganisation and cultural change programme.

According to www.hbr.org (2006), Home Depots original culture, set primarily by its charismatic founders,
was a major factor in the companys success. It was marked by an entrepreneurial high-spiritedness and
a willingness to take risks; a passionate commitment to customers, colleagues, the company and the
community; and an aversion to anything that felt bureaucratic or hierarchical. The company was sometimes
referred to as a $40 billion start-up.

Home Depot executives recall the disdain with which retail store managers used to view directives from
headquarters. Because everyone believed that managers should spend their time on the sales floor with
customers, company paperwork often ended up buried on someones desk, or tossed in a wastebasket.
Such behaviour was seen as a sign of the companys unflinching focus on the customer. The idea was to
challenge senior managers to think about whether what they were sending out to the stores was worth
store managers time, says Tom Taylor, who started at Home Depot in 1983 as a parking lot attendant and
became executive vice president for merchandising and marketing.

26
Home Depot Turns Its Attention to Supplier Performance Management; www.supplychainbrain.com; 1 June 2006.
Page 17 of 24 PD3 Case Study May 2016
There was, however, a downside to this culture. Important store safety directives might disappear among
the unread memos. And while their sense of entitled autonomy might have freed store managers to
respond to local market conditions, it paradoxically made the company as a whole less flexible. For
example, a regional buyer might agree to give a supplier of garden furniture prime display space in dozens
of stores in exchange for a price discount of 10% only to have individual store managers ignore the
agreement because they thought it was a bad idea.

The cultural characteristics that had served Home Depot well when it had only 200 stores started to be a
constraint when the company grew rapidly in the mid-1990s. Individual autonomy and a focus on sales at
any cost eroded profitability, particularly as stores were not able to benefit from economies of scale that an
organisation the size of Home Depot should have enjoyed.

Robert Nardelli arrived at Home Depot as the new CEO in December 2000. He had no retailing experience
and had spent his entire career in industrial, not consumer, businesses. His previous job was running
General Electrics power systems division, whose multimillion-dollar generating plants for industry and
governments were greatly removed from $10 light switches for DIY customers. However, his aim was to
bring some big-company muscle to the entrepreneurial organisation and to overcome the latent financial
and operational problems that threatened its continued growth and survival.

A Dose of Discipline

From 2000, Nardelli laid out a three-part strategy for Home Depot: (i) enhance the core by improving the
profitability of current and future stores in existing markets; (ii) extend the business by offering related
services such as tool rental and home installation of Home Depot products; and (iii) expand the market,
both geographically and by serving new kinds of customers, such as big construction contractors.

To meet his strategic goals, Nardelli had to build an organisation that understood the opportunity in,
and the importance of, taking advantage of its growing scale. Some functions, such as purchasing (or
merchandising), needed to be centralised to leverage the buying power that a giant company could wield.
Previously autonomous functional, regional and store operations needed to collaborate. This would be
aided by making detailed performance data transparent to all the relevant parties simultaneously, so that
people could base decisions on shared information. The merits of the store environment at that time
needed to be re-evaluated; its lack of signage and haphazard layout made increasingly less sense for time-
pressed shoppers. And a new emphasis needed to be placed on employee training, not only to bolster the
managerial ranks but also to transform sales associates from cheerful greeters into knowledgeable advisers
who could help customers solve their home improvement problems.

This new strategy would require a careful renovation of Home Depots strong culture. The challenge was to
build on the best aspects of the existing culture, particularly peoples unusually passionate commitment to
the customer and to the company. However, Nardelli wanted them to rely primarily on data, not on intuition,
to assess business and marketplace conditions. People were also expected to coordinate their efforts,
anathema to many in Home Depots entrepreneurial environment. People also had to be accountable for
meeting company-wide financial and other targets, not contemptuous of them. Finally, staff had to deliver
not just sales growth, but also other components of business performance that drive profitability.

Page 18 of 24 PD3 Case Study May 2016

Change Management

Resistance to the changes was fierce, particularly from managers: much of the top executive team left
during Nardellis first year. But some saw merit in the approach and in fact tried to persuade distraught
colleagues to give the new ideas a chance. Over time, attitudes slowly began to change. Some of this
resulted from Nardellis successful efforts to get people to see for themselves why the strategy made
sense. But other, more concrete tools, designed to ingrain the new culture into the organisation, ultimately
prompted employees to embrace the change.

The mechanisms that Home Depot employed changed the social architecture of the organisation to
support the business model. Many of them are familiar operating tools, but they were employed in such a
way that they changed the human side of the equation: peoples behaviour, beliefs, social interactions and
the nature of their decision-making. It was this social element that allowed Home Depot to achieve and,
more importantly, to sustain its dauntingly large-scale and complex cultural transformation.

The mechanisms fell into several categories: metrics (which describe what the culture values and make
clear what people will be held accountable for); processes (which change how work is carried out and thus
integrate the new culture into the organisation); programmes (which generate support for and provide the
first demonstration of the new cultures effectiveness); and structures (which provide a framework for the
new culture to grow, often by changing where and how decisions are made).27

There were criticisms of Nardellis approach, as outlined by Wharton Business School, University of
Pennsylvania (2007). While GE is a great source of management talent, the style of leadership that works
at GE doesnt necessarily readily carry over into a company that does not have GEs traditions or GEs
riveting focus on performance, says management professor Michael Useem, director of Whartons Centre
for Leadership and Change Management.

GE has a deeply held, corporate cultural value around the idea of performance. If you dont get results, you
just wont hold your position long. An executive leaving GE will attempt to bring what worked in the past,
but at Home Depot, the way of operating was decentralised. Managers had a lot of discretion and there
was a free-flowing, exciting feel to working there. Nardelli tried to streamline some 2,000 stores to get
control over them, which might have worked at GE, with its focus on performance. But at Home Depot, that
approach to leading did not work well, given the history of the company.

According to Barry Henderson, an equities analyst at T Rowe Price, Nardelli made two big mistakes at
Home Depot: he alienated employees and angered stockholders. The Home Depot culture is distinct in
retail, Henderson explains, describing it as having been extremely entrepreneurial and very customer
focused when Nardelli arrived. Nardelli concentrated on overhauling Home Depots business processes,
which did need to be addressed, but he over-focused on the processes and swept aside the elements that
made Home Depot special.

Nardelli angered people by firing long-time Home Depot executives and bringing in GE alumni, according
to Henderson. He also increased the number of less knowledgeable part-time workers at Home Depots
stores, which left full-time employees fuming and led to a diminishment of customer service, one of the
companys strengths. From the very beginning of his tenure, Nardelli damaged morale, and he was seen as
a real threat to the Home Depot culture, Henderson says.28

27
Home Depots Blueprint for Culture Change; www.hbr.org; April 2006.
28
Home Unimprovement: Was Nardellis Tenure at Home Depot a Blueprint for Failure? www.wharton.upenn.edu; 10 January 2007.
Page 19 of 24 PD3 Case Study May 2016
After Nardelli

In 2007 Nardelli was replaced as CEO by Frank Blake, who had served as Home Depots executive vice
president since 2002. Blake immediately made key operational changes. Nardelli had slashed employee
benefits and focused on expansion and acquisitions. Blake reversed that tactic, set about repairing the
companys damaged customer service reputation, and cut costs without killing morale.29

In the Nardelli era, it was very hard to find a Home Depot employee on the selling floor. If you did, that
person would likely tell you This isnt my department and walk away. That has certainly changed. In the
early Blake era, they would even follow customers around the store trying to be helpful. There are now
more employees on the selling floor, they are very helpful and they know that they are appreciated.30

Omar Lopez, a Home Depot district manager in Miami, says that Blake has given stores more leeway to
select products that are tailored to specific markets, moving away from a more centralised purchasing
structure under Nardelli. It's really working in our favour, because we can now order products
market-specific as opposed to with a broad brush, said Lopez, who has worked at Home Depot for nearly
20 years. The associates are so much happier.

