Tag: Home Depot

OM in the News: Retailers, Rising Theft and Shrinkage

As retailers report on the busy holiday shopping season, operations managers will be trying to get more understanding into shrinkage and theft, reports The Wall Street Journal (Jan. 9, 2024). The stores are fighting a growing wave of theft, cutting into profits that were already under pressure. But theft is just one contributor to shrink, the industry term for the difference between inventory on the books and what’s physically on hand. Lost or damaged goods and inaccurate records also play a part.

Shrink is now one of the most frequently discussed topics among management at Home Depot, said the firm’s CFO, having moved onto its list of top priorities two years ago. That focus hasn’t changed even though some mitigation efforts, such as locking up certain items and using live-view parking lot cameras, are in place.

The higher shrink may partly reflect a return to prepandemic norms rather than entirely new trends in theft. Reduced visits to physical stores starting in 2020 simultaneously decreased the opportunities for theft, an effect that dissipated as shoppers stepped out of their houses again.

Dollar General’s gross profit rate, or its profit as a percentage of net sales, fell 5% last quarter, due primarily to increased inventory shrink, more markdowns and lower inventory markups. Shrink is a roughly 100-basis-point headwind for Dollar General. Dick’s Sporting Goods  expects shrink’s impact on its gross margin to be roughly 50 basis points higher in its current fiscal year compared with 2022.

Retailers have said they are responding by adding security personnel and technology, locking up goods and closing hard-hit stores. Target, which last year said that shrink was expected to cut into profitability by more than $500 million, closed nine stores, citing higher theft and safety concerns for shoppers and workers. Nike closed one of its Portland stores in 2022 amid issues with theft. Academy Sports & Outdoors is using locked shelves for certain items and outfitting some departments that have seen higher shrink, such as the baseball bat section, with sensors that indicate when people linger in an area. Some retailers, such as Costco, are less exposed to theft for reasons including that they sell larger, harder-to-steal products, and stores are laid out with one primary entrance and exit.

Classroom discussion questions:

  1. Why is this an OM issue?
  2. What would you do, as a supermarket manager, to cut shrink?

OM in the News: Home Depot’s $1.2 Billion Supply-Chain Overhaul

Home Depot plans to spend $1.2 billion over the next five years to speed up delivery of goods to homes and job sites as the rise of online shopping resets consumer expectations, reports The Wall Street Journal (June 12, 2018). The home improvement retailer will add 170 distribution facilities across the U.S. so that it can reach 90% of the U.S. population in one day or less. The new sites will include dozens of direct fulfillment centers for next-day or same-day delivery of commonly ordered products, as well as 100 local hubs where bulky items like patio furniture and appliances will be consolidated for direct shipment to customers.

The retailer is realigning its supply chain to a changing retail landscape. Customers “expect delivery to be free, they expect it to be timely,” said a company exec. “Sometimes they want it fast, and are willing to pay for that. Sometimes they want it free, and they’re willing to wait for it. We need to have the right options there.”

The push comes as Home Depot is trying to tamp down transportation costs and improve inventory management as it tries to more closely integrate its growing online business with its network of about 2,280 brick-and-mortar stores. Online orders accounted for 6.7% of the retailer’s $100 billion in sales last year, but the digital revenues expanded 21% from the year before. About 45% of online orders are picked up inside stores, and the company is rolling out self-service lockers at the front of some stores to speed up order retrieval.

Shoppers accustomed to 2-day delivery from online retailers like Amazon are increasingly making buying decisions based on convenience factors. That’s pushing retailers to reshape distribution networks that were originally designed to ship pallet-loads of goods from warehouses to stores. They are turning to tactics such as drop-shipping, where suppliers ship online orders directly to customers, and opening warehouses closer to customers. The company is also testing the use of cars and vans for lower-cost delivery of smaller orders, and expanding its network of flatbed trucks that can deliver loads of concrete and other building materials to professional customers..

Classroom discussion questions:
1. What are the key OM issues Home Depot is facing in this article?

2. How does Home Depot’s approach to customer delivery and pickup compare to that of Amazon?