Readers of this blog are often aware that one of the features of Supply Chain Matters is to follow certain supply chain transformation efforts involving either manufacturers or retailers. Our goal has always been to tie existing news and developments with some form of context, whether crisis, transformational or renewal related. In essence, we enjoy connecting some of the dots for our readers when supply chain business process and technology initiatives make a discernable competitive advantage.
An ongoing story involves home improvement retailing, which began with Home Depot and its efforts to overcome supply chain fulfillment capabilities gaps with its prime rival, Lowes. Our initial commentary began in early 2010, Can Home Depot Close Its Supply Chain Gap?, and was followed by a subsequent commentary in September 2010, Home Depot Making Progress in Closing the Supply Chain Gap. The essence of these ongoing initiatives from Home Depot were an avoidance of a previous ‘big IT’ approach in favor of concerted investments in specific supply chain related process enablement capabilities.
During the bulk of last year, the Depot embarked on a $250 million investment in improved supply chain capabilities on both supply chain operations and planning. There was a rather large effort to shift inventory replenishment strategies toward more centralized planning, which included the majority of inbound inventory activity moving through 19 regionalized flow-through deployment centers. Additional investments were made in inventory optimization, supply chain network design and inventory forecasting technology which were all part of a three year effort focused on supply chain transformation.
In late February, the Wall Street Journal featured an article reflecting on Lowe’s operating results while noting that while Lowe’s demonstrated respectable results, these results were not quite as good as those of Home Depot. Noted specifically was that in the midst of severe winter conditions that occurred in the U.S. throughout Q4, Lowe’s had run out of key inventory while Home Depot was able to capitalize on strong sales of snow blowers, shovels and other storm-related needs by more responsive inventory replenishment strategies. A quote from the WSJ notes: “The question is which retailer will win the latest round in their three –decade-long battle for customers, as consumers resume spending on projects once again.” Also included is a quote from Lowe’s CEO Robert Niblock: “The competition has certainly gotten better.”
To update our commentary, we recently reviewed the latest operating results from both retailers.
In its briefing of Q2-2011 operating results, Home Depot senior executives again made specific mention of the positive bottom-line contributions made from recent investments in supply chain capabilities. Specifically, benefits of the ongoing supply chain transformation in the U.S. contributed 26 basis points of margin expansion while improving delivery, service and transportation cost savings to U.S. stores. Centralized supply chain inventory management and the now deployed 19 regional distribution centers presently handle 63 percent of total goods, up from 50 percent in the previous quarter. Also noted was an expansion of supply chain improvement initiatives within outlets serving Canada and Mexico. As severe weather and drought impacted many parts of the U.S., Home Depot was able to satisfy demand for essential items in storm recovery, reconstruction and landscaping needs.
Meanwhile, Lowe’s continues to fall short of expectations. The company’s Q2-2011 operating results featured flat sales for the first six months, an associated 2 percent decline in operating profitability, and a decision to close seven retail locations. Gross margin has decreased 37 basis points and the company is facing some additional tough decisions to improve profitability. There is now 2 percent more inventory than a year ago and inventory turnover has declined 3 basis points. Last week the retailer announced a major restructuring of U.S. store reporting structures along with a restructuring of merchandising operations. Three operational executives have left the retailer.
For supply chain related initiatives, Lowe’s executives have highlighted the implementation of an Integrated Planning and Execution (IP&E) initiative to enable a more market-driven approach for merchandising while supporting efforts for some local region uniqueness. This seems to be a different approach than that taken by competitor Home Depot, that noted centralized inventory ordering and replenishment. While we were not initially able to investigate the details of IP&E, we trust that he has some tenets to a market-driven S&OP process. Lowe’s has also begun deploying 42,000 handheld terminals for U.S. and Canadian stores, while merchandising structure and alignment remains in transition. That seems at the surface to be implementing automation without first fixing inventory and assortment management.
In April of 2010, Lowe’s CEO noted that he was confident that Lowe’s supply chain capabilities would continue to provide a competitive edge [over Home Depot]. Obviously that statement is no longer apparent, and Home Depot’s supply chain initiatives are providing continued boost to the bottom line. The chairs have swapped, and now Home Depot is leading in meaningful supply chain responsiveness.
Supply chain renewal and innovation does matter in retail and in other industry supply chains and this ongoing case study of home improvement retail rivals reflects the ups and downs of each.
Supply Chain Matters will continue to monitor and highlight these industry case studies.
©2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters