Why Is Home Depot Making A Considerable Investment In Its Supply Chain?

Home Depot (NYSE: HD) has stated its intention of investing roughly $1.2 billion into its supply chain over the next five years. Given the changing retail landscape, the company believes “a great customer experience depends on great supply chain capability.” Over the past decade, the company has made big strides in its upstream supply chain – moving product to the stores and direct fulfillment centers (DFCs) – and more recently, it has undertaken significant expenditure to build its downstream supply chain – delivering to customers directly. However, the home improvement giant feels there is still some way to go to fully leverage its upstream network, as well as build the fastest and most efficient delivery system.

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Meaningful Achievements So Far

In terms of its upstream network, Home Depot has made a meaningful improvement in devising an optimal flow network with its RDCs (Rapid Deployment Centers), improving its inventory management capabilities, and driving further efficiency through the Supply Chain Sync initiative. For an enhanced direct-to-consumer supply chain, HD has introduced a number of interconnected customer offerings like Buy Online, Ship To Store, and Buy Online, Deliver From Store. The home improvement retailer has also built a network of DFCs, which gives them the capacity to reach 95% of the U.S. population in 2 days or less, and 30% in one day. Moreover, for the professional segment, the company has introduced 2- and 4-hour windows for deliveries.

Potential For Improvement

Home Depot feels its downstream network consists of four unconnected and independent components – store-based delivery, online delivery from DFCs and vendors, appliance delivery, and Interline brands delivery – which may not be the most ideal situation. Moreover, the current process of packing and shipping from the store leaves room for improvement. Another area that could be upgraded is the speed of delivery from DFCs in cases where the time taken to reach customers is over a day. Keeping all this in mind, the company is taking the following steps:

• Add 170 distribution facilities across the U.S. to reach 90% of the U.S. population in one day or less.
• Open market delivery operation (MDO), which are local hubs that will consolidate the freight for dispatch on to final-mile delivery vehicles appliances for Interline MRO, Pro and DIY delivery from DFCs, vendors, and stores, in about 100 locations. This will allow consolidation and sorting  capability for big and bulky freight and parcel freight and extend HD’s delivery reach.
• Consolidate store-based delivery in fewer stores in secondary markets, which will be linked to the upstream network.
• Open 40 flatbed direct fulfillment centers to serve HD’s top 40 markets. These centers will specialize in big and bulky building material SKUs (Stock Keeping Units), such as lumber, building materials, and flooring, which will be delivered on a next day and same-day basis.
• Open about 25 local direct fulfillment centers that will carry the most delivered store SKUs and Interline MRO SKUs, to ensure delivery on a next-day and same-day basis direct-to-customers in the top 40 markets.
• Continue the rollout of van and car delivery options in top urban markets in 2018. For car delivery, HD has partnered with app-based delivery providers, as this results in lower cost and often faster delivery for smaller orders.

By undertaking this investment, HD aims to create the “fastest and most efficient delivery in home improvement.” Given the enormous scale and scope of this initiative, the company has given itself a period of five years to complete the actions. Such efforts come at a time when Home Depot is grappling with high transportation costs, as a result of the increase in oil prices. In the first quarter, HD faced transportation headwinds which had an eight basis points negative impact on the gross margins. With the increasing shift toward the online space, as well as the addition of features such as same-day delivery, transportation costs may continue to be a hindrance this financial year. However, the overhauling of its supply chain may be a step toward overcoming such headwinds.

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