15. Interview with Mr. Mark Holifield of The Home Depot
Introduction
This chapter consists of a series of questions and answers from an interview with a leading supply chain executive. The objective of this chapter is to provide a practitioner’s perspective on the subject of life cycle issues in supply chain management. Other related subjects are also discussed in the interview.
About the Interviewee
Mr. Mark Holifield is the Senior Vice President of Supply Chain for The Home Depot. His responsibilities include the company’s logistics, distribution, delivery, transportation, and inventory planning and replenishment operations. He has more than 30 years of experience in supply chain management, including serving as the Executive Vice President of Supply Chain Management for Office Depot, Director of Consulting Projects at Dallas Systems Corporation, and other supply chain positions at Frito-Lay North America Inc. and H.E. Butt Grocery Company. He earned his Bachelor’s degree in Business Administration with honors from the University of Texas and his Master’s degree in Business Administration from Baylor University.
“Our supply chain must deliver on all of our company’s strategic imperatives. Our key supply chain deliverables are being in stock with the right products for our customers, driving inventory productivity, attaining low total logistics costs, and giving great service to our stores and customers.”
—Mark Holifield, 2012
About The Home Depot
The Home Depot was founded in 1978, based on a vision of one-stop shopping for the home improvements do-it-yourselfer.
The Home Depot’s strategy is based on answers to three key questions:
• What are we passionate about? We are passionate about providing outstanding service to our customers.
• What can we be best in the world at? We want to be the product authority in home improvement, bringing innovative products and great value to our customers.
• What drives our economic engine? We will be disciplined in our allocation of capital, always driving productivity and efficiency.
The Home Depot is able to offer the best customer service in the industry because its associates provide know-how to customers for their home improvement projects. This requires store associates to undergo rigorous product knowledge training. This training allows the firm to offer clinics for customers to learn how to do home improvements themselves. As a result of this approach, The Home Depot has become the fastest-growing retailer in U.S. history and is the world’s largest home improvement retailer. The fourth quarter sales in 2011 were reported as $16 billion. The Home Depot has more than 2,200 retail stores in the United States, Puerto Rico, the territories of the U.S. Virgin Islands and Guam, Canada, Mexico, and China. They also operate procurement offices in the U.S., Canada, China, Mexico, and India. While principally a retailer, The Home Depot has committed to be the product authority in home improvement by bringing innovative products at great value to their customers. This often requires sourcing products globally and engaging in direct relationships with manufacturers to provide innovative products of high quality and great value.
Interview Questions and Answers
How do you manage your supply chain for products that are in the Introduction Stage of their product life cycle?
Bringing innovation and value to our customers requires us to work with our suppliers to develop new products and bring them to market. As a retailer, our suppliers provide the bulk of the product development. Our job as a retailer is to find the best products and bring them to market. New products are brought to us by vendors we have worked with for a long time or by new vendors we are just getting to know. Our merchant team is constantly looking for new ideas, and we source products from around the world. We operate sourcing offices in Asia, Latin America, and Europe, and the people that work in these offices work directly with manufacturers to develop products that will meet our customers’ needs and desires.
From a supply chain perspective, we collaborate with our merchants and vendors to determine how best to flow product to our stores. This involves consideration of the handling characteristics of the product, and we evaluate the effectiveness of various paths through our supply chain network. Key determinants of the flow path are the expected sales velocity, the value of the product, and the handling characteristics. For example, lumber, large appliances, and power tools all flow through different parts of our supply chain network that are best suited for them.
We have a channel management team within our supply chain, and this team seeks to assign products and vendors to the optimal flow path through our supply chain from the manufacturer to our stores. Each time a new supplier and product are onboarded, this team works with the supplier to evaluate the various factors and choose an optimal flow path that will maximize our ability to be in-stock while having high inventory productivity and the lowest logistics cost.
How do you deal with the risk of newly introduced products?
We don’t usually test a totally new product in 2,000 stores. We typically select a limited market to test and see how well products will meet our customers’ needs and how well they will sell. We do attempt to forecast demand for new products with no sales history at The Home Depot, but obviously this is challenging. That is in part why we utilize test markets. We also look at similar products and use that demand behavior to forecast demand on a new product.
How do you manage your supply chain for products that are in the Growth Stage of their product life cycle?
We work to move the product as quickly as possible through our supply chain to meet the sales growth. We work closely with our suppliers to let them know what we are seeing in terms of demand growth. As we have built our distribution and logistics network, a key objective has been to build in flexibility, agility, and speed so that we can deal with challenges like scarcity in the most efficient manner. In that vein, we built our supply chain largely as a flow through model. Our recent efforts to rebuild our supply chain have largely focused on creating substantial capacity for fast flow and postponement, as these capabilities provide the needed flexibility, agility, and speed to handle our demand growth.
What if a product has a long lead time and growth strips the shelves empty?
