By Paul Ziobro
CONROE, Texas -- Home Depot Inc. is bringing a new philosophy to its cavernous stores: Less is more.
Instead of filling its warehouse-style racks to the ceiling with Makita drills, rolls of Owens Corning insulation and cans of Rust-Oleum paint, Home Depot wants fewer items on its shelves and it wants them to be within customers' reach.
"Get comfortable with days of inventory, not weeks," Tom Shortt, Home Depot's senior vice president of supply chain, says is the message going out to stores. The retailer is targeting sales growth of nearly 15% by 2018, but wants to keep inventory levels flat or slightly down.
It is a shift happening across the retail sector as companies try to figure out ways to profitably serve the growing needs of online shoppers while making their network of stores less of a financial burden. Chains must predict whether demand will come from the internet or a store visit, and whether they'll ship online orders from a distribution center or a store. Every move of inventory is an added cost that eats away at already thin margins.
Online shopping "has forced the industry to rethink not only the math and science behind the inventory pool, but also the strategy," said Scott Fenwick, a senior director at Manhattan Associates Inc., which makes supply-chain software.
Wal-Mart Stores Inc. and Target Corp. are cutting back on the number of packs of diapers, boxes of cereal, and bottles of laundry detergent in their backrooms, and moving the product to shelves faster. Wal-Mart has also widened aisles to further reduce the amount of goods on its shelves, while Target has moved bulky items such as patio furniture into centralized distribution locations instead of keeping them in stores. Kohl's Corp. is aiming to lower inventory by 10% by the end of next year, after seeing it swell 15% over the past five years as the department-store chain tried to become a bigger online player.
In the first quarter, Wal-Mart's inventory rose slower than sales, helping to improve gross profit margins. "It's like oxygen in the store, " Wal-Mart CEO Doug McMillon said at the company's annual meeting last month. "The weight of inventory has been relieved to an extent. And I think that bodes well for the future."
Inventory is one of retailers' highest costs. Any reduction in the level of capital tied up in unsold goods frees up resources to invest elsewhere, such as building out online operations or covering wage increases. But destocking isn't without risk. Bare shelves are a major annoyance to shoppers who take the time to go into stores to shop.
"If I hold too much inventory out of the stores, then it looks like I'm out of business," says Rodney Sides, vice chairman of the retail practice at Deloitte LLP.
When many chains first started selling online, they set up distribution centers to service their e-commerce operations. But that ran the risk of doubling inventory. Then they tried to make their stores double as online fulfillment centers and merged the systems that manage their online and store inventory pools. While that helps lower shipping costs by storing products closer to customers, it means more work for store employees.
"Ideally, you put less inventory in the stores, but replenish more frequently," said Brian Gibson, a supply-chain professor at Auburn University. "You'd rather fulfill based on demand than based on a forecast."
Home Depot has weathered the shift to online shopping habits better than most, with sales at existing stores up at least 5% in each of the past three years -- helped by the continuing rebound in the housing market. Still, its push to lighten inventory levels will be a challenge, especially as it seeks to increase annual revenue to $101 billion in 2018 -- $12.5 billion higher than last year -- without opening more U.S. stores.
To tackle the issue, Home Depot is overhauling a big part of its brick-and-mortar supply chain. It's instituted "Project Sync," a series of changes that include developing a steadier flow of deliveries from suppliers into its network of 18 sorting centers. Instead of being slammed with five trucks twice a week, for instance, Home Depot now wants to have suppliers send two trucks five days a week.
The savings from the synchronized inventory flow are a key part of getting Home Depot's operating margin up to 14.5% by 2018, from the current 13%, and also boosting the return on invested capital, a closely watched industry metric. The more frequent deliveries also help improve in-stock levels, even as Home Depot tries to keep a lid on inventory growth.
When the shipments get to stores, workers move them right to the lower shelves, eliminating the need to store and retrieve products from upper shelves using ladders and forklifts. Those activities are some of the most expensive parts of the supply chain, Home Depot executives say. Savings can be used to have more workers on the floor or finding orders for shoppers who are picking them up.
This also keeps stock from collecting dust out of reach. "You would stack it high," says Jessica Thibodeaux, manager of a Home Depot just outside Houston, "but it wouldn't fly."
Write to Paul Ziobro at Paul.Ziobro@wsj.com