It was like stocking the North Pole warehouse with swimming pools. Home Depot’s store in Prescott, AZ, stocked a pyramid of John Deere tractors.

Problem: It’s a desert landscape around Prescott. The store moved one unit last year.

But the blunder wasn’t uncovered until an outsider came in and took a fresh look at the store, and began asking questions.

This true account is a product of Home Depot’s campaign to transform its supply chain and streamline inventory operations.

The major component of this makeover is changing the way product gets to Home Depot’s retail outlets. Before, about 80% of products were shipped directly from manufacturers to stores.

This had the potential for creating chaos, in terms of visibility and efficiency. If one location lacked an item, it was recourse was to call around and try to find it at another location — or simply order a new unit. That often meant new units were being ordered and shipped while surpluses of those items gathered dust at other locations.

At the same time, there were locations that simply had too much inventory on hand.

Home Depot’s plan: Set up distribution centers, instead of direct store delivery. The distribution centers provided a central source of tracking product volume and availability. Now, Home Depot plans to reduce direct deliveries to 25% by 2010.

This system improves the efficiency of inventory operations, and transportation and labor operations.

It gave Home Depot the opening to begin using analytics and tools to improve replenishing — and much greater control over the financial planning process.

The dollars at stake are monumental, but the payoff is even larger: Home Depot estimates the changes and the new technology will cost the company $260 million through 2010.

However, the planned reductions and streamlined operations are likely to free up as much as $1.5 billion in working capital.

Tags: distribution, inventory, supply chain, technology