We relentlessly focus on reducing cycle time in our supply chain so that we can quickly respond to changes in the business. We work with vendors to ensure they can handle the demand to our many stores. We work with them to reduce what we call VTT, or vendor turn time. This is the time it takes for a supplier to ship an order from the time we send them the order to the time it leaves their dock. We constantly evaluate transportation methods to optimize inventory needs and cost. If needed, we expedite transportation, but of course that adds cost. In any event, it can be a scramble to catch up with demand. We believe that we can never go wrong by having a supply chain that runs faster than others, and that’s why we utilize more flow through than other hard-line retailers. Our point of view is that maximizing the use of flow-through logistics, rather than traditional warehouse storage, will drive a competitive advantage. This is a more challenging approach, requiring us to shorten our inventory decision time frames and speed up our logistics flow, but we think the extra effort is worth it. For example, utilizing flow-through distribution allows us to receive the product and send it right out to the stores immediately. To implement the flow model, we have flow-through centers that receive the goods from our suppliers and immediately send it on to our stores. About two thirds of our store SKUs are handled in the flow-through centers. We take the goods off of an inbound truck at a flow-through center, and they essentially move directly to an outbound truck destined for a store usually in just a few hours. These flow-through centers do not warehouse goods at all; the product simply passes through.
To augment the flow-through centers, we have stocking distribution centers that do engage in traditional distribution center practices of stock and pick. We use these facilities for product where it is most optimal to hold safety stock upstream. Our typical stocking distribution center holds in stock about 4,000 of our 35,000 store SKUs. Additionally, we operate lumber and bulk distribution centers that have a few hundred SKUs that are best distributed to stores on flatbed trucks.
What are the goods you are stocking? High volume goods or low volume goods?
Typically, these are goods that are high value, have low or unpredictable demand, or unreliable or long supply lines. A good example of these SKUs is seasonal SKUs that we might import. Specific examples might be lawn tractors or mowers, which are highly seasonal, and products with a very long supply chain like imported decorative Christmas lights.
How do you manage your supply chain for products that are in the Maturity Stage of their product life cycle?
Most of the products we sell fit this description and are handled through the rapid deployment flow-through centers. For these products, we would typically be on a weekly or more frequent order and delivery basis with our vendors. If a product is transitioning out of our assortment, we have to carefully manage the exit, utilizing effective clearance practices to move these goods out. A key challenge if there is a replacement product is to ensure that the new product is available when the older product is gone.
At the Maturity Stage of the life cycle, there is always the danger that a product can become a commodity, sold by any of your competitors. How do you keep your customers thinking of and coming back to The Home Depot for those mature products?
We constantly seek innovation from our suppliers. We carry the top brands, and we expect those brands to bring customers to us through their innovation and product relevancy. If the branded products are not doing that, or we think we need to create a distinct new product advantage, we do utilize private brands to drive innovation and competitive advantage. We have several brands that are sold only at The Home Depot for just this reason.
How do you manage your supply chain for products that are in the Decline Stage of their product life cycle?
Our quest for product authority in home improvement requires us to continually change our assortment to be relevant to our customers. When we see sales declining, we have to make tough decisions to rationalize our assortments to maximize the return on our investments in inventory and store square footage. That is not to say that we don’t carry some slow moving goods. We are the kind of retailer that customers come to complete projects, not as much for one item at a time. So, customers come wanting a variety of items, and we keep that in mind when we look at a group of products that customers have come to associate with our business. We accept and are willing to allow slow moving inventory to maintain a customer base that needs a set or collection of products to complete a home improvement project. So, we try to balance our desire to satisfy our customers, and at the same time we expect all of our products to return a profit for our shareholders.
How do you deal with a discontinuation of a product?
Typically, we go to a markdown clearance process until it is gone. There is an art and a science to managing markdowns in retail, because you want not only to maximize return but also to move the goods out.
If end-of-life product won’t sell at all, we end up destroying it, or we sometimes have to return it to vendor options, but with low-value products we usually don’t want to handle the product too much. We also donate product to charities if they are products that can be used to meet a specific need.
Because our business is highly seasonal, we do have some unique challenges here. For example, think about Christmas decorations. After that holiday period is over, it takes a lot of space and labor to store the leftovers. Hence, we work hard to move these products quickly at the end of the season and give our customers a good deal on them.
How do you measure the performance of a product in your stores to know when to discontinue or manage products in general?
We use a variety of metrics, including sales per square foot and use those metrics to understand what is happening with our business and how to allocate space in our stores. Our merchandising staff handles most of this decision making.
What other unique features about understanding supply chain management at The Home Depot might you add to your interview comments?
Some key issues are important to understand The Home Depot supply chain, one of which is the seasonal nature of our business. If you are a retailer of toys, you know when Christmas comes and can plan for it. If you are in the home gardening business, you don’t know when the first day of spring is going to come, because of the weather, but you have to be ready for it when it comes. Although the calendar marks the first day of spring, it comes at different times in different geographic locations. Predicting the weather is difficult. Predicting the impact on our inventory management is even more difficult!
In addition to seasonal variation, macroeconomic variations have to be factored into our forecasts and planning. The economy of the past several years, with the downturn in housing investment and housing turnover, has had a big impact on our business.
How do you deal with reverse logistics for return items?
When products are damaged or problems with products exist, they need to be returned to vendors. We have created return logistic centers where we collect the products from the stores and return the products to their disposition source.
How do you deal with packaging goods that are delivered to the stores?
We have a group that focuses on packaging for our private brand goods that we develop and merchandise. We also work with our vendors to partner with us to ensure packaging meets all our requirements. We are always working to improve our packaging and to meet the many demands on packaging for product protection, customer information, and sustainability.