Mark HolifieldSVP – Supply Chain

Supply Chain Transformation

2008Investor & Analyst Conference

2

Supply Chain Scorecard

2007 2008Improve ProductAvailability

Increase CentralDistribution

Improve Inventory Management

Develop Distribution Network Model

Implemented improved merchandise financial planning

External and internal measuresindicate continued progress

Migration to optimal solution has begun

Have 3 operational RDCs

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Supply Chain

Why is Supply Chain so important?Ensure a high in-stock level Optimize Inventory ManagementReduce Supply Chain costs

What does a good Supply Chain do?Simplifies store operations = Better customer serviceImproves speed to market = More product excitementBetter inventory flow and less clutter = Better shopping experienceFocused stocking tactics = Differentiated customer strategies (job lot quantities for Pros)

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Retailers: Out-of-Stocks

The solution lies in addressing common root causes:

In the store, not on the shelf

Insufficient ordering and poor forecasting

Poor inventory accuracy

Late or insufficiently filled purchase orders - #1 root cause at HD

Leading studies indicate that a typical retailer loses ~4% of sales from OOS

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Inventory Performance

HD’s Inventory Performance Has Been Deteriorating…

…but Every 1/10th Improvement in turns ~$150 Million in Cash

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inve

ntor

y Tu

rnov

er

$32

$34

$36

$38

$40

$42

$44

$46

$48

Avg

Ann

ual S

ales

per

Sto

re

Inventory Turnover Avg Annual Sales Per Store

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DomesticVendors

DomesticVendors

Direct to Store

Sources Distribution Channels

Import DCs

Transit Facilities

Carton DCs

Lumber DCs

~ 20% COGS

ImportVendors

Stores

2007 DC Network

~ 20% COGS

~ 60% COGS

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Optimal Flow Distribution Network

Direct To Store

Rapid Deployment

Center

Area Stocking Center

(“Stock & Pick”)

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Direct to Store

Sources Distribution Channels

Stocking DCs

RDCs

Lumber DCs

Stores

Future DC Network

Vendors

Vendors

~ 75% COGS

~ 25% COGS

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RDC Concept of Operations

THD Store demand is forecasted for all stores

serviced by a RDC …

… and aggregated for all stores serviced by that RDC. A single PO is sent to the Vendor.

The Vendor picks the bulk RDC-level order,

applies a standardized label to the pallet with product information …

Product is shipped from the Vendor to the RDC

… pallet standardized labels are scanned and

product is detail received against the Vendor’s

shipping order

… and sends an electronic shipping notice to the RDC

At the RDC, product is physically unloaded…

… and sorted to the desired store location

RDC Will Simplify & Speed Order Processing RDC Will Simplify & Speed Order Processing

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Pre-Allocated Last minute allocation

Partial Truckload / Less than Truckload (LTL) Full Truckload

1 PO per store(100 stores = 100 POs)

Bulk pick

RDC vs. Transit Facilities

VendorMinimums

No VendorMinimums

Store pick

1 PO per RDC(100 stores = 1 PO)

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Why Start with RDC?

Immediate, scalable solution to aggregate orders and improve in-stock in our stores

Biggest efficiency and cost out – 60% of the network value is derived from the RDCs

Low capital investment – Average RDC cost ~$10M in leasehold improvements and technology

Simplify operations

Low cost operations

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Project to Date Accomplishments

Rolled out 3 RDCs: Georgia, Illinois, Texas

Each RDC services ~100 stores

Have real estate locations for remaining 5 RDCs in 2008

% of COGS for stores serviced by an RDC

On-Boarding Vendors

2008 Target

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08

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Long-term Benefits from Supply Chain

Gross Margin Benefits (Basis Points)

~20-30

~30-40

2011 Post 2011

Expecting 1 Full Inventory Turn = $1.5 Billion CashExpecting 1 Full Inventory Turn = $1.5 Billion Cash

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Benefits of End State Supply Chain

Simplifies store operations

Improved speed to market

Better inventory turn, lower in-store inventories

Differentiated customer experience