In stores, workers feel more empowered to focus on basics in interacting with consumers who walk in, as
opposed to collecting data on how many people are shopping, he added. We lost our way, because we got
so metrically driven, Lopez said. He added, however, that Nardelli taught us to be better business people
in terms of setting standards.31

Carol Tome, Home Depots chief financial officer, feels that the company has re-captured its original values-
based culture. These values include things like giving back, taking care of each other, respect, creating value
and customer service.

Perhaps most unique to our culture is the management construct we call the inverted pyramid. Our
executive team sits at the bottom of the pyramid and the associates serving customers are at the top. We
believe this is the secret sauce, because we at the bottom bear the responsibility for our actions and the
decisions we make. Its a heavy weight, considering we have more than 2,000 stores and 400,000 people.
We bear that weight to free up our associates to take care of our customers.

In relation to the Nardelli era, Tome states: They tried to change the culture once, but it didnt work.
They brought in a new leader from the outside to run the company. This person was experienced, but he
turned the pyramid around so that leadership was at the top and associates at the bottom. That made the
associates responsible for the actions taken. We sort of lost our way during that period, and Home Depots
market share receded. In early 2007 Frank Blake became our CEO. On Franks first day as CEO, he read from
a book written by Bernie and Arthur [the founders] that talked about the inverted pyramid. Frank flipped
the pyramid back around, so that he was at the bottom and associates were at the top.32

29
Home Depot Knows When to Call it Quits; www.fortune.com; 26 October 2012.
30
Home Depot's Resurrection: How One Retailer Made Its Own Home Improvements; www.forbes.com; 21 August 2013.
31
Home Depot Workers Say New CEO Changing Culture; www.reuters.com; 16 March 2007.
32
How Home Depot Overcame a Difficult Cultural Shift; www.greenleaf.org; 10 July 2015.
Page 20 of 24 PD3 Case Study May 2016
References

Marketline; 5 February 2016; Home Depot Company Profile

www.marketrealist.com; 8 February 2016; Home Depot: Potential and Prospects in 2016 and Beyond

www.forbes.com; 16 August 2016; Home Depot Points to Strength in Housing Market for Record Profits

www.homedepot.com; accessed September 2016; Wall Street Journal, 27 April 2016,

Free Shipping Crowds Out Small Retailers.

www.investopedia.com; 7 July 2015; Home Depot vs Lowes: The Home Improvement Battle

www.globaltimes.cn; 20 September 2012; Home Depot Business Model a Poor Fit for China

www.dcvelocity.com; 1 August 2009; Home Depot's Supply Chain Remodel

Supply Chain Transformation Presentation, Home Depot Investor & Analyst Conference, 2008

www.accenture.com; Omni channel is a multichannel approach that seeks to provide the customer with a
seamless shopping experience, whether shopping online from a desktop or mobile device, by telephone or
in a bricks-and-mortar store.

www.mmh.com; 1 February 2015; Home Depot Builds an Omni Channel Supply Chain

www.wsj.com; 27 June 2016; Retailers Rethink Inventory Strategies

www.supplychainbrain.com; Home Depot Turns Its Attention to Supplier Performance Management;

1 June 2006.

Home Depot: Massive Breach Happened via Third-Party Vendor Credentials;

www.infosecurity-magazine.com; 7 November 2014.

www.hbr.org; April 2006; Home Depots Blueprint for Culture Change

www.wharton.upenn.edu; 10 January 2007; Home Unimprovement: Was Nardellis Tenure at Home Depot
a Blueprint for Failure?

www.fortune.com; 26 October 2012; Home Depot Knows When to Call it Quits

www.forbes.com; 21 August 2013; Home Depot's Resurrection: How One Retailer Made Its Own
Home Improvements

www.reuters.com; 16 March 2007; Home Depot Workers Say New CEO Changing Culture

www.greenleaf.org; 10 July 2015; How Home Depot Overcame a Difficult Cultural Shift

Page 21 of 24 PD3 Case Study May 2016

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