IDG outlines restructuring plan

Industrial Distribution Group, Atlanta, GA, has gone through its share of turbulence ﾖ almost since its beginning in 1997 when the company was formed through the roll-up of nine general-line industrial distribution companies. Since its initial public offering, the company has had a succession of CEOs. Andrew Shearer became president and CEO of IDG in August, 2001. He has served since 1991 as president of the IDG York business unit, formerly Shearer Industrial Supply Co., one of the nine IDG founding companies. He has been a member of the board of directors and since the beginning and is also the largest single shareholder of IDG. In an interview with MDM in late December, Shearer outlined IDG's strategy and restructuring plans.

How does your vision of Flexible Procurement Solutions look different than integrated supply?

Shearer: FPS - Flexible Procurement Solutions ﾖ came about because we believe every customer's needs are very different and we need to provide a flexible approach in a wide range of solutions. Integrated supply is one solution and we currently market five other solutions under the heading of FPS. In the near future, we want to focus more on developing process-oriented solutions for mid-market customers. We intend to incorporate some of our large-customer account solutions into our mid-market offerings. One of our FPS solutions for the mid-market is our BIR system, bar-coded inventory replenishment. It focuses on helping our customers automate their procurement systems and manage inventory and accountability. It's different from integrated supply in that customers can manage the systems themselves rather than have us do it for them. It lowers costs for them.

How does your FPS business break down?

Shearer: In the third quarter of 2001, FPS revenues were 45.6 percent of IDG's total sales. Integrated supply is 30 percent of our business, the other 15% is comprised of the various solutions we talked about. Year to year, our integrated supply sales increased 19 percent, while our total FPS sales increased 7 percent. We added 30 new fully integrated supply sites in 2001. We believe this is reinforcement that, despite the economic conditions, we're headed in the right direction in delivering FPS to our customers.

It sounds like customers are pretty aggressive about going after value solutions despite the economy.

Shearer: Some are, some have cut back in staff, some are less willing to take risk, and FPS could be considered a risk by some. But some companies are moving forward in selecting IDG as their provider.

Is the large-customer market pretty well saturated in terms of integrated supply at this time?

Shearer: We see significant opportunity in the large customer market, although there is a lot of competition there. The mid-market area is a little less competitive, and we have tremendous relationships in that area already.

Are you talking about shifting the organization more into a fee-for-service mode?

Shearer: It's a component of our plan in the areas of process improvement and product solutions. In the past, we've been more focused on the product rather than process, and process improvement is where the cost savings are for customers.

Can you give an example?

Shearer: With mid-market customers, growth traditionally has come through product sales. But the customer also requires inventory management, lower procurement costs and accountability monitoring. So the broader components are where the real value is for customers. Our challenge is to educate customers that the value is in the process area versus the product area. Instead of a customer stocking $1 million in inventory that turns once a year, if he can turn it twice a year through better management, it's a 100-percent improvement for the customer and a 50 percent cost reduction for the supplier. Multiply that

scenario by just a few clients and that cost of $1 million in stocked items can go down significantly. With that thinking in mind, FPS will be the focus of IDG going forward, and the focus will be using existing resources we have in the organization to build up very quickly and make the transition immediately.

One year, two years?

Shearer: I'd say short-term, it will vary from division to division.

Do you have an education task, internally as well as externally, shifting focus from the traditional distribution business?

Shearer: A lot of our businesses have already shifted from product-oriented to FPS-focused. But that it is being rolled out in phases through all of IDG. We have the resources in place that can educate and improve the relationships we already have, and we can do that quickly.

In terms of process vs. product, what does that look like? Those terms can mean different things depending on your capabilities. IDG has formed a core on the cutting tool, abrasives and metal working supplies. When you talk about solutions to customers, is it bringing in the expertise that IDG has built up nationally?

Shearer: We have a broad-based approach. The process improvement capabilities can reach a wide variety of customers. We will continue to leverage our internal expertise in the cutting tool and metal working area in the future. But if you look at the new relationships we've built recently, it is not in the heavy metals area, it's in the processing area. One example is the Playtex facility. Not a traditional account in the past, but one in the future. And Duracell, a manufacturer of batteries, in the past would not have been a focused IDG customer, and is now showing significant growth opportunities for us as an organization because our solutions are demonstrating the benefits promised.

Based on the history of IDG and other rollups in distribution, is that a valid model today?

Shearer: Rollups are a significant opportunity, as long as you complete the integration of those businesses, which is what we're doing. We are currently focused on improving operating efficiencies and growing the
top-line through our Flexible Procurement Solutions. So there are no immediate plans for additional acquisitions.

As the market improves and we see results from our emphasis on improving efficiencies, we would of course be open to making strategic acquisitions. The necessary situation for an acquisition would have to include a company of adequate size to impact our revenue and be immediately accretive to earnings.

What does the streamlining of IDG look like ahead?

Shearer: We have 12 business units; we're streamlining down to four divisions and two specialty units. We believe the productivity improvements and efficiencies brought by bringing together multiple units can be realized in the very near future. Charlie Lingenfelter is president of the Southern division; Mark Fuller heads the Northeast division; Jeff Hayes the Midwest division and Marty Burkland the Northwest division. Dave Schreiner leads our Wichita Business Group, and Steve Wherry the Cardinal Business Group, our machine tool subsidiary.

The revised vision - where are you going with that?

Shearer: One of the words that's missing in our new vision statement is product. That's where we focused in the past, and it's where we focused our resources. We want to make it clear to our customers where we feel we have advantage and value. We believe our customer's focus is how they can control their costs by managing the supply chain, and that's where our focus will be. We'll exploit that competitive advantage in the future because we have the resources and capabilities available immediately in-house.

There was an unsuccessful effort two years ago to move to a central computer system to consolidate. What do you see in the 24 months ahead?

Shearer: We will be on three systems at the end of that time, and that will be a benefit in the way of IT system flexibility that we bring to customers. It's a dramatic reduction from the 12 we operate on today.

Are your customers driving e-procurement initiatives on your part today?

Shearer: Yes, but not as aggressively as we thought. We're seeing it in different pockets. They want our information to be available to them through the Internet, be it a catalog or data form; what customers are looking for varies significantly.