Digitalization: Enabling A Home (Depot) Run in eCommerce Fulfillment
How supply chain enhancements enable The Home Depot to better serve its online customers.
Megatrend: Context and Relevance
It’s no secret that customers are shopping more online. The Home Depot is both experiencing and driving this shift in its business: online represents over 6% of net sales, and the channel’s 23% year-over-year growth rate greatly outpaces its 6% net sales growth.[1] This shift creates both opportunities and challenges for retailers, such as how supply chains should best adjust to serve consumers in the context of this disruption.
Firms have several options. Retailers can leverage their store networks, either for deliveries to customers or for in-store pick-up by customers. To do this, stores must have adequate supply of products and know where those products are, particularly given that stores carry less inventory than warehouses and much of that inventory is already available to shoppers to buy or move.[2] Another approach is for retailers to deliver directly from their distribution centers. Although this may be beneficial from a forecasting or inventory management perspective, delivery may come with shipping costs and can take longer than in-store fulfillment.[3] Further, these options influence more than just distribution costs, as customers tend to buy more when they visit a physical store than when they shop online.[4]
Trends toward digitalization of supply chains, such as improving availability of information and increasing speed, can enable firms to better manage increasing customer expectations and order complexity.[5] The Home Depot has and is leveraging these trends to improve inventory visibility and stock levels in stores, build and effectively deploy specialized warehouses, and improve its integration with suppliers. In doing so, it is able to serve customers along each, not just one, of these options.
Management Actions
Inventory Transparency and Supply Chain Responsiveness
The Home Depot uses its stores both for pick-up and delivery, establishing both Buy Online, Pick-up In Store and Buy Online, Deliver From Store across its US store network.[6] To achieve this, the company has centralized its inventory and replenishment functions, ensuring that stock levels are understood and maintained, and that products get to stores rapidly.[7] The firm also makes its detailed inventory information, including store availability and location within stores, readily available to both store staff and customers.[8] As a result, the organization has been successful at keeping its stores relevant: around 45% of the retailer’s online sales are picked up, and 85% of returns are conducted, in stores.[9]
Targeted Enhancements for Speed
To enable order fulfillment through both stores and distribution centers, The Home Depot has taken an integrated view of its inventory and transportation assets.[10] While a typical store at The Home Depot holds 35,000 SKUs, the retailer also offers two-day delivery for 100,000 products through its three new Direct Fulfillment Centers, shipping orders to customers on the day they are received.[11] This has also come with meaningful investments in information technology and staffing.[12] This approach allows The Home Depot to take a holistic approach when fulfilling online orders.
Further Supply Chain Integration
Looking ahead, while the business continues to grow its online presence and fulfillment offering, it is also working to improve integration along its supply chain. The Home Depot is undertaking a project to enhance collaboration with its suppliers and transportation providers to improve planning and scheduling, and reduce lead times.[13] This is intended to continue enhancing stock levels in stores, serving both in-store and online customers.
Potential Other Steps
One of The Home Depot’s areas of focus has been to add capacity by building Direct Fulfillment Centers to service online orders. Over time, however, the share of online sales is likely to continue to shift. As a result, the organization may require further capacity, either by building new facilities or by converting existing assets. Given the pace of online growth, developing approaches in advance to quickly and efficiently address future shifts could be beneficial.
Second, The Home Depot has been deliberate in enabling all of its US stores to serve its eCommerce customers (both in terms of pick-up and delivery). However, these investments likely come with meaningful costs in terms of staff training and staffing levels. Over time, The Home Depot may wish to consider whether all stores truly require this feature given the associated costs, particularly as it considers how this program could be rolled out internationally.
Discussion Questions
How can retailers best improve flexibility or speed in existing supply chains to facilitate, or even drive, this ongoing consumer shift?
How does the role of stores change as they are increasingly used for pick-ups or deliveries of online orders? How could that change affect the rest of supply chains, including distribution centers?
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Footnotes
[1] The Home Depot, Inc., July 30, 2017 Form 10-Q (filed August 15, 2017), via The Home Depot, accessed November 2017.
[2] Loretta Chao, “Home Depot Touts Use of Stores for Online Fulfillment,” The Wall Street Journal, August 18, 2016, https://www.wsj.com/articles/home-depot-touts-use-of-stores-for-online-fulfillment-1471550919, accessed November 2017.
[3] David R. Bell, Santiago Gallino and Antonio Moreno, “How to Win in an Omnichannel World,” MIT Sloan Management Review 56, no. 1 (Fall 2014): 48.
[4] “How to Make the Most of Omnichannel Retailing,” Marketing, Harvard Business Review 94, no 7/8 (July-August 2016): 22-23.
[5] Alicke, K., D. Rexhausen, and A. Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company, April 2017.
[6] The Home Depot Inc., 2016 Annual Report, p. 13, http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/reports-and-presentations/annual-reports/annual-report-2016.pdf, accessed November 2017.
[7] Josh Bond, “The Home Depot builds an omni-channel supply chain,” Modern Materials Handling, February 1, 2015, http://www.mmh.com/article/the_home_depot_builds_an_omni_channel_supply_chain, accessed November 2017.
[8] The Home Depot Inc., 2016 Annual Report, p. 13, http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/reports-and-presentations/annual-reports/annual-report-2016.pdf, accessed November 2017.
[9] Craig Menear, Chairman, CEO & President, The Home Depot, remarks made during Q3 2017 Home Depot Earnings Call, Call, November 14, 2017. From transcript provided by The Home Depot, http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/HD%203Q17%20Final%20Transcript.pdf, accessed November 2017.
[10] Vaugh Highfield, “The Home Depot’s Mark Holifield on Fulfilling Customer Needs,” YouTube, uploaded July 23, 2014, https://www.youtube.com/watch?v=2XgUOWnCD2Y, accessed November 2017.
[11] “The Home Depot Opens Direct Fulfillment Center to Support Online Business,” The Home Depot press release (Atlanta, GA, February 10, 2014).
[12] “The Home Depot Opens Third and Largest Direct Fulfillment Center,” The Home Depot press release (Atlanta, GA, September 18, 2015).
[13] The Home Depot Inc., 2016 Annual Report, p. 15, http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/reports-and-presentations/annual-reports/annual-report-2016.pdf, accessed November 2017.
Photo source: School Photo Project (http://www.schoolphotoproject.com/logos-brands/home-depot-logo1.html)
MV, this is a great article! E-commerce is definitely shifting the way the whole supply chain looks like for retailers, but specially for retailers carrying larger sized articles such as the Home Depot, where delivery of items becomes a lot more complicated due to volumetric restrictions.
One thing that really stood out to me from your article is that over 80% of returns are done in store. This is impressive. Returns are one of the highest costs incurred by most e-commerce retailers, and I would have thought that they would be a major pain point for the Home Depot. One thing that I would love to understand is wether this is driven by having a specific pricing on returns that prompts buyers to drive to the store to return on their own. Another possible alternative might be the fact that by returning directly to store they can pick up a replacement in situ.
While on the surface this might seem to be a huge positive, it might be increasing the barrier to order and hindering orders from being completed, so I would urge management to A/B test against this in different cities.
As for your second question, I see a future trend where last mile delivery becomes so efficient that stores are only used as showrooms and all inventory is shipped same day from distribution centers. For this trend to come true, the aggregate cost of rent would have to be larger than the total cost of fulfillment. With primer real estate rent prices going up and last mile delivery getting more efficient I can envision a future state where this happens.
MV – Very interesting article on a difficult problem many retailers are trying to solve. On your 2nd question, I think that many stores are becoming more like showrooms that allow consumers to try a product before actually buying it. This is especially important to Home Depot because they sell many big ticket items that consumers use everyday and will likely need to see in person before deciding to purchase it.
One other question I would pose to you. How does Home Depot ensure that ship from store does not end up hurting the in store experience for customers? Having employees run around the store picking from shelves could not be appealing to many consumers and may result in certain stores running out of high demand SKUs. While ship from store could be great for last mile delivery, I am worried it could impact the customer experience and brand
As for the offline store, I think the major change is about the layout and space allocation. Traditionally, when we shop, we need to go through all the aisles to find the products we already have in mind. Nowadays, since we have already placed online orders, what we need is to drop by and pick up the order in minutes if not seconds. The pick-up function should exist in harmony with the existing functions. Online shoppers should not have the trouble to pick up. Offline shoppers should not find the pick-up area chaotic or noisy that affect their own shopping experience. To push it forward, if the offline channel serves more and more the function of picking-up, shall we keep it as spacious and enjoyable as it is right now? Home Depot may need to strike the balance.
As for the whole supply chain, distribution center now ship inventory in batches to different stores. With a larger online portion, more orders need to be distributed order by order, in smaller units per order but more orders. Traditionally, inventories are only sent to a bunch of stores but now directly to millions of households all over the country.
Lots of great points. I agree that e-commerce creates complex issues for retailers in the building products industry, with so many large, high-ticket items for sale. I would argue that consumer engagement for significant purchases is incredibly important, and Home Depot must allow its customers to engage with them in store. With that in mind, I think enabling each of its stores to have e-commerce pickup capabilities is a necessity. Given the footprint of a typical Home Depot store, they do not have the luxury of multiple stores in relatively concentrated geographies – they must serve a large number of customers efficiently from a centralized location. By removing full-suite e-commerce capabilities from a selection of stores they run the risk of a breakdown in the relationship with the customer. I agree that they will incur additional costs, but I view them as necessary costs in light of technological advancement.