Home Depot’s CEO Robert Nardelli: Exclusive Interview with Home Depot’s Robert Nardelli

Let’s talk about your technology strategy. You used the analogy that you’re changing the engines of an airplane still in the sky. 

 We’re changing the engine while the plane is still flying. 

You arrived in December 2000. How did you know what needed to be done, technologically speaking? How did you know that you needed to launch what is, in effect, a $2 billion fix? You’re roughly halfway through.

Yes, a work in progress. If you recall, I was very fortunate to personally experience this digital revolution, this digitization of business, with General Electric. You know, Jack Welch certainly created the right environment and challenged each of us.   So I had the opportunity to have hands-on, personal experience the last couple of years at Power Systems. We were digitizing the business along with introducing Six Sigma technology.

When I got here, it was important to really be a dry sponge and kind of immerse myself into the business. You know what you know from a leadership standpoint. That’s probably 75 percent of the job. But the other 25 percent you’ve got to absorb. I always felt it’s incumbent on the CEO to be on a vertical learning curve.

 What did you find here?

I saw a lot of labor, a lot of tasking going on. It was a little bit like the adage, “When in doubt, add a body.” But technology has never let me down in 35 years, whether it’s technology in product design or the ability to run the business. So all you had to do was walk around. And you found a lot of human intervention, manual payroll. You saw green terminals, dumb terminals.

The example I always use about the inability to do emails.  I walked through the store and I saw people manually doing inventory, counting boxes.  If you walk in a store, you can tell when it’s getting prepared for inventory–manual counts with no bar coding.

I walked into receiving and I saw data entry, bills of lading and invoices. So what I saw within the four walls of the business was a tremendous amount of human intervention. And I knew that it was ripe for the opportunity then to take that valuable resource through digitization, and reapply it to sales. And that’s been my commitment to this company and to our associates on the floor. 

This is not about digitization for elimination. This is about digitization for reapplication. I’m getting more pull than push.  We had our first technology forum for store managers and we interviewed some as they came out. They said, “I’ve got to have this, I’ve got to have that.” So we are getting more pull than you would ever envision rather than just pushing the technology.

From the store managers?

Yes. Take self-checkout. That’s 40 to 60 hours that can be shifted to the selling floor, as opposed to tasking. We’ve gone out and done some benchmarking, for example, with UPS. And you look at finger bar code readers. And you look at the ability to get certified receiving. You look at bar coding for inventory taking, if you look at perpetual inventory replenishment. Those are all huge opportunities.

I met with a group of analysts recently, and I said, “Look, for all the productivity we’ve delivered in the past three years, we have the ability to deliver that much more. So you should feel good about where we are positioned, relative to productivity and earnings per share and cost leverage, because we’ve got that much more opportunity in front of us.”

We’re only touching the mega-platforms right now. We’ve implemented PeopleSoft, and I don’t know another company that flipped the switch like we did last month on SAP, on the full suite.  We closed the (financials for the) month of June, right out of the box.

We have an opportunity in logistics and in supply-chain management, we have the opportunity in merchandising. There hardly is a place in the business where we can’t use existing technology. I kind of kiddingly say we’re taking a major leap to the present. For some retailers, it’s old hat. For Wal-Mart to have point-of-sale, to be able then, at the register, to regenerate inventory replenishment, is something we’re moving to.

So you as one individual walked in to this. How did you put together the team of people and the skill sets that you needed to undertake this technology revolution?

It wasn’t like I showed up cold. I knew we had to change our approach to information technology. We were somewhat of a deli counter: first in, first out. We really didn’t prioritize the return on investment relative to our overall operating strategy. We needed some mega-platforms. At the same time, we needed some kind of quick hits, so that we could show the legitimacy of what we’re doing, because people had been disappointed here in what IT delivered.

So we immediately said we need to get somebody best in class. We need somebody who’s been there, done that. We needed somebody with a lot of scar tissue, who had been seasoned, who was used to dealing with mega-volume, i.e., Bob DeRodes from Delta and Citibank. Sometimes you put people in a job to grow them. Sometimes you put people on the job to grow the job. This was a case where I needed a seasoned professional. Believe me, Bob, in his own right had his own revolution going on at Delta, really changing the culture, changing the expectation, raising the bar on accountability and one creating business pull versus IT push.

A lot of CEOs are at a loss, frankly, when it comes to technology. They hire a chief information officer and, certainly during the late ’90s, he or she said, “I want to spend $200 million on this technology. It’s cool, it’s neat.” And they’d bring it back and install it, and it often didn’t work with the business. How did you avoid that trap?

Been there, done that. You know, sometimes you get people who for their own intellectual gratification want to create this laboratory of platforms and technology. I couldn’t afford to do that here. I didn’t have the luxury of creating a suite for future use. We had real legitimate needs today.

Bob is a businessman who is responsible for information technology. He’s a businessman first, who is steeped in IT technology, who has had to deliver under some pretty stressful conditions. Dennis (Donovan, executive vice president, human resources) invested a lot of time in this. We systematically said, in his organizational design, We’ve got to have somebody in operations. We’ve got to have somebody in finance. We’ve got to have somebody who will support merchandising. Those are different skills. 

Then what you want is somebody who can do architectural design at the mega-platform level, so the sum of the systems plug together, so that the sequence of implementation is right. It doesn’t do any good to create a system and then find out that the data flow that goes into it is not clean or is not automated. We did a lot of mapping on this.

Then Bob started to very systematically bring in best in class again. We scoured the globe to bring in these individuals who have proven track records. In some cases, they were chief information officers themselves in smaller business but were excited about joining a bigger business whose leadership team embraced information technology.

What kind of role does Bob DeRodes play as CIO?

Bob is an equal partner at the business roundtable. He has a functional responsibility, but he’s operationally an equal at the table. That’s very important, I think. He’s not a backroom guy.

You’ve created a system in which Frank Blake (executive vice president, business development) and the business units come up with their requests for technologies. There’s an element of strategic planning there. And then Bob DeRodes is an IT implementer, but he doesn’t really own the process of deciding what the company ought to do. It seems like a bifurcation of responsibility.

The counsel I would give is, You don’t want to put all of that with the IT guy. You want him at the table next to your chief merchandising officer, your chief operations officer, your financial officer, your human resource officer, because you want him to say, “Okay, what is the best prioritization for the business? Where is the greatest need?” and not, “What is most intellectually stimulating?” or “What is the easiest to do?” And then, “What is the right sequence of platforms that we want to put in?”

I think the strategy is working well. The business has to own the architecture. DeRodes and his team have to do the architectural design, the programming, so that it’s plug compatible. No one tells him how to design the architecture and how to program it. That’s why I think we’ve got this healthy, functionally aligned, operationally assigned system, which is a term I like to use.”

It’s the business owners who say, “Okay, here’s what I want to get, here’s how we’re going to use it, here’s the benefit.” And we drive every one of these through a pro forma, to make sure we’re getting the right return on investment.

 A pro forma financial performance?

Yes, a financial pro forma: Here’s the cost, here’s the benefit. We put it through a pretty tough matrix. We’ve got to make sure we’ve got a pretty tight screen.

It’s interesting that you seem to have a feedback mechanism.  If the IT guys are out building something and it’s not working, they come back to the business-side guys, and say it’s not going the right way. The IT guys just don’t come back 18 months later and say here it is, but it doesn’t work.

It’s the biggest mistake businesses make. They kind of tell the IT guy, “Okay, go back to your cube, and when it’s done come up.” More times than not, you get disappointed, don’t you?  You see these huge investments that don’t work, and then you’re building patches. The right way to do it is to have an iterative process. That’s why we have program reviews. They’re not always friendly. 

 How do you know you’re getting straight answers?

I hope we have created an environment here where the unvarnished truth can come out and we can deal with an issue honestly, up front and in a constructive manner. It’s only when you hide those things from each other and the business that you have these major conflicts. So I think this integrative process, these program reviews, these project reviews, the visibility to project status (red, yellow, green) not only from a financial standpoint, but from a tasking standpoint, has all been healthy for us. 

 Have you made any mistakes?

Oh yeah. I’m thinking specifically in one area. What we said is, We wanted to do special order across every SKU (shop keeping unit), every category, every department. This thing would have been bigger than the national electricity grid. We screwed up.  So we came back and said, “Okay, that is not user-friendly.” 

So now what we did is we said, “Let’s take a vertical slice.  Let’s take one category across the business, across all categories across all businesses.” So we step back, we reconstruct it. We’re able to use a lot of what we had, but in fact, we kind of went back to the drawing board.

No one got fired?

No.

Your folks can be truthful to you and no one will lose their job?

People who do things make mistakes. They never make the biggest mistake of all, which is doing nothing. So, now we don’t feel good about people who say they will and later won’t, but it’s unrealistic to think that with every swing, we’re hitting it out of the park.

So no, no one got fired. You’d rather have it now than later.  People who keep pushing it down and repressing the truth, and then you get to the end, that’s a worse situation. You could deal with it now. What you can’t deal with is finding out about it 18 months from now.

So the overall technological transformation is working?

I think it’s working extremely well. We have legitimatized technology at the Home Depot. If you read the book The Ten Deadly Sins of K-Mart, and I’m not pointing a finger, one of the biggest sins is technology aversion. To a certain degree, we had that within the company. We thought we didn’t need technology, we were better than that, we could overcome it with passion and energy.” What we’re finding is we want passion and energy and technology to really be competitive in today’s world. Is it without angst? Is it without moments of anxiety? Are there not moments of confrontation? No. But my business compass tells me we’re headed in the right direction, and that we are building credibility and capability as we go along. The issue now is, going faster.

Let’s get specific. The first things you attacked were the point of sale, the self-checkout and the scan guns, right?

It wasn’t by accident. It was very strategic. Customer survey data has shaped everything we have done. The customer said, “Bob, we love Home Depot. You have more convenient locations by a factor of two than your nearest competitor. We love what you’re doing on store modernization-cleaner, brighter, more navigable stores. Get me out faster.” Okay.

The naysayers out there, when we announced we’re going to self-checkout, said it wouldn’t work and that we would abandon it. But we very thoughtfully laid out our approach. We now have over 800 stores plus with self-checkout, with over 30 percent customer utilization and 40-some percent reduction in queue time.

Then we went to the cordless scan gun. You get the pro customer out faster, because you don’t have to unload the cart and reload the cart. The cashier is no longer tied to a cord, and it’s not only cordless scan guns, but it’s two-way. In other words, they can actually see on a screen what’s showing up on the cashier screen.  It’s not a dumb trigger.

So, No. 1, we get them out faster. No. 2, ergonomically, it’s a home run. Associates aren’t bending over, picking up bags of concrete. They’re not pulling off sheetrock. Third, it’s a big help on shrink (inventory loss). The accuracy of, you know, you got ten sheets of dry wall, two sheets of OBS, you’ve got two by fours ��  before, the cashier was kind of counting, running back, push it in. So our shrink has improved

It was a lot of investment. We installed 5,000 miles of cable, 90,000 devices last year. Now we’re working our way from front to back, from customer to back room. So that’s why we’re working on back-end automation receiving, automated receiving.

 A lot more has to get done?

Now what we want to do is digitize the internals of the store, introducing scanning into receiving, so that we can get certified receiving, so that we can get accuracy and speed.  If I have certification on the back, I got POS on the front. I now can do automatic replenishment.

Right now, we have an inventory manager who covers multiple departments, and his or her job is to reorder for those departments. You literally walk the aisle, and the mobile ordering cart will say, “I think you have six left-verify that. We recommend 30 is what you should order. Do you agree?” That’s kind of where we’re working now.

You’re aiming for the Wal-Mart model?

 Absolutely. People ask me about the RFID (Radio Frequency Identification Devices) Wal-Mart’s using, and I was thinking, Before I can use it, I have to have the store wired to be able to read the RFID. That’s an emerging technology. If it works, I’m going to be there.

What would you hope to get out of that data mining?

Today’s retailers can tell you at five or six o’clock in the morning what they sold by department, by category, by class. I can’t get that right now. I can get it, I can’t get it as quickly as I may need it to make more timely decisions. And our merchants down there, are somewhat handicapped, that’s No. 1. 

No. 2 is that we are still doing our “planograms” manually. See that white board up there that I’ve got? It would not be uncommon to go into a store and they got 25 toilet seats, and then they’re looking at the price points, and they’re trying to do product line reviews, and pricing reviews. They’re way too manual there.

So for me the next big megaplatform in this company is going to be a retail platform that’s going to give my merchants and my stores the ability to do this much more seamlessly and much more quickly and accurately. Price changes are still way too manual.

Is IBM your lead partner on the data-mining effort? Who at IBM is your contact? You didn’t talk to Sam Palmisano about this-

Actually, I talk to Sam a lot. Last week, I talked to Michael Dell and John Chambers. I want to stay involved in this. I’m not a technology expert, but I want to make sure I’ve got a good relationship. I want to make sure I’m getting the A team. I want to make sure that if they have to make a decision, hopefully, I’m top of mind. When other companies were pulling back, in 2001 and 2002, when people were stopping spending on technology, when they were stopping expenditures on infrastructure, we didn’t pull back one dollar. Matter of fact, when I got here I took the capital expenditure budget up a billion a year. We put $10 billion back into the company since I’ve been here, ’01, ’02, ’03.  Just put another $3.5, $3.7 this year. It’s unprecedented.

How much this year?

We’ll put another $3.5 billion to $3.7 billion back into the company. So while other companies were kind of pulling back and getting a little soft-kneed, we said look, “We’re going to continue to invest.”

Shareholders haven’t complained?

I’m not saying earnings per share will go down because we’re investing. In fact, if you look at our earnings, they’re up over 70 percent during that three-year period. In that period, I took dividends up 20 percent (last year 25 percent). And we have repurchased, first time in the history of the company, over $5 billion of stock. We returned to our shareholders last year over 50 percent of our earnings, against an industry mean average of 20. 

So we’re giving back to our shareholders and we’re reinvesting at unprecedented levels back into our company. Why?  Well, because I believe my legacy is to position this company for the next 25 years. We’re celebrating our 25th anniversary this year.

Coming back to the technology, the data mining has the potential to tell you what to put on the shelves and how to price it, right?

Right now, we tend to get macro numbers, and you’ve really got to drill down to get the store, the district and the region.  This ability to do data mining will be an unbelievable tool for our merchants. It’s going to take a couple of years to get there.

What has to go in place before it works?

First of all, we’ve got to get our base tables lined up.  You know, we never really forced the issue with our suppliers on standardization of coding. We have never forced our suppliers on standardization of SKU identification, palette size, color, pack size, etc. Wal-Mart has been much more rigorous and forced much more compliance with their suppliers than we have. 

So that’s where we’ve got to go. You’ve got to start with your base tables first. You’ve got to be able to have clean data that is automated from vendor to us. We can’t have manual intervention. We’ve got way too many people with this vendor data, type it into a dumb terminal, nine times.

 Are you serious?  Nine times?

Remember, this was a very decentralized company.  Every region had their own buying office. 

 I see, nine different buying offices. What would it do for your business in terms of profitability, in terms of customer experience, if you can pull this off?

The inherent cost benefits that you’ll get from this will be very significant. We’ll be able to reapply human capital to other areas. Just like we do in the store, I’ll be able to put more people on new categories, new trends, new marketing approaches, new merchandising presentation, and all that.

The customer will see the benefit of this because we’ll continue to enrich the merchandising mix in the stores. If you looked at the facts, we went from $48 an average ticket (sales receipt) to $55 the end of the first quarter. That’s not an accident.  That’s by bringing distinctive and innovative merchandising. 

We may be able to get innovative merchandise certified, answered, distributed, priced, shelved, much quicker, through automatic planogramming, through an overall merchandising program, so that we know what goes in and what goes out.

What some of the analysts and the naysayers say is that in Home Depot you can’t find things, there’s no one to help you, the checkout is horrible. You’re going to fix that?

I think we are systematically working to-first of all, one of the raps was, Your stores are getting old and dirty, they’re not customer-friendly. You walk across the street (to a demonstration Home Depot) and you see a 180-degree change. 

So I think our strategy is pretty clear. Our advertising is mirror imaging what our customers are telling us. It’s all about family. You’ll see a family on a deck, you’ll see a mother and a son both painting a room. You’ll see a father making room in his garage for his daughter’s car. What we’re trying to do with our technological innovation is to become much more market-focused and customer-centric. 

Tell me about your efforts on inventory and supply chain management. Right now, it’s very-

Very manual. The model that was built was “full truck load to the store.” The more you brought, the more it would force you to sell, because you kind of get jammed. The old adage in the book was “stack it high and watch it fly.” But customers are looking for a different shopping experience. They’re looking for less intimidation. They’re looking for more orderliness..

Are you going to try to use technology to break the full-truckoad mentality down to less than a truckload?

Two things. We recently realigned our current logistics operation and took it from a function into the operations. So now our VP of operations runs the logistics centers we have today. Again, they were totally decentralized with different policies, different practices. We’re now bringing visibility to fill rates. We’re now bringing visibility to accuracy. We’re now bringing some order and accountability to our inventory. That’s Point 1.

Part 2 is we said look, let’s start with the answer. We want to be $100 billion company. But it’s not a $100 billion company of the past, where you basically had a single channel to market, the orange box (Home Depot stores). Now we have Home Depot supply we’ve created. We’ve got at home services. We’ve got B to B. We’ve got government. We’ve got online.

So what we’re seeing is a multi-dimensional logistic system that has to be in place to support, minimally, $100 billion plus business. I want to make sure that the systems I develop support the business I want to have when I get there. And that probably is going to be a combination of central distribution, probably have the ability to ship direct, to fulfill call, click or visit orders.

 If you get the logistics right, how will that help the business?

I wake up every morning thinking about what-if we get the logistics thing right, what’s that mean to me? The most precious thing in the world-additional square footage in the store. Today, I may have four faces. That means I may have four of the same items, because there is a minimum on reorder quantities. If I get efficiencies in the logistics system, I go to two faces. If you think about that collectively across the store, it’s like getting 10 percent more square footage for either more mix within the category, or new categories.  That is a home run, to be able to bring new categories in the store, to be responsive with emerging megatrends, 

What’s the technology piece of the logistics challenge?

It’s sales times square footage, times margin. What you want to have is the ability to use a system almost as a rheostat (similar to a Humistat) and dial in market preferences, square footage, times sales, times margin. You bring a level of sophistication that we try to introduce now manually. We’re doing a good job.  I think we could do better because we’ll be able to do it faster, more accurately. We’ll take some emotion out of it, not all. Retail is emotion. But we’ll be able to get at it faster, a lot faster.

But you’ll never leapfrog Wal-Mart and Target in terms of your overall technological sophistication.

I wouldn’t say “never.” I would say my goal is to be more on parity with technology evolution with some of these other guys like Target and Wal-Mart. But I’ve got some catching up to do.

When you add up all the changes we’ve been talking about, how big is the gain?

It’s a big deal. When people say you’re kind of tapped out and Home Depot has seen its best days, we’ve had great days, but our best days are in front of us. 

People say that to you, “You’re tapped out”?

Yeah. I mean the analysts say, “Jeez, aren’t you reaching saturation?” Saturation is a state of mind. If you think you are, you are. We aren’t. Not by a lot. I’ve been in a lot of businesses, and I tell myself, I’ve never been in a business that has more growth opportunity, more opportunity for improving everything we touch, than The Home Depot. We’ve been tremendously successful, and for all of our success there’s a multiplier as we go forward. It’s a $900 billion market out there for us. 

And you only have what percent?

$64 billion. Obviously, we have a higher percent share, Bill, in the do it yourself, but if you think about at home services, and we don’t disclose this so I’m not-but if you think it’s $200 billion and we have this much, and we’re growing 40 percent.  I haven’t even touched international.  We announced we’re going to China.

The pundits that suggest we’ve reached saturation don’t understand the business, don’t understand the model, don’t understand the opportunity that we have at hand. It’s huge. I tell you, if you died and came back and say what job do you want in corporate America, it would be this one. This job is the best job because it has the most opportunity, because we have the best financial position of any retailer in corporate America. Look at our debt to equity, 6, 7 percent. Return on investor capital is over 20.  We’re sitting on $3-plus billion of cash, after we’ve done all this other stuff. As you said, I’ve had my pick of jobs, I’d pick this one. This is a sweet job.