Home Depot Turns Its Attention to Supplier Performance Management

The last five years have seen a concerted effort by the world's third-largest retailer to improve communications and compliance with its army of suppliers.

Rarely is a company motivated to overhaul its processes by a single incident. But when the chief executive officer of the world's third-largest retailer can't e-mail all of his stores because they're on different systems, something's got to change.

Robert L. Nardelli took over as president and CEO of The Home Depot Inc. in late 2000. He came straight from the quality-obsessed world of General Electric. Nardelli vowed to bring process discipline to a company that had previously focused on organic growth and the customer experience.

Home Depot's information systems "were not near where they needed to be to support the business of a Fortune 500 company," says Julia F. Saia, director of global supplier performance management. The Atlanta-based home-improvement chain, outranked in sales only by Wal-Mart Stores and France's Carrefour, had been sailing along with a hodgepodge of systems. To stay on the course of growth, it would have to acquire new tools and revamp business processes.

Among the areas to suffer most from the old methods were supplier relationships. There was no central point of communication between Home Depot and its army of suppliers, which currently numbers between 10,000 and 12,000. Saia says there were a minimum of 14 individual "touch points" for suppliers to do business with the retailer. Home Depot had no easy way to keep tabs on suppliers and monitor their compliance with rules for product quality, order fulfillment and delivery. For the most part, fax and phone were the order of the day.

Any improvements would have to take place against a backdrop of non-stop growth. Between 2000 and 2005, Home Depot's revenues leapt from $45.7bn to $81.5bn, with an increase of more than 100 percent in earnings per share. The store network expanded from 1,134 to 2,042.

The character of the business was changing as well. The number of Home Depot Supply locations, serving professional builders and corporate maintenance, repair and operations (MRO) needs, went from 41 to around 450. Home Depot Direct, for orders over the internet, was another promising source of new business. What's more, there was no end in sight to the growth. Company executives were projecting sales of up to $140bn by 2010.

Nardelli's new strategy was built on three pillars: enhance the company's core elements, including customer satisfaction; extend the business through creation of new stores, retailing formats and sales channels; and expand the market, both geographically and in terms of the Home Depot Supply operation. All carried strong implications for the company's supplier base.

Sending a Message
From the beginning, Home Depot laid out goals for improving the performance of its suppliers. They would be held to strict standards, based on clear metrics and guidelines conveyed through streamlined, centralized communications. The compliance program would focus on three "categories of excellence": behavioral, helping Home Depot to protect the reputation of its brand while instilling social and environmental responsibility in supplier relationships; manufacturing, improving product quality, cost and innovation; and supply chain, reducing overall costs through process integration and standardization.

Home Depot's list of expectations held no surprises for its veteran suppliers. The retailer was demanding the highest possible levels of product quality, innovation, availability, on-time delivery, safety in production and shipping, compliance with laws and codes of conduct, and sensitivity to brand reputation.

What was different was Home Depot's strategy for ensuring compliance. Now, says Saia, the retailer would issue clear and concise guidelines for supplier conduct. Such guidelines would be communicated through its "Supplier Center" web site. It would become Home Depot's sole means of communicating expectations and critical information.

Previously, says Saia, Home Depot had sent out 8,000 paper versions of its buying agreement to suppliers. There was no good way of tracking who actually received it. All of that changed in May 2005, with launching of the online Supplier Center. It features continuously updated information on how to do business with Home Depot, including the corporate performance policy, updates, news, information on events and training, and scorecards. Saia says the new Supplier Center came in handy late last year, for information on hurricanes in the Southeast. Suppliers were told how to reroute shipments to avoid the hardest-hit areas.

Included in the laundry list of expectations is Home Depot's Social and Environmental Responsibility (SER) program. It covers a wide range of issues related to proper treatment by suppliers of their workers and the environment, including age requirements, wages, working conditions, emergency planning, health and safety, and strictures against forced labor, fraud and discrimination. The program combines regular audits of factories with extensive education to help suppliers understand the retailer's expectations.

More recently, Home Depot has begun piloting online supplier scorecards, providing graphical representations of performance levels. Each participating supplier is rated on criteria such as compliance to shipping-platform standards and import on-time delivery. Trends are viewable over a 13-month period. Green, yellow and red "lights" for each category let suppliers see their ratings at a glance.

