Home Depot

A. Executive Summary * Introduction * The Home Depot Story - First Stage (1979-2000) * The Home Depot Story – Second Stage (2000 – 2006) * Problem Identification * Case Questions

Introduction * Home Depot was founded in 1978 in Atlanta, Georgia by Bernie Marcus and Arthur Blank. * Both of them worked at Home Improvement Company in California and were fire by this company. * So instead of looking for a new job they decide to start up their own business based on a vision they had. * This vision was about creating home improvement stores similar to warehouses where customers would be able to find different types of tools and products with the help of experts in home improvement and customer service. * Home Depot created the concept “Do it yourself” (DIY) where homeowners were encouraged to buy products and tools and to use them to build, repair and improve their own homes. * This concept of “Do it yourself” was Home Depot’s main strategy to become successful in the Home Improvement industry. The “Do it yourself concept consisted on: * Prioritizing customer service (special attention to their customers problems) * Providing customers with training workshops and clinics to teach them how to repair their own homes. * Vendors and sale associates went through a rigorous training in product use before servicing customers. * Sales associates develop relationships with customers rather than just merely seeing the sale as a transaction. * The growth of the company was quite fast. We can see that in the following figures * In 1979 the two first home depot stores were opened. * By 1980 they achieved $22 million in sales in only four stores they had. * By 1990 Home Depot achieved $3.8 billion in sales with 145 stores and in that way Home Depot became the top U.S. retailer in the home improvement industry. * To explain things in more detail we have divided the story of Home Depot in two stages. *
The Home Depot Story (First Stage) * The first stage goes from the years 1979 to 2000 (first 20 years) when Bernie Marcus and Arthur Blank were managing the company. * So during this first stage Home Depot had the following characteristics: * All stores were independent from each other (run rather informally). In other words each store manager run its own store operations. For example, each store decided their employees’ wages, what merchandizing was going to best for the store, and what promotions the store should display. So the operational decisions each store took were based on the local market needs and preferences. * Purchasing was decentralized. There were nine regional purchasing offices in total that negotiated separately with suppliers. Blank believed that decentralization would help increment sales between 15% and 20% as each local store would be able to understand better the local needs of that particular market they were in. * Home Depot had full time employees who were like experts in home improvement. * They pay well to their employees staying away from minimum wage. * These strategies kept productivity high and turnover low. * Focus was on customer service and sales growth. * As purchasing grew in size, Marcus and Blank thought that a more disciplined approach to operations would be important for further growth. * In the year 2000, the company hired Robert Nardelli to lead this change.

The Home Depot Story (Second Stage) * The second stage goes from the year 2000 to the year 2006 when Nardelli was hired. * Nardelli conceived the following strategy in order to respond better to the demands of the market: * Extending the business into new lines: tool rental and home installation of Home Depot products. * Expanding the market geographically: Nardelli expanded Home Depot’s market to Mexico. * Expanding the market with new types of customers: Expanded the wholesale business of products and services to a wide range of professionals such as plumbers, electricians, industrial contractors rather than to the traditional do-it-yourselfer customer. * Making existing operations more profitable: Major changes were made to fundamental retail functions such as merchandising, vendor management and store operations. * Nardelli centralized Home Depot’s merchandizing and purchasing. For example, to support centralized merchandising, Home Depot spent $1 billion to modernize the retailer’s technological infrastructure and IT systems. * Introduced the Six Sigma quality methodology to make Home Depot’s store operational processes more efficient. * He made changes to improve productivity, to increase data accuracy, and to improve labor scheduling.

B. Problem Identification First Stage * Managers at stores didn’t process paperwork because they were busy on the sales floor attending customers. * Merchandising was based on each store manager’s local market intuition and not on metrics, tools or data for quantitative analysis. * Decentralized purchasing squandered the chance to drive down costs and boost gross margins. * Promoting autonomy and responsiveness also implied difficulty in delivering on agreements with vendors. * Home Depot’s decentralization also meant there was little communication among managers and limited ability to negotiate national deals. * While the company could generate national wide store displays from its headquarters, it could not easily coordinate them with nationwide purchasing. * The company’s decisions were based on emotion rather than data. * Home Depot was years behind other retailers in technology (like Wal-Mart). * There was no general counsel, no chief marketing function and no CFO.

C. Problem Identification Second Stage – Nardelli Era * Customer service declined. Hire part time employees with lower wages to cut costs. New focus and strategies implemented by Nardelli prevented them from delivering excellent service. * Decline in the stock price. * The time spent by managers on floors to serve customers was reduced because they had to monitor their store numbers. * Several stores responded to the “inventory velocity” metric requirement by reducing the amount of inventory coming in, leading to stockouts.

D. Key Case Facts * Customer Service * Product Knowledge * Do it yourself

These are the key case facts because without them Home Depot wouldn’t have been a successful retailer.

E. Case Questions 1. Discuss the pros and cons of Nardelli’s changes in a) centralizing purchasing b) centralizing merchandizing. Then defend why you agree or disagree with this changes.

a) Pros Centralizing Purchasing: * Greater purchasing power: * This allowed to make exclusive deals with certain vendors that in the past were unavailable for Home Depot such as John Deere. * Negotiated better deals. Eg: extended payments terms to 45 or 50 days from the typical 30 days. * Cost savings. * Addressed inefficiencies in operations. * More control of inventory. * Improve customer service. * Greater control of over the mix of products in store. * Better manage of vendors. * Allowed Home Depot to set up relationships with loyal vendors and fewer entities.

Cons Centralizing Purchasing * All stores would offer the same product mix (if you are looking for some product in particular you would not find it). *

b) Pros Centralizing Merchandising * Better stock control

Cons Centralizing Merchandising *

2. What caused the decline in customer service at Home Depot?
In order to make Home Depot more profitable he cut costs by hiring employees with lower salary and with less knowledge and experience. Home Depot hired part time workers. In that way he sacrificed the cost of serving customers well at the expenses of making Home Depot more profitable.

There were fewer vendors than before. Many employees who had grown in the Marcus and Blank era felt that the new strategies implemented by Nardelli prevented salespeople from delivering excellent service.

3. What metrics would you use to assess the effects of Nardelli’s changes on profitability, labor productivity and customer service?

Profitability: * Look at the net income in the income statement. * Review profitability ratios to know the earning power of the company (Return on Sales, Return on Assets)
Labor Productivity * Individual basis evaluation. For example, how many products did the employee sold. * Total output production versus number of employees. * Workers productivity per hour (total output / number of hours worked)
Customer Service: * Customer surveys to measure satisfaction. * Expenditure in advertisement versus sales levels. * Expenditure on market research.

* Home Depot is the world’s largest home improvement retailer with more than 2200 retail stores in the United States, Canada, Mexico and China. * Home Depot was founded in 1978 in Atlanta, Georgia by Bernie Marcus and Arthur Blank. * They opened the first two Home Depot stores in 1979. * Home Depot popularized the concept of “Do it yourself”. * This concept consisted on encouraging homeowners to build, modify or repair their homes by themselves without the aid of experts or professionals. * During it first 20 years (1979 – 2000) the company was run rather informally. All stores were independent from each other. For example each store decided their employees wages, what merchandizing was going to be best for the store and what promotions the store should display. So the operational decisions each store took were based on the local markets needs and preferences. Purchasing was decentralized. * As Home Depot grew in size a more disciplined approach to operations was needed. Hire Robert Nardelli (2000- 2006). * Nardelli centralized merchandising and purchasing. He simplified and standardized store processes and operations using Six Sigma quality methodology. * Nardelli’s changes led to higher profitability but customer service declined and stock prices remained unchanged.