Procurement continues to make the business headlines on a regular basis these days. Last week, the Wall Street Journal (subscription required) featured a story describing how Home Depot is moving back to a localized procurement model that focuses less on national uniformity and more on regional customer preference. This move marks an abrupt 180 degree turn from their previous approach to centralized sourcing that contributed to significant unsold inventory. According to the story, "Home Depot's inventory problems stemmed from a 2001 decision by then-CEO Robert Nardelli to consolidate nine regional purchasing offices into a centralized buying operation at its Atlanta headquarters. The move saved money by leveraging buying power and simplifying life for suppliers. But managers found they couldn't tailor merchandise for specific markets. Home Depot lost the money it saved through centralized ordering by not having the right products in the right quantities in the right stores."
It might be easy for an outsider to look at this situation as a centralized corporate sourcing model failure. But it's not that simple. While at Home Depot, John Campi, who served as CPO under Nardelli, delivered a strong performance by significantly reducing costs through embracing a centralized procurement approach. The problem, as became apparent from a merchandising perspective, was that specific stores and regions completely lost discretion in tailoring stock to local preferences. One of the major challenges for retailers -- especially as private label brands become more popular with cost-conscience consumers -- is balancing the benefits of a centralized environment with decentralized execution. Unfortunately, because of this, it's no longer as simple as drawing a line to separate out merchandising from non-merchandising spend.
Perhaps the best solution for Home Depot and others going forward is to have centralized procurement act as a service provider to the various regions. Rather than serve as a central group that leads with its own policies and suppliers, it could transform itself into a provider that balances optimal merchandizing by region with the advantage of centralized leverage and policy. Home Depot's experience should serve as a good lesson for companies regarding the unforeseen limitations and challenges that centralized procurement models can foster -- in retail and beyond.
- Jason Busch