Since the Great Recession of 2008-2009, few publicly-traded companies have undertaken as much change in sales model, technology platform, process improvement and culture as Chicago-based Lawson Products. From 2009 to 2013, Lawson converted all of its sales representatives from a network of independent sales agents to sales employees, today numbering 1,000. MDM last talked with President and CEO Michael DeCata in 2014, who outlined the unique service-focused value proposition and changes taking place at the time. Four years after transitioning its sales model, we check in again for a progress report. Read the first part of our interview here. In this issue we conclude our conversation with Decata.
MDM: You have a sales force of about a thousand representatives. As you describe, a lot of traditional outside sales force models are under enormous pressures in terms of cost. But you talked earlier about the analytics part of this. They’re getting very clear direction and guidance based on the analytics that you’ve built.
DeCata: That’s correct. We provide tremendous feedback on all aspects of what they do, whether it is, opening new accounts, penetrating existing accounts and retaining existing accounts. So very simple metrics and analytics, but delivered in an effective way that the individual sales reps and their district sales managers can use.
We have gone from about 757 sales reps on Jan. 1 of 2013 to approximately a thousand sales reps today. Currently, half are seasoned reps who have been with us a number of years. The other half are newer, as we’ve added and expanded.
Even in changing our culture, the idea of growing sales within existing customers is challenging because very often customers like to spread the business around a little bit. But it is our belief, based on the analytics and our objective analysis of the marketplace, that we are a far better supplier to our customers, with more comprehensive service, more reliable and consistent service – we call it service-intensive vendor managed inventory – than any of our competitors.
So, from my perspective, anything less than 100% share of consumables at our customer’s site is a disservice to the customer. Again, we’re not talking about motors and ladders and compressors. We’re talking about 12 product categories of consumable MRO, but anything less than 100% and the site is getting poor service, less frequent service, less intense service. Now, communicating that effectively to a customer can be challenging, but by us being more effective with our customers, our commitment is to make our customers as profitable as possible by providing the least amount of inventory they can possibly have, and at the same time never letting them run out of anything and solving the problems that come up. The optimization and integration of all of that results in a profitable value for the customer – their machines run and run more effectively. If we can do that, we build tremendous stickiness and the loyalty between our sales rep, who is providing service, and the customer.
MDM: How much does either an inside sales team or the combination of that and digital help you to keep that cost equation in place?
DeCata: The inside sales team is expanding. Recently, we’ve added salespeople who are telephone-oriented salespeople as well as what we call retention specialists. So, should a sales rep retire or leave for some reason, we want to keep in contact with the customer. Digital plays an important part in this as well. Our website and digital messaging helps us stay in contact with the customer until either that customer is assigned to an existing sales rep or we hire a new sales rep. The combination of inside sales reps, digital, outside sales reps and retention specialists – that combination goes a long way in bridging the gap when there is a transition. In 2018, by applying that approach, we saw tremendous progress in our customer retention metrics.
MDM: You talked about a pretty unique product and high-service component to what you do. With your outside salesforce model, you’re putting a lot of your value in the market into the quality of the people on your team. But we’re also in this really tough labor market. Can you talk a little bit about how you et that challenge?
DeCata: This is a challenge for us: a shortage in the labor market and long-term demographics for us in our industry. Both are a challenge for us, but it’s my belief that, for our company, there are far more benefits than there are challenges. And I say that because we’ve had success attracting sales reps because of the investments we’ve made in infrastructure, process, culture and technology. The benefit to us is that our customers are desperate for maintenance mechanics, truck drivers, and they are in extremely short supply. The more challenged our customers are with maintenance mechanics and truck drivers and people to keep machines running, the more valuable our service becomes. So, in a tight labor market, while we do have challenges in hiring warehouse personnel and attracting sales reps, the bigger benefit is that we become more valuable to our customers. The last thing a shop owner wants is for the extremely valuable maintenance mechanic running up the street to get a part or waiting until tomorrow with the opportunity cost associated with a machine not running for even one day. That opportunity cost is extraordinary.
Many in our industry have a value proposition that goes something like, “If your motor fails, call. We’ll get you anything tomorrow.” But our value proposition is, “If your whatever fails, you will not call us, because when your mechanic reaches into the drawer for the necessary part, it will already be there.” Beyond just the availability of the product – labeling, shop organization, cleanliness – all these things that people take for granted might save your mechanic one, two, five, 10 minutes. They know exactly where to go when the bins are properly labeled. They’re clean and it’s easy to read it. So even if the stuff is in your shop but you can’t find it, it might as well not be in your shop. Beyond just the availability of the product, the fact that the shop is pristine and organized also improves the customer’s productivity.
MDM: There’s labor and logistics involved; I’ve got to believe there’s a cost aspect to this that has to drive up your cost-to-serve. How do you control that to make it a profitable proposition?
DeCata: A number of ways. We’re controlling our costs and enabling productivity of our sales reps through the combination of great training, data and the analytics delivered in an effective manner for the sales rep. The delivery is different than the way a finance person might need it; a sales rep needs it delivered in a certain way. We rolled out a number of years ago a software package called Order Pad. It gives the sales rep complete line of sight to product availability, pricing, application data, customer history, all completely available to the sales rep at all times. The combination of all of that has enabled our sales reps to become more productive.
There are many products that we sell where we feel very pleased about the margin, the unique nature of the product, the value-add, highly customized for the needs of the maintenance mechanic. But, there are other products that we sell that are commodity products – still necessary, and by nature a lower margin. And yet enabling our sales rep to take all of the business, serve the customer’s whole need, even the low-price, low-margin, low-commission products is just as critical to the customer and to our cemented relationship. So yes, there are a number of moving parts. Our value proposition integrates product and service intensive VMI. It’s a different way of going to market than an e-commerce only model. We believe that this approach offers the lowest total cost for our customers and differentiates us from competitors.
Our customers have told us they like the idea of not even having to think about it. Their 45-minute-a-week employee in the form of our sales rep shows up, does their job, makes sure they don’t run out, puts it all away, and then leaves. And the customer can be hardly involved if they choose to be hardly involved. Their bins are always full, the product is always available. There’s never more than they need, nor is there is there less than they need. So customers value this high-service, high-touch model, and they recognize that it is the lowest cost alternative they have, even though the prices may be a bit higher because we integrate our service and product. They all recognize it, whether they’re very large customers, who get to this answer analytically, or the very small customer who just sees it in front of them and the productivity of their maintenance mechanics. They all come to the same answer, which is, “This is the lowest cost choice that I have.” It’s a very simple model, but it is a cost-based value proposition, not a price-based value proposition.
MDM: It’s an interesting twist on a traditional distribