A feature of Supply Chain Matters is to follow significant supply chain transformational efforts involving either manufacturers or retailers. Our goal has always been to tie existing news and developmentsHome Depot Store with some form of context, whether crisis, transformational or renewal related.  An ongoing commentary involves the competitive battle among major home improvement retailers Home Depot and Lowe’s, and how investment and leverage of supply chain process capabilities have either enhanced or detracted from business performance.

Our initial commentary, Can Home Depot Close Its Supply Chain Gap?, was in early 2010, when Home Depot was struggling to compete with Lowes . Our most recent update in September, commented on reading between the lines of each retailer’s Q2-2011 financial results. Our conclusion was that it has become obvious that the chairs have swapped and Home Depot is leading in supply chain responsiveness capabilities. While both retailers have to deal with a challenging economy and frugal consumer, supply chain capabilities are making a difference in having the right items in-stock and in operating in the most efficient manner. That reality was reinforced with the latest November 16 Wall Street Journal Home Depot earnings article headline: Supply Chain Boosts Net at Home Depot. (paid subscription of free metered view)

The Q3 highlights for Home Depot included a 4.2 percent increase in same store sales and a nearly 12 percent increase in profits.  Chairmen and CEO Frank Blake again specifically stated in the earnings briefing that supply chain investments continue to provide significant benefits for the business.  I wonder how many of our readers would enjoy hearing that phrase consistently stated by their CEO.    The benefits were quantified as 26 basis points positive contribution to margins. That happens to be the same contribution as reported last quarter. The ongoing Regional Distribution Center rollout program was again cited by senior management as helping to keep more items in stock, but included the acknowledgement that many of the centers were not fully mechanized on initial implementation. There was a stated need to test and learn which automation efforts would garner the most benefits. Current benefits were described as positive results in capacity, efficiency and accuracy. Centralized supply chain inventory management currently handles an additional 2 percent of goods sold, raising the total number to 65 from 63 percent.  One other interesting note, home improvement retailers are not immune to the ravages of severe weather.  The Home Depot incurred $26 million in storm damage in Q3 from the effects of Hurricane Irene and other events. The retailer’s Binghamton New York store remains temporarily closed due to flooding damage.

Turning to Lowe’s, its Q3 earnings report was somewhat somber.  Same store sales grew less than one percent (.7 percent) while year-to-year earnings fell 44 percent. Store closings and a large-scale Lowe's retail outletrestructuring contributed to the earnings decline. Gross margins declined by 99 basis points.  Reorganization of store operations has led to the announced closing of 27 underperforming stores and 50 percent cutback on previous planned store openings for 2012. Lowe’s senior management acknowledged that performance is not at levels expected and that a renewed emphasis is underway for looking at the business from fresh perspectives.

From a supply chain process perspective, Lowe’s is currently concentrating on rationalizing and optimization of overall inventory investments. In procurement, efforts are directed at value improvement methods for procuring inventory with a focus on securing goods at the lowest cost with more simplified deal structures.  Reorganization and streamlining of the retailer’s merchandising organizational structures has a goal for more localization of product assortment, which adds additional challenges in optimizing inventory investment.

A previous plan for investing in store systems infrastructure and empowering sales associates with mobile devices has been accelerated.  An estimated 60 percent of stores have the new devices, with an average of 25 devices per store, and the plan is to have all stores equipped by the end of the calendar year. These mobile devices will be based on Apple’s user intuitive iPhone operating system platform and are directed at providing sales associates enhanced tools to assist customers with buying choices and service needs.

Lowe’s, like other major retailers including the Home Depot, is also investing in a more significant online presence. A new site MyLowe’s was launched in October to create increased customer loyalty and consolidate spend toward Lowe’s, somewhat similar to an Apple or Amazon buying community network. The goal is to have 260,000 items available online by the end of the year, and there are plans to include aspects of multi-channel fulfillment with consumers having the ability to have their purchases shipped direct, available for pick-up at the local store, or other options. The big picture points to the ability to provide added buying choices to consumers with various options for purchase, meaning not all items will be physically stocked in stores.

A supply chain capability comparison among both of these retailers, today, and moving forward, has to focus on overall merchandising and inventory strategy.  Clearly, Lowe’s has demonstrated a tendency to over expand in store footprint and under-invest in ongoing supply chain capability. As an example, Lowe’s inventory turnover has a current average of 3.6 turns, and has been flat with previous quarters.  Lowe’s expects its year-end inventories to be 2-3 percent above last year as rationalization efforts continue. Lowe’s appliance inventories ended the quarter at 5.2 percent higher because of a conscious decision to not match aggressive promotions occurring among the competition, yet competitors make leverage of regional stocking and direct ship programs available from major appliance manufacturers.

Home Depot’s inventory turns are 4.3 and have been improving, and that has been reflected in average customer ticket purchase trends which are higher.  In the current economic environment, consumers are more motivated to buy more expensive home improvement items based on compelling events such as storms, disasters or local tragedies, and having inventory of key items on-hand, and prominently displayed makes all of the difference. That has been clearly demonstrated in the recent quarter where an unexpected hurricane and unusual large snowstorm impacted the U.S. eastern seaboard region.  This author observed first-hand the buying frenzy at Home Depot when New England was threatened by an unusually large October snowstorm.  Shoppers scooped everything in sight including shovels and roof rakes. Similar reminders exist for severe weather events that occurred in other parts of the U.S. and North America.

The battle of the home improvement retailers will continue and the supply chain capability stakes will get higher, especially when both retailers dive into more sophisticated multi-channel inventory planning, deployment and store operational capabilities.  Home Depot has consciously avoided the “big-bang” approach for implementing automation and technology tools, favoring a learn first, run fast learning approach.  Lowe’s on the other hand took its eye away from competitive supply chain capabilities, and is now in accelerated investment mode.  The stakes remain high, but both retailers can benefit greatly from much of the past learning acquired in other industry settings. In the end, people and leadership will make the ultimate difference for both.

Supply Chain Matters and other influencers will certainly continue to monitor this great living and active case study in how supply chain capabilities matter in bottom line results.

Bob Ferrari

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