The scorecards are only as good as the data they contain, so accuracy is essential. "We will not approve a scorecard where the data does not pass a measurement system analysis," says Saia. Home Depot carefully compares data from its own sources with that submitted by suppliers. It uses Six Sigma quality guidelines to sample data for accuracy, coupled with rigorous piloting processes before the system is up and running.

Suppliers Come Together
Full implementation will take time. As of April 2006, Home Depot was running a proof of concept on its scorecard with just 44 of its biggest suppliers. It is aided by a Supplier Council, consisting of the retailer's 15 most strategic suppliers, who collaborate on multiple initiatives. They meet with Home Depot a minimum of four times a year, in day-long sessions. Recently, council members spent a full morning with merchandising executives in a question-and-answer session. They also participated in a store walk, to see how a store is laid out and where their goods are stocked or displayed.

Home Depot also hosts regular supplier workshops, the latest of which took place last March in Shanghai. Presentations are held in the local language so that factory leaders can attend. The idea, says Saia, is to teach vendors "how to do business with Home Depot, and how to be a better supplier overall."

"Home Depot's information systems weren't where they needed to be to support a Fortune 500 company."
- Julia F. Saia of The Home Depot

Collaboration takes places on multiple levels. First, Home Depot meets with internal managers to define requirements and performance metrics. Expectations are validated through focus groups with key members of the supplier base, as well as during workshops and merchandising meetings. Soliciting "the voice of the supplier" is essential to the success of Home Depot's performance-management efforts, claims Saia. "Most suppliers want to do business with Home Depot the right way," she says. "This will truly help them become more effective."

Once the performance standards are established, they are communicated via the internet and various training programs. Scorecards follow, moving through a pilot phase as both parties validate the data. Not until all of those elements are in place does Home Depot initiate a workable compliance program.

The technology underlying Home Depot's scorecard proof of concept is provided by Ottawa, Ont.-based Cognos Inc. The software vendor had previously worked with a number of other Home Depot divisions, says retail industry director Patricia Waldron. Its contract with Saia's group for supplier scorecarding dates back to the beginning of this year.

Home Depot had earlier launched a formal Six Sigma program in place, by which defects are identified then progressively reduced to minuscule levels. But it lacked the tools to communicate status information to suppliers, Waldron says. The answer: a Web-based supplier scorecard, similar in appearance to a management "dashboard," which could be easily viewed by all interested parties.

Home Depot deployed the Cognos 8 Scorecarding software, part of the Cognos 8 Business Intelligence suite. The company had the system up and running in pilot form with a select number of suppliers within a matter of months, says Waldron. The site opens with a log-in screen, allowing users to drill down into a series of performance metrics, charts, graphs and reports. The actual number of metrics varies from user to user, says Waldron; Home Depot employs around half a dozen to track the performance of its supplier base.

The scorecard can draw on data from a variety of sources, including warehouse management systems, purchase orders and a repository of contract terms. Actual performance is measured against established targets in order to grade suppliers. Home Depot's intent, says Waldron, was to acquire a tool that could receive data from any relevant system, regardless of source or platform.

Cognos will continue to work with Home Depot on integrating supplier data and other information from Hughes Supply Inc., the distributor of construction repair and maintenance products that was acquired this year by the retailer. The Hughes deal is part of Home Depot's strategy to increase its business-to-business supply unit.

Other capabilities that Cognos might provide Home Depot in future include supplier reporting and the ability to analyze data using Excel spreadsheets. "They're one of the top retail chains," says Waldron, "and we're delighted to be selected and working with them."

B2B Exchange Transformed
Home Depot already has a business-to-business exchange for dealings with suppliers, but the nature of the electronic exchange environment has changed significantly over the years. Fifteen years ago, says Saia, the retailer implemented Sterling Commerce as a value-added network (VAN) for the transmission of messages and documents via electronic data interchange (EDI). That process typically involves the exchange of data in batch mode, with the VAN acting as intermediary.

More recently, Home Depot realized that the technology was insufficient for its needs, particularly in light of the growth of EDI over the internet. So this year, Home Depot is upgrading its B2B infrastructure for handling electronic exchanges with suppliers, again with the help of Sterling Commerce.

Not as the same kind of vendor, however. Dublin, Ohio-based Sterling has gone through several stages of development over the years, beginning as a provider of private, industry-specific EDI technology, according to John Stelzer, director of retail industry marketing. From there it moved into more standardized EDI formats, growing as a classic VAN, then as a provider of software for translating and reformatting data according to the technology of various trading partners. More recently, Sterling has developed the Gentran Integration Suite (GIS), a hosted platform for connectivity and data translation that allows for a true B2B electronic exchange, regardless of the technological sophistication of its many users.

To Stelzer, a modern-day exchange isn't just about getting information from one party to another. "It's about what is done with the information." Today's systems must be able to execute special processing depending on the type of product and whether it is sourced domestically or internationally. The challenge facing Home Depot, as with any major retailer, lies in building a system that allows for automated and highly integrated links with all suppliers, and is flexible enough to adjust for the unique characteristics of each, Stelzer says.

Such a tool can also be used to drive supplier compliance, he says. One component of GIS, dubbed Visibility Manager, monitors a supplier's track record in transmitting and receiving all necessary documents, including purchase orders, advance shipment notices and invoices, in a timely manner. A system of exception-based alerts flag any supplier who is falling short in that regard.

In the near future, Stelzer says, the software will be able to grade the accuracy of each message, a critical part of any supplier-compliance program. "Reconciliation across document content is clearly the next step," he says.

A key feature of modern B2B exchange software is its accessibility by all levels of an organization. No longer is the content intended only for IT staff. Individuals from sales, marketing, logistics and customer service can make use of information about supplier performance, including the real-time status of orders and shipments. Sterling's GIS has had that capability for about a year, Stelzer says.

Going Back to School
In bringing suppliers up to speed, Home Depot wants to do much more than offer a web site. A program dubbed Supplier University, now in development, will provide in-depth training for vendors. Merchandising suppliers can take online courses covering the supply chain, manufacturing and behavioral categories of excellence. Individual topics include logistics, store operations, finance, inventory management, manufacturing quality and safety. In addition, suppliers will have access to various electives, including a point-of-sale data glossary, acronyms used by Home Depot, and a complete rundown of relevant personnel within the organization.

A separate set of courses will be aimed at procurement suppliers, those who sell office supplies and other items used in Home Depot's corporate operations. They will cover such topics as customer service, financial compliance, quality assurance and strategic sourcing. Electives are essentially the same as those offered to merchandising suppliers.

Saia insists that Home Depot's compliance program is focused on education instead of the punitive approach. Still, there is a price for not meeting the company's strict requirements. Fines for non-compliance amount to $10,000 for the first violation of Home Depot's shipping standards, and $25,000 each time thereafter. In any case, says Saia, compliance by suppliers "has been trending up," especially in China.

China is a prime target for growth, both in sourcing and sales. Home Depot, which up to now has limited its physical retailing operations to the U.S., Canada, Mexico and Puerto Rico, has announced plans for some kind of commercial presence in China, though no definite date or format has been specified. In the meantime, it is beefing up sourcing activities there. Currently it has two sourcing offices in China, in Shanghai and Shenzhen, with a combined staff of 80. (Saia expects that level to top 100 by the end of this year). Each location houses experts in quality control and sourcing, to keep a close watch on area suppliers.

Saia says the retailer plans to open up at least two more sourcing offices in China, probably in Chengdu and Dalian. It has also moved to broaden the scope of Chinese suppliers from a geographical standpoint. Like many other U.S. retailers, the company started out shipping most of its Chinese-sourced goods through Hong Kong, but is now looking to other parts of the country, including the entire Pearl River Delta and the Yangtze River region. The company has previously said it intends to move west into less congested areas of China, a strategy that is likely to increase the supplier base while raising new issues of compliance and vendor quality.

At the same time, Home Depot is striving to bring more of its existing suppliers into the compliance program. The company is aiming for 100-percent electronic exchange with its supplier base within the near future. "That is our stretch goal," says Saia.

The Home Depot at a Glance

The company: The Home Depot, Inc., a chain of "big-box" home-improvement stores in the U.S., Canada, Mexico, Puerto Rico and St. Thomas. Second-largest retailer in the U.S.; third-largest in the world. Includes The Home Depot Supply, serving professional builders, and EXPO Design Center, offering design and installation services.

Headquarters: Atlanta, Ga.

Top executive: Robert L. Nardelli, chairman, president and CEO

Number of employees: Around 325,000 as of 2005. Added a reported 9,600 with the recent acquisition of Hughes Supply.

Financial results: $81.5bn in sales for 2006; net income of $5.8m.

Supply chain challenge: Overhauling its supplier performance management program to centralize information and communications, and improve supply education and compliance.

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