integrated supply selling team to come in and look at this account.” We’ve put a program in place to reward our sales people for providing us with integrated supply leads and we protect them on the back side.
Being a distributor and an integrator helps us because we have 28 product specialists. A pure integrator seldom has these resources. They also don’t usually have the support of the manufacturers. The pure integrators typically are brand-neutral so the supplier takes a hands-off approach. We are not brand-neutral. We do have a brand preference and we bring suppliers who can deliver value to our customers.
MDM: How do suppliers view your model?
CL: I would say that IDG’s model has always been well thought of by suppliers. However, we’ve not done an effective job of using our supplier’s resources to help grow sales. We’re aggressively pursuing that. I spend about 20 percent of my time with the suppliers right now working on growing sales and profitability.
MDM: What is your focus going into the second half of 2007?
CL: IDG’s biggest problem is that it hasn’t delivered profitable, consistent sales growth. We’re working on selling more Flexible Procurement Solutions deals and at the same time improving our profitability in our general MROP side by buying better as one company and using strategic pricing, which we are implementing now.
MDM: Strategic pricing seems like a critical move for IDG.
CL: The biggest pricing issue that IDG had is that we were selling below market. As a $550-million distributor with national buying power, we have margins and operating income like a smaller distributor.
Almost every company IDG acquired had a cost-plus pricing mentality with our sales and customer service people driving the pricing. We’re changing that mentality. We’re now pricing from list price down. We need to be sure that IDG is competitive in the marketplace in relation to the value of the product that we offer. The high-volume, high-profile products need to be priced differently than the low-volume items. Over the next 18 to 24 months, this is a major opportunity for us. We’ve applied strategic pricing to our small accounts and now we’re preparing to apply it to our other accounts.
We provided strategic pricing training for everybody in the company. We used a “Price is Right” theme. We compared our typical selling price for certain products to other national distributors’prices for the same product. Guess what, IDG was usually the lowest price. If you’re that low on price and you’re not growing sales, it says there’s something wrong with your strategy and execution. We are working to fix that.
History of IDG
Industrial Distribution Group Inc., Atlanta, GA, is a nationwide distributor of MROP products, including cutting tools, hand and power tools, abrasives, material handling equipment, coolants, lubricants and safety products. The company also provides an integrated supply service -comprising roughly 60 percent of its overall revenues -called Flexible Procurement Solutions.
Industrial Distribution Group is formed from nine general-line industrial distribution companies. Together the companies have about $250 million in annual revenues. IDG is taken public in an initial public offering. At this time, principals plan to consolidate only certain corporate functions but use a decentralized management structure at each subsidiary. CEO brought in from outside industrial distribution: Martin Pinson, formerly executive vice president and CFO of U.S. Office Products Company, which was also a roll-up.
IDG adds 17 companies to its portfolio, for a total of 26 operating companies with annualized revenues of close to $572 million.
Pat O’Keefe was brought in from outside industrial distribution to be CEO.
Andrew Shearer, a founding member of IDG, is named president and CEO. He had served since 1991 as president of the IDG York business unit, formerly Shearer Industrial Supply. Shearer brings number of business divisions from 13 to four, plus a specialty cutting tool business unit.
Charles Lingenfelter, a founding member of IDG and president of IDG’s Southern region, is tapped to replace Shearer as president and CEO. Lingenfelter creates the One Company strategy to further integrate the four remaining geographic operating divisions.
Since 1997 when the company was formed through the rollup of nine industrial general-line distributors, Industrial Distribution Group, Atlanta, GA, has seen its share of integration challenges. Charles Lingenfelter, a founding member of IDG, became president and CEO of the $550-million national distributor in November 2005. Since taking the helm, Lingenfelter has pushed hard to take the distributor from four divisions to one company.
MDM spoke with Lingenfelter recently at the Industrial Supply Association’s annual meeting in Las Vegas, NV. Lingenfelter spoke of his company’s progress and the work that still has to be done to make IDG’s One Company plan a success.
MDM: Over the past 10 years, IDG has had a series of integration challenges. Can you describe where the company was when you assumed your current role at the end of 2005, and what fundamental changes you have been driving since?
CL: When I took over we had four separate operating divisions and a stand-alone specialty cutting tool business in Wichita, KS. Each of the divisions had their own back offices with three separate management information systems and division-based accounting departments. We also had a corporate accounting group that brought all of the financial information together. That gives you four purchasing teams, four sales teams, four logistics teams, four marketing teams and four HR teams.
This was the first time in my career that as soon as I got the job I knew what needed to be done. The plan was to move the four divisions to a One Company structure in order to leverage the resources of our human capital, which we were not doing. We might have had the best logistics person in one division, the best purchasing in another, and the best HR in a third. But we weren’t sharing that talent. We quickly went to a flat organization. The regions still have the overall authority and responsibility, but the back office was centralized. We also went to a functional operating structure rather than a geographic one.
The other thing IDG has had all along is great practices. We were one of the first industrial distributors to do activity based costing, integrated supply, and we had a mature quality system that has evolved into a business management system for the company. We were always on the cutting edge in one division or another, but we weren’t sharing or adopting these practices as a company.
Our customers are at least national in scope if not global, and they want one person to buy from and they want one person to deal with on operational issues. One of the first things we did was to put into place a single Flexible Procurement Solutions (integrated supply) team. The team is responsible for selling FPS, implementation, developing best operational practices and staffing sites. Once we execute an agreement, we hand it over to the regions to manage the relationship. This approach has been very successful. In 2006 we closed a significant number of new FPS agreements.
MDM: There are a lot of examples of rollups that just didn’t work. Rollups can be like & lsquo; herding cats.’Is there a successful blueprint to follow?
CL: The traditional rollup strategy is flawed because few take into account the single most difficult thing for a roll up to deal with: culture. That’s the part that most miss. I spend a lot of my time on the culture side. Today we have the majority of our associates behind our strategy, but change is a very painful and usually slow process. There’s been a lot of work done over the past 15-18 months. You have to think, act and operate as one, and rollups never took that into account. If you don’t do that you don’t get the economies of scale necessary to make a roll up financially successful.
MDM: Can you outline your marketing efforts as part of the One Company strategy?
CL: To get the customers and suppliers to look at us as one, we needed a national marketing presence. We quickly put a national marketing team together. Before, if you wanted to sell IDG a product, you had to go through five different booths at ISA or visit each division. At this year’s convention, we had a cutting tool booth, a safety booth, and so on. We have more marketing and product people here (at the ISA trade show) than sales leadership.
MDM: 18 months in, do you see the light at the end of the tunnel?
CL: The culture is in line -and we are moving together in a progressive manner. People are working well on teams. They are sharing best practices. If there’s a problem, we’re crossing geographies to find the people with the best skill sets to fix it.
What we’re probably struggling with somewhat is the technology and data side -not so much our ERP system but the EDI piece. We brought five different databases together, and we’re still cleaning up data issues. We’ve changed and standardized over 750,000 part numbers.
We brought 95 percent of the company onto one system within nine months. Could we have gone slower and would it have changed much? No. If you give people 18 months to complete a conversion, they would try to do all their homework and preparation in the last three months. We had one advantage. We chose Infor and 40 percent of our business was running on this software already. So we were able to draw people out of that group to help in other places.
The heartburn has been different processes and the multiple databases. We had a lot of one-off solutions for customers that we’ve had to remap. We’ve had to design new processes to serve them. Heartburn-wise, we’re probably three to four months from being complete. That’s with a lot of work from our people. You can implement software in a weekend, but the preparation and getting past the go-live issues are the tough parts.
MDM: How will IDG continue to differentiate?
CL: We are a distributor first and foremost. We’re a successful integrator, but the roots of those integration skills and resources started as a distributor. In the past nine years we’ve lost sight of that. The growth was so great on the Flexible Procurement Solutions side, that we didn’t mind our Ps and Qs on the distribution side. I’ve put about 80 percent of my effort in the past 18 months into really focusing on the core of our business -being a technical MROP distributor.
We’re going back to how we differentiate IDG, and that’s to have technical sales associates and technical product specialists working together. You might be the best cutting tool sales person but if the customer wants to buy air tools today, we can send an air tool specialist with the sales person if necessary.
We’re complementing our technical people with specialists and backing them up with service at our regional service centers. We’re also paying our sales people an incentive for documenting customer cost savings. I think IDG has been the leader in documenting cost savings and now we’re compensating for that. Our belief is if you’re taking costs out for the customer, you’re providing value, and there’s a good chance you’ll get a higher price and it’s less likely you’ll get fired.
MDM: Is it possible to operate a traditional distribution business on one side and integrated supply on the other and make those two work together?
CL: The biggest problem distributors have operating as a traditional distributor while trying to do integrated supply is that you have competition between your sales associates. The sales associates don’t want to give up their account to the integrated supply side.
Many times they take the risk of losing their account to an integrator before saying, Hey, we need the