Business Case of The Home Depot

Conducted by:Walt, Freddie and Manny

June 10, 2005

Inventory Mgmt Issue

Why HD Needs ERP Implementation

Relationship With SAP

SWOT

HD CorporateStrategy

Background

Projected Benefits of Better Inventory Mgmt

Current Situation

Current Issues

Projected Net Benefits

Conclusions

• Home Depot is the second largest retailer in the U.S. – with sales of $73 billion in 2004; 2nd to Wal-Mart

• It was founded in 1978 and has had remarkable growth … – By end of 2004, HD had over 1900 stores in North America with

over 300,000 employees– On average, HD opens one new store every day– Conducted 320 million transactions per day in 2004– Average transaction is $58

• Largest competitor is Lowe’s– Approx ½ size of Home Depot

• HD has spent over $1billion in IT over the last 3 years

Background

• Home Depot buys in bulk and services both homeowners and home improvement companies …– competes based on low price and wide selection

• HD is based in North American markets. It would like to penetrate other global markets but needs to have consistent business processes and robust IT infrastructure before pursuing new markets– Developing business opportunities in China

• Wants to be known as a leader in technology applications for retailing …– When current management took over in 2000, HD could not send an

e-mail to its employees!– Now has self check-out, kiosks, POS tech, etc. …

HD Corporate Strategy

• Progressive Management• Technology Advancement• Low Pricing• Wide Selection • Large Customer Base

SWOT Analysis

Strengths

ThreatsOpportunity

Weakness• Customer Service Issues• Post 9/11 Reputation• Non-integrated computer

systems

• Growing Markets• Technology Expansion• Growth in D-I-Y market• Demographics – Baby

Boomers

• Strong Competitor (Lowe’s)

• Capacity Constraints• Economic Uncertainty

Relationship With SAP

• Home Depot began using SAP software seven years ago – SAP Financial module implemented fully by 2004

• Both firms recently agreed (May ’05) to a strategic partnership with benefits accruing to both …– HD will serve as a “lighthouse” SAP account … this

involves partnering on R&D with the most advance SAP applications …

• Estimated value of new contract for full SAP implementation at HD = $50 million over 7 years

Why HD Needs ERP Implementation

• To ensure uniform business processes as it expands beyond North American Borders

• To provide a advanced logistics platform that will help HD with:– Merchandizing management– Inventory management … old system– Supply chain management …

• Remember, HD produces NOTHING! It is totally dependent on it’s supply chain partners … and needs best possible systems to gain efficiencies

• Help HD implement best trade-off between customer service and technology substitution– Number of Employees per store …

Current Issues

• Customer satisfaction …– Not up to Lowe’s level– Fewer employees per store (200 … 175)

• Post 9/11 performance sub-par– Very troubling– Lowered stock price … when firm should have

been booming

“One goal is to explain to every employee the importance of the company’s culture of respect, trust, ownership, and entrepreneurial spirit

by believing it and living it”

Current Situation

Technology Expansion: The common use of UPC codes allows for faster checkout and easier credit approval processes at retail industries across the country.

Projected Customer Base: The typical customer base of 25 to 35 year olds is expected to increase by 34% and 45 to 54 year olds are projected to increase by 40%.

Point-of -Sale Systems: Many retail industries are taking advantage of the new technology for scanning and inventorying merchandise.

Estimated Business Professional Sales: The estimated professional business customer sales across the United States are anticipated to grow to $265 Billion.

Current Situation

Electronic Data Interchange (EDI)Vendors can share electronic ordering and invoice data so the store know when shipments will arrive.

Store Productivity Improvement (SPI)That allows to restock merchandise faster and more efficiently.

Inventory Management System That allows for inventory 5.4 times a year.

Technology Initiatives resulted in more efficient inventory turnover, in-stock inventory accountability and increased communication flow from top management to employees and from top management to vendors/suppliers.

Inventory Mgmt Issue

• HD has an “antiquated” mainframe system to track inventory

• At end of FY 2004 HD had $11.3 Billion in inventory

– Necessitated, to some extent, by the

outdated inventory mgmt legacy system

– THIS COSTS MONEY!!

• Assumes a 10% reduction in inventory is possible (10% of $11.3 billion = $1.13 billion)

• Counts as a recurring benefit the reduced carrying costs associated with less inventory …– Estimated carrying costs of 10%

• 7% interest rate on borrowed funds (prime + 1%)• 3% combined warehousing and inventory shrinkage costs

• Therefore, an estimated savings of $113 mil per yr (at full implementation) is possible …– Equal to reduced inventory ($1.13 billion) times 10% or $113

million per year by end of year 7

Projected Benefits of Better Inventory Mgmt

Projected Net Benefits

Over the 7-year investment period, the$50mil initial investment will be paid back many times over just due to improved inventory mgmt. This does not include soft savings associated with the implementation.

Year 1 2 3 4 5 6 7 8

Benefits 0 0 10 30 50 70 90 113

Costs 5 5 10 10 5 5 5 0

Net Benefits (5) (5) (0) 20 45 65 85 0

Cum Net Benefits (5) (10) (10) 10 55 120 215 0

Conclusions

ERP Implementation will:• Broaden business opportunities …

– Improve supply chain management, expand potential list of partners

• Result in standardized business processes• Set the stage for global expansion• Keep HD at the forefront of applied info technology

Questions