Digitizing the Depot

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Digitizing the Depot

06/01/2006

When a retailer becomes massive, achieving Wall Street's growth expectations requires adding new business the size of a small country — every year. For The Home Depot, the second largest retailer in the United States, achieving such growth encompasses creating new business plus transforming the company's existing processes and systems in a multi-year makeover.

Back in 2002, when Bob DeRodes joined The Home Depot as CIO, the company's CEO Bob Nardelli charged him with transforming the vast organization to accommodate a growth strategy of enhancing the core stores, extending the business into adjacent areas and expanding into new markets and geographies. The Home Depot would have to transform from 20 years of decentralized operations to a centralized operational structure and educate more than 300,000 employees — all using technology improvements as the backbone of the centralization efforts. Moreover, it would have to accommodate growth into the mega-billions of dollars and enable massive expansion into the hot new areas of installation and professional contractor supply.
Founded in 1978, The Home Depot is the world's largest home improvement specialty retailer. In fiscal 2005, The Home Depot's sales rose 11.5 percent to $81.5 billion. Earnings per share rose 28 percent on profits of $5.8 billion. With more than 2,040 stores in 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Canada and Mexico, The Home Depot has been recognized by Fortune as the No. 1 Most Admired Specialty Retailer and the No. 13 Most Admired Corporation in America for 2006.

Multi-year Transformation
DeRodes devised an ongoing, multi-year strategy to implement standardized systems and platforms and to build a robust IT infrastructure. The transformation plan consisted of four primary stages. Each started in order, and each continues after the next stage begins:
2002: To support growth and subsequent stages, a new basic infrastructure was implemented.
2003: Store processes/systems, including POS, receiving, labor scheduling and many time-saving new store systems that deliver fast paybacks were completed.
2004: Special ordering (i.e., selling products plus services) with assisted selling, home visit, and installation planning for competitive advantage was put into action.
2005: Merchandising/supply chain systems improve procurement.

So far, The Home Depot's program, dubbed "Digitizing the Depot," has cost more than $2 billion and achieved its ROI by:
Redeploying extensive labor hours onto the selling floor as a result of technology enhancements, including self-checkout and new POS systems, which has improved consumers' shopping experiences. Slashing customer wait times at checkout by 40 percent. Delivering a modernized IT infrastructure and platform that allows flexibility and scalability for deploying future business systems. Reducing technology cost per store while implementing completely new store networks, software and substantial hardware. Improving procurement controls and vendor rationalization. Improving customer satisfaction scores via operational excellence and assisted selling. Improving the availability of information to run the operation.

Building the Foundation

As The Home Depot focused on transformation, it had to deal with homegrown systems that the company had outgrown. "The systems that got The Home Depot to its first $50 billion wouldn't get it to its next," says DeRodes. "For example, we were cannibalizing store hardware and buying parts on eBay." The new infrastructure included centralized data, financials, human resources, integration, real-time capability, common platforms, standards and comprehensive wireless and wide-area networks. To support its efforts, the company opened a new, state-of-the-art data center in Austin, Texas. "We looked at outsourcing our data center, but decided to stay in house," says DeRodes. "A second data center cost less than outsourcing while delivering the hardened security, capacity, dispersion of intellectual capital and disaster recovery we needed." In addition, DeRodes plans to put separate instances of the major business systems in each country (currently Canada, Mexico and China), allowing each to "tweak the dials" independently while keeping one global footprint. All use globally synchronized
data about customers, vendors and service providers. Product data synchronization also is planned. DeRodes also likes having second vendors in IT categories. "That way we keep a narrow footprint while providing nimbleness," he says. "However, it means we have to select vendors that work together well and can expand rapidly. The downside is that it's harder for small vendors to break in."

Nailing Down Big Savings

The fastest payback would come from improving store operations, so DeRodes scheduled new store processes and systems to follow enabling infrastructure quickly. "Self-checkout has proven truly transformational," he notes. "It reduced task-oriented store labor, allowing our associates to spend more time in the aisles helping customers. As you can imagine, that has a substantial, positive impact on customer service." In addition to self-checkout, other technology-enabled new processes have reduced labor in receiving, checkout, returns, inventory, shelf labeling, customer assistance and more. For the most part, those hours have been directly redeployed to customer service. "For example, we are piloting a system now so that when a consumer calls in," DeRodes explains, "rather than going to a store call center, the call gets transmitted to the right associate who is on the floor helping customers in between calls." The new store receiving process also is cutting labor while increasing inventory accuracy. "That provides more accurate inventories that enable us to stay in stock while reducing inventory and shrink. We also now have carts in the aisles using .NET and wireless for an automated new process for shelf labels and inventory checks." Closed-circuit TV (CCTV) also delivered a rapid payback. "CCTV has cut shrink and helped to identify potential safety issues," says DeRodes. "It has cut losses at the back door. Run with our POS system, it has slashed shrink at checkout. Play back of accidents has showed how to make safety changes and has helped to identify false claims. "
The Home Depot also is actively investigating what may be the next great in-store transformation. "That might entail communicating with consumers over their own PDAs," DeRodes notes. "It's not ready yet, but imagine the impact of customers using PDAs that they already own and know how to use to find what they want or to compare products."

Constructing Value

Special ordering is a key competitive advantage for The Home Depot, which has created technology "that does not fully exist anywhere else," says DeRodes. These new systems help customers contract for product and installation. Rolled out for flooring and being extended to other categories, the new ordering system includes:
Lead capture
Product identification/selection
Measurements from home visits
Online vendor linkages
Work estimate, schedule and sales transaction
Installation
Customer satisfaction follow-up.

"The cost of quality — re-work in customer homes — is a key source of benefits," says DeRodes. "With the system, we now get orders correct the first time. For example, it avoids faxes that can lead to errors, and it enables installers to see the marble threshold that might disrupt installation. It enforces a comprehensive process, provides good graphics via digital catalogs and helps close the sale. With it, customer satisfaction has climbed." Another key step involves building the supply business. By 2010, HD Supply's sales are expected to reach $23 billion. DeRodes will consolidate at least eight purchasing systems and help advance
data synchronization initiatives. DeRodes' experience as one of the integrators of the SABRE system used in the airline reservation process should prove valuable during this project. "A next step for the future involves R&D on innovative technology that helps consumers see an appliance that is not on the floor," DeRodes notes. "No one can carry all SKUs in all stores. So we are looking at opportunities to provide customers more access to information in an interactive format."
Appliances also will become critical to The Home Depot's growth. "We have a great partnership with GE Appliances; they (and others) have proven an excellent partner for us with home delivery," DeRodes explains. Another big project is in the area of merchandising and supply chain, according to DeRodes. His team is partnering with SAP for the "heart and lung transplant," which is under development. The end result will include overall master data, pricing execution, promotion management and execution, assortment execution, demand forecasting, supply chain and inventory visibility, purchase order management and payables management.

IT governance

Many retail executives who have attempted major transformations have not experienced results like those at The Home Depot. For DeRodes, key success factors include strategic consistency and governance. "The IT department participates in business strategy, which helps us determine how we need to support the business with infrastructure and projects," says DeRodes. "And we've been able to avoid the start-and-stop syndrome that plagues many other companies. The Home Depot has stayed with its strategy year-to-year, so IT alignment has stayed true over time." "Getting the right strategic agreement with the business gets you half way," DeRodes adds. For IT governance, DeRodes involved both the business and the board of directors. "Each major project has its own steering committee and governance process," he explains. "In addition, Bob Nardelli formed a subcommittee of the board, which reviews our spend, projects, progress and strategy. It's very valuable to have a senior board member say our large IT investment is worth the spend." Building The Home Depot of the future requires much more than hammering in new applications. It requires constructing a flexible foundation, well-structured savings, innovative advantages and a roof of strong relationships. DeRodes has built much more than a nice home within the digital Depot.