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
|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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