Home Depot Margins Higher Now Than Before Housing Crash – Thanks Logistics!

After over 30 years in business Home Depot admitted their supply chain processes were not a priority for many years. The main priority was expanding the business. When the housing market crash began in 2006 they knew they had to shift their focus. As Home Depot CEO Frank Blake explains, “A downturn is a terrible thing to waist.”

Most Home Depot stores are large warehouse stores with ample extra room for inventory and storage, but they began opening smaller stores in smaller markets that could not hold the same amount of inventory. This lead to stock-outs and unhappy customers. They realized it was time they completely changed their supply chain processes starting with centralizing operations by rebuilding their distribution process. Before 2006 only 30% of the orders were store-centric, while managers made 70% of the orders. The transportation model had its own similar shares of changes to be made. They started with the construction of 24 new rapid deployment centers located throughout the country, each would serve about 100 stores. These facilities were to be flow-through facilities for quick cross-docking and little storage. The RDCs allowed their products to be shipped with 24 hours of arrival now. Currently, one third of the RDCs are built and being used. Home Depot is already seeing the benefits.

It seems Home Depot may have chosen the perfect time for their restructuring because now that their new processes are beginning to run the housing improvement and construction markets are growing. Home depot’s margins increased 35%, net income for the fourth quarter increased 32%, and sales rose 6%. Ms. Tome, the chief financial officer of Home Depot, claims the restructuring of their supply chain processes is the reason for these large increases.

Home Depot is not only the leader in the improvement industry, but is the second largest retailer in the country, second to Wal-Mart. Can we expect to see greater growth as the last two thirds of their RDCs are implemented? How can other retailers learn from Home Depot’s changes?



16 thoughts on “Home Depot Margins Higher Now Than Before Housing Crash – Thanks Logistics!

  1. It is refreshing to see a blog about a company other than Apple and Google! I believe Home Depot can anticipate more growth as the last two-thirds of their RDCs are built and used because the RDCs will increase the design capacity of their supply chain, and their effective capacity will greatly increase. Other retailers can emulate their strategies by analyzing their own supply chains and figuring out how they can improve them.

  2. I couldn’t agree more with both the post and comment above. Not only can we expect to see a continuation of increased growth for Home Depot, but other retailers can certainly learn something from this strategy. It’s been just recently I’ve noticed several major retailers offering a some type of “ship to store within 24 hours” option to purchase something off their websites.

  3. I agree, this is a good post and deals with a giant sector of the marketplace. HD has been around for yearsss, and is one of the leading companies in its market. How they continued to grow through tough times means they have a stable and well thought out plan for the future too. With the economy being how it is i would compared HD to BestBuy and when you see companies like BBY struggling you assume that all the big guys are, but that is not the case for HD.

  4. Great article, and especially relevant given the local competition with Menards (primarily Midwest chain). Contrasting with Home Depot’s model, Menards employs a single-store supply chain, meaning the product selection and pricing varies from store to store and market to market. As someone who shops online (and is a new homeowner), this drives me crazy as I can’t see a consistent offering. Home Depot’s site is laid out much more clearly, and is more conducive to quick ordering and search.

  5. It’s worth noting that another potential contributor to the company’s recent growth was the closing of some 15 locations nationwide, the removal of 50 stores from its new store pipeline, and the elimination of its design and bathroom business units (HD 2011 10K report). They’re rationalizing more than just their supply chain. I believe they are recognizing that they’ve overreached and, much like Starbucks in the early/mid-2000s, now need to scale back in order to remain profitable.

    What do you guys think? Did they get too big too fast? What are some of the factors that may have made them elect to scale back expansion?

  6. It is great that Home Depot’s stores in some of the hardest hit regions of the country during the recession are seeing higher sales numbers and profits. There idea to cater more to women is a great idea. It must be difficult for them with the warm and dry weather we have been having. Compared to a large retail store that sells electronics like Best Buy, they need to have their stores stay big. A reason could be that people want to pick up there plants and immediately have their working equipment. These items are also very large and I commend them on their supply chain and marketing strategies.

  7. Finally a post that is not about apple or google! I enjoyed reading this post and I think Home Depot took the right approach to tackle their problems. I believe this many industries and individuals were effected by this recession however, smart companies like Home Depot took this as an opportunity to turn around their businesses. It also seems like Best buy is also adopting the same kind of approaches. They are shutting down many of their locations and changing the design of their stores. Overall, Home Depot made a right move at the right time, which leaves me with no surprise that it is the second largest retailer in United States.

  8. Home Depot realized that its not just about expansion, but keeping your customers happy. Unhappy customers equal losses. Their realization caused them to restructure the way that they do business. Getting rid of smaller stores and focusing on their larger stores, making sure that it was always fully stocked, will keep customers happy and not force them to take their business else where.

  9. That is interesting that Home Depot has decided to rebuild their distribution structure, considering the large investment accomplishing an intermediate objective like this would take. It is also interesting that Home Depot managers were unable to accurately forecast the demand for their products in these smaller sized stores, as well. TCM would have suggested that local managers or employees “on the floor” have more responsibility. Following such a stretgy would have enabled Home Depot to avoid this inssue.

  10. I think companies should look to Home Depot as an example of how to do things the right way. The impact of the housing (construction) crisis was massive relative to some of the other obstacles that companies face. Home Depot obviously worked their way through the issues to create great success. Because Home Depot is such a large company, I think it is only natural that other companies, both within the same industry and others, will look toward it for guidance.

  11. They could of just looked at how walmart was doing this and used it. You could see they took advantage when the market drop so that was smart. People should buy property now when it is low. Good idea to optimize profits with the ecoomy.

  12. What a great company! Home Depot is a wonderful example of a company restructuring done right! It amazes me that it wasn’t until recently that Home Depot’s supply chain processes were not a priority for so many years! Supplies and merchandise are constantly coming in and out of their stores. I must say, it is definitely annoying to go to a home depot for something and then find out they don’t have it! I just moved a few weeks ago and had to hit three different Home Depots to get everything I needed..

  13. Home Depo’s success is a rare exception to a generally accepted rule in economics, that firms should stick to their comparative advantage. If I had ran Home Depo, I would have made the mistake of trying to abandon the small Home Depo stores and replacing them with larger ones. Home Depo’s ability to change their supple chain to meet the needs of small stores requires more planning than you’d expect. It is worth examining in greater detail.

    Sent from my iPhone in Frankfurt Germany

  14. The analysis of Home Depot’s recent success seems very well put together. i admire how management at Home Depot decided to think outside of the box and look at the Supply Chain process rather than trying to open new larger stores everywhere. It does surprise me however, that it took such a long time to figure out that Home Depot could grow as a company and that supply chain process wasn’t a priority before especially since it directly affects internal controls one of the factors that must be checked when annual audits of the company is made.

  15. There are always aspects of a business that can use restructuring or a face lift of sorts. For Home Depot it came at a time that is necessary. But i believe it is those companies that do these sorts of things when they don’t necessarily need it that really lead to greatness.

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