Global Sourcing Helps Home Depot Keep Prices Low, Quality High

One small example of Home Depot Inc.'s retailing success is its Wedding Registry. Where engaged couples once listed their gift preferences only with upscale department stores or specialty shops, today they often register at Home Depot warehouse centers as well, letting friends and family know they would welcome such non-traditional presents as step-ladders and electric drills.

This telling example demonstrates how Home Depot has capitalized on an explosion in the home-improvement market, propelling the company from a couple of stores in Atlanta two decades ago to a still-growing roster of 632 centers today. Catering to both do-it-yourselfers and contractors, Home Depot plans to have more than 1,100 stores in the U.S., Canada and Latin America by the end of the decade. It will open its first store outside North America later this year in Chile.

The Home Depot formula for success is a simple one: warehouse stores that feature everyday low pricing, extraordinary customer service, quality products and a very large assortment of items - each store typically carries 50,000 SKUs, and there are more than 100,000 SKUs company-wide.

With that many products, and with price a critical factor, sourcing, procurement and inventory management play vitally important roles in the company's overall strategy.

	"Our appetite as a company is just so huge for product that it often is very difficult for one manufacturer to supply us with all we need." - Don Paul of Home Depot

Most purchasing at Home Depot is done domestically and on a regional basis. Because the selling floor doubles as a warehouse, goods typically are delivered direct to store with no intermediate handling at a distribution center. However, that system, which works very well for domestic products, is not efficient for the chain's growing number of imported goods, according to Don Paul, Home Depot's director of import inventory management.

"With a domestic product, you can have regular meetings with your vendors and you have products that are unique to geographical areas," said Paul. "If a store is in the middle of Texas, there probably is somebody in Texas that makes it and the people in Texas want that particular product. But when it comes to imports, we didn't need to have each of our purchasing regions sending someone to China, or saying, 'OK, Mr. Vendor, here is how I want you to ship your product out of China to the U.S.'"

Consequently, the company early on established several distribution centers for imported products, but "from a business growth standpoint, we had reached a size where our current infrastructure was running out of room," said Stan Payson, senior manager for information services. "So we made the decision to consolidate our buying power and bring our imports into a single organization."

At the same time, management decided to centralize and automate the replenishment process for imports. That led to a decision to combine several import distribution centers into two, one on each coast. These import centers would then act as vendors to Home Depot stores.

Since the bulk of stores - approximately 460 - would be served from the East Coast DC, that facility was given priority. A site in Savannah, Ga., was selected and a 1.4 million-square-foot distribution center was constructed, replacing three smaller facilities in Atlanta, Miami and Dayton, N.J.

The Savannah import distribution center accepted its first container in April last year. It is a fully automated facility using a highly customized version of the Catalyst warehouse management system. Bar codes and radio-frequency devices are used to track inventory, which moves through the facility via conveyor belts and wire-guided equipment. Test shipments began in May 1997, with the actual roll-out starting in July.

Savannah was selected because it is conveniently located to serve Home Depot's East Coast stores, said Payson.

Centralizing import functions also was part of a larger corporate strategy to expand global sourcing and supply. Currently, about 3 percent of Home Depot's stock is directly sourced outside the U.S. The company anticipates that number will increase to support Home Depot's accelerating growth and to fill domestic shortfall, Paul said. "We are in the process of positioning ourselves to buy more products offshore. It may be that some products we source domestically are already being manufactured offshore but we are buying them through an importer. They may be somewhat less expensive than a similar domestically made product, but we aren't getting a lot of the benefits because the importer has to put his markup on them."

Home Depot also is increasing the number of countries from which it imports. Currently, products are sourced in approximately 30 nations, the majority of which are in Asia.

Growth, Profits and Customer Respect: A Retailing Hat Trick

Being laid off by Handy Dan Home Improvement Centers was probably the best thing that ever happened to Home Depot founders Bernard Marcus and Arthur Blank. After losing their executive jobs in 1978 in a corporate buyout, the two joined Handy Dan co-worker Ronald Brill to launch a new and improved home center for the do-it-yourselfer. The Home Depot was born. They opened three stores in Atlanta in 1979 and the next year added another. In 1981, the company went public, raising more than $4m in capital, which it partially used to open four stores in South Florida. Sales of $50m that year doubled to $100m in 1982 according to Hoover's Company Profiles. Just four years later, in 1986, sales surpassed $1bn in 60 stores. Since then new stores have opened at a blistering pace. At the end of last year, the company operated 587 Home Depot stores and five EXPO Design Centers in the United States, and 32 Home Depot stores in Canada, with an aggregate of approximately 66 million square feet of selling space. Earnings have been equally meteoric. In 1997, Home Depot posted record earnings for the 12th consecutive year. Net profit, excluding a $104m pretax non-recurring charge, totaled $1.2bn, a 30 percent increase over 1996. Sales for the 52 weeks of fiscal 1997 totaled $24.2bn, an increase of 24 percent from the prior year. Comparable store sales rose 7 percent. Last year Home Depot acquired Maintenance Warehouse/America, a direct-mail marketing company. Home Depot is expanding distribution of MWA's 1,000-page catalog aimed at builders and maintenance supervisors of hotels, hospitals, grocery stores and other businesses and is offering free, next-day delivery of all orders. Later this year, The Home Depot will open its first store outside North America, in Santiago, Chile, which it plans to use as a jumping-off point for wider international expansion. These opportunities are being developed against a very positive economic outlook in Home Depot's domestic market. U.S. home ownership rates are rising at a pace not seen since the 1950s. Moreover, homeowners are spending more money on larger homes, buying more second residences, and investing more to maintain or improve existing homes. If that weren't enough, Home Depot recently was named America's most admired retailer by Fortune magazine for the fifth consecutive year. It's no wonder a company statement described Home Depot's future as "bright orange."

Since Home Depot seldom has only one supplier for any of the many products it carries, there typically are multiple vendors in each country. "We are not looking to have 10 or 12 vendors for a product, but we do try to have more than one," Paul said. The reason is not so much to avoid "having all our eggs in one basket," he said. "It's more that our appetite as a company is just so huge for product that it often is very difficult for one manufacturer to supply us with all we need."

An added benefit of centralizing foreign procurement was the ability to standardize specifications and requirements to vendors and to develop a consistent testing process, Paul said. "If you look back to the early 1970s, a lot of people thought of imports as being cheap and inferior in terms of quality, and there is still some of that mind-set out there. In many cases, the products we import actually are of higher quality than the domestic product, but we wanted to put a testing process in place to legitimize that and to give us a standard for comparison."

A third party is used to test products up front, before a decision is made to buy from a particular vendor. After the initial testing, random audit checks are performed for quality control, said Paul.

Knowing what to buy, and in what quantities, has always been as much art as science, but in Home Depot's case the challenge was intensified by an annual growth rate of 22 percent to 25 percent and by the seasonality of many products. Moreover, stock items at the hardware giant are not as static as one might guess.

"Many of our products have a lot of the characteristics of fashion items," said Paul. "For example, we import a lot of ceiling fans, and people's tastes change from one year to the next as to whether they want polished brass or antique brass, white blades or wood blades and so on, and these things really do change your forecasting numbers." The same is true of tile, where demand varies year to year according to color and finish.

Other product lines, like hammers, are more stable, he said, but there can be great volatility between suppliers. "For example, if we used to carry two imported hammers and we now carry five and those three new ones have a significant price advantage, that dramatically changes the demand for the other two, because now customers are able to get a comparable product a lot cheaper," said Paul.

Home Depot developed a forecasting system internally with the help of Kurt Salmon Associates. It uses two years' of point-of-sale (POS) data and factors in Home Depot's growth rate and product seasonality. The system also provides replenishment planning functions, so that inventory threshold-levels can be set by SKU and vendor lead times accounted for. Forecasted sales are compared with the replenishment schedule, explained Paul, "and the system comes back and tells you that you need to buy 'x' number of widgets today, for delivery 120 days from now, to keep you in stock."

POS data is compiled weekly from all stores and forecasts are regenerated regularly, but "we try very hard not to change open purchase orders with vendors," Paul said. "There is no perfect inventory level and if we are going to be overstocked a little this month, then it's better to just place a smaller order the next month rather than try to change an open order. Obviously, if it gets too far out of line, we will contact the vendor and say we need to up that order or to cancel an order, but we try to keep that to a minimum."

One of the major considerations in centralizing imports for Home Depot was the ability to track orders with off-shore vendors once the orders have been placed. The company found only one software system capable of doing that: the RockBlocks purchase-order management module offered by RockPort Trade Systems of Gloucester, Mass.

"There are still a lot of systems out there that don't do tracking of imported products," said Paul. "They cut a purchase order and then nothing happens until the shipment is received. We wanted a product that would say, 'Hey, you cut this purchase order four months ago and it is supposed to be here at this point, and a week later at this point.' Then, if it is not at those points, I know the due date is going to be different and I need to make some changes. Most systems we looked at didn't have that capability and that was one of RockPort's key selling points for us."

"Most of the existing purchase-order systems are for domestic purchases," added Payson. "We needed a system that could take into consideration the special data and information needs for imports." These include different formats for foreign addresses and phone numbers and different financial arrangements, such as letters of credit.

Here is how the system works at Home Depot. Once the sourcing group has determined what products and quantities to order, it feeds that information, along with a requested ship date, into the RockBlocks system, which has been populated with SKU information and, for each SKU, a default vendor. The system combines orders based on common vendors and common ship dates and melds them into one work order.

Once complete, the work orders are sent out via fax or EDI to Home Depot's vendors, who then confirm that they can make the requested quantities in the stated time frames and that the pricing is correct, said Paul. If the confirmation includes modifications - for example, that only 700 of an 800-widget order can be shipped by the request date, but the additional 100 will be shipped a week later - these adjustments are made to the work order. A purchase order is then cut and sent to the vendor.

At the same time, a copy of the purchase order is sent to the import distribution center and to accounting, which has the financial systems for handling letters of credit.

Home Depot controls the inbound transportation and tells each vendor which forwarder to contact for shipment. Forwarders handle all the documentation. "Given our size and where we see the business going, our accounting folks decided not to use the RockPort system for documentation because we already had existing software and procedures for handling documentation," said Payson.

Each purchase order includes a template created by Home Depot with dates built in for exception reporting. "Let's say we are expecting a booking notice from a freight forwarder by a certain date," said Kathy Buettner, director of international logistics. "If we don't get a booking by a set number of days prior to the ship window, the RockPort system prints out an exception report." Similarly, she said, "if the expectation is that we will have an advance ship notice by 'x' days prior to or during or after the ship window and we don't have it, the system will tell us. It does event tracking on all our incoming shipments and allows us to manage by exception."

When exceptions are noted early in the process, it gives the company more options. "We can potentially order from another vendor or we can manipulate our forecast about what is coming in or we can adjust carriers to make up time in transit," Buettner said. In such instances, Home Depot will on rare occasions use air freight. "We try and come up with a solution that is workable for everybody," Buettner said.

Once an advance ship notice is received from a forwarder, Buettner's international logistics group compares it with the purchase order and makes any corrections before feeding that information back into RockBlocks.

"We developed a front-end piece that we added to RockBlocks to allow us to manipulate the data for better accuracy," said Buettner. "The accuracy level of our advance ship notices is not as good as we need, given all the interfacing that goes on, so we elected to fix the data before populating the data base. Sometimes the ETAs are wrong, sometimes the quantities on the advance ship notices are wrong, so we are validating key pieces of data against the purchase orders with a program that kicks out any mismatches."

The RockBlocks system is highly integrated to all other Home Depot systems, particularly financial and forecasting, said Payson. "Our West Coast distribution center and a couple of other centers also use the RockPort system, and we needed to integrate inventory information from all these."

Because Home Depot typically buys large quantities of each product it imports, it ships almost exclusively in container loads, with little need for consolidation. "Say, for example, we are buying white toilets into the East Coast distribution center," said Paul. "On a container you are probably going to get 600 toilets, but that's not even one per store, and we are growing everyday. We certainly don't need to consolidate with that vendor. With ceiling fans, it's the same thing. We probably buy 20 different fans from one vendor, so if I need 2,000 ceiling fans to fill a container, that's only 100 of the 20 SKUs every month. I'm probably going to buy four or five container loads from that vendor."

Even with smaller items, Home Depot buys in bulk, said Paul, "and when you do that across 400 stores you can fill up a container pretty quick."

The RockPort system helps optimize container usage by recognizing how quantities of specific SKUs relate to container capacity. "If an order is for a certain number of units, the system is able to calculate how many containers that represents," said RockPort CEO Susan Welch. "For example, if an entire order will fill 14.75 40-foot containers, then the system will prompt the buyer to reconfigure for 45-foot containers or to increase the order to fill 15 40-foot containers."

Home Depot's import operations involve approximately 20,000 container loads annually, Buettner said. To accommodate that volume, the company uses a number of ocean carriers, both conference carriers and independents, with which it negotiates directly for rates. Core import carriers include Maersk, NYK Lines, Sea-Land, OOCL, Hyundai, Senator and Hapag Lloyd.

Shipments from Asia bound for the East Coast import center currently are moving all-water to the ports of Savannah and Charleston, S.C. The mini-landbridge route that was previously being used for a portion of shipments was closed down when rail problems on the West Coast accelerated last year. "We will probably go back to some use of mini-landbridge around mid-year because of the draft restrictions through the Panama Canal," said Buettner. "We also may shift some product from the Panama Canal rotation to a Suez rotation."

The Savannah center currently is moving inventory at a rate of about eight turns a year and achieving a better than 95 percent fill rate at its stores, numbers that it "expects to ratchet up."

"For the past six months, we have been concentrating on getting the import center running smoothly and to transition in the three distribution centers that we were closing," said Paul. "Now that we are moving into a more steady state, we will review the situation and see where we need to fine tune and where we might work on enhancements."

One of the areas he wants to review is communication with vendors. "Currently, we are autofaxing instead of using EDI," said Paul. "We need to determine how much benefit we would gain if we shifted more of our vendors to EDI."

That is another area where the RockBlocks system may prove helpful. Its RockWeb module allows companies to communicate with foreign vendors via the internet. "Small manufacturers around the world typically don't have the infrastructure to support EDI or the expertise to use it, yet communication is key," said RockPort's Welch. "By having an application available on the internet, they can log in to a page that will tell them, for example, that they have eight purchase orders from Home Depot and three of them must be responded to within four days. It can also alert them if a ship date is coming up and sort of forces them to update their side of things. It's a lot better than fax."

RockBlocks: Software Designed for Global Sourcing and Supply

The ideas behind RockPort Trade Systems' RockBlocks software had their germination in the years that CEO Susan Welch spent in the trenches as a buyer, traffic manager and auditor for such retail firms as Zayre Corp. "I saw operations from the transportation side, the purchasing side and the finance side and I just thought, 'there has got to be a better way,'" said Welch. The better way that eventually emerged as RockBlocks is a modular multi-function system focused around the demands of global sourcing and supply. RockBlocks is designed so that companies can implement the entire system or choose from a variety of modular components or "BaseBlocks" to meet specific needs. "When we first started looking at this, everything was import and the U.S. was the center of the universe," said Welch. "But when we focused on what was really happening in the retail industry, companies were becoming pseudo manufacturers because of private labeling and were moving outside the U.S., opening up stores in Canada, Mexico and Europe. So all of a sudden we realized that the only difference between an import and an export is a moment in time and where you are standing relative to that moment. "When we started RockPort we wanted to make sure we could handle different countries, different industries and different directions and not be constrained by which way product is moving or where it is sourced." In addition to handling such tasks as documentation, billing and payments, multi-country consolidation, shipment/load planning, and event tracking, the system also provides robust decision support in the sourcing area. "We realized that at the beginning [of a sourcing decision] what is really being sourced are concepts," said Welch. "All the buyer may know initially is that he wants to purchase a certain product and to sell it in these stores for $25. Using our planning system, he can determine what price he needs to negotiate in various countries. The system will look at the traits of the product and of suppliers and at different countries of origin and take into consideration things like transit time, ocean freight costs, duty rates, which supplier has the right kind of machines, which has capacity - all of those factors - and then tell him, if you go to Turkey, you negotiate a price of $11; if you go to Hong Kong, negotiate a price of $12.50 and so forth. When they go into these various countries - or if they are sourcing across the Worldwide Web or across their own vendor base - they know they need to get prices in a certain range based on the country being quoted." As buyers start to solidify information about a particular product, the data gets more and more detailed. "At any point in the process," said Welch, "event tracking can begin: If you want to have a sample for review you have to get prototypes out to various suppliers by this date, have the first review here, go to testing on this date, and so on. And again the only thing the buyer knows is that the sample has got to be available by a certain date. The system sets up all the different events or milestones that need to occur to meet that date." RockBlocks also has modules to handle the actual purchasing transactions. Here, said Welch, all kinds of approval issues and security issues come into play. "We wanted to have a block that would handle each of those things, from the buying to the approvals and all of the edits that happen. Our goal was to make global purchasing as easy as domestic purchasing." A new BaseBlock due out this year will add a "virtual inventory" function. "A lot of our customers want to allocate inventory before it exists," said Welch. "For example, say a customer makes all different kinds of apparel - women's shirts, men's shirts, children's' clothes - that are all made of cotton. They can see, based on our forecast with RockPort we will need 1 million yards of cotton within the next six months. Then they have two choices: They can order the goods and depend on each manufacturer to source the cotton, which means they will have lots of issues of quality and price and delivery; or they can decide to negotiate with a supplier of cotton for 1 million yards. Now they can either place that order and take on the financial responsibility and delivery responsibility, or the system will be able to issue a virtual order to that supplier of cotton that will be drawn down by the individual vendors, who will be instructed to buy their cotton from this supplier. Now, the buyer controls the price, quality and delivery and yet there is no financial impact on the bottom line." RockBlocks is targeted at companies with complex sourcing and supply requirements, said Welch, such as those in retail, apparel and electronics. The company has more than 30 clients located in 20 countries. Major clients include Disney, Federated Department Stores, Timberland, Stride-Rite, J.C. Penney and Liz Claiborne. With headquarters in Gloucester, Mass., the company recently opened its first international office outside the U.S. in Hong Kong and has plans to establish an office in London by mid-year. More information about the company can be obtained at its web site: www.rockport-trade-systems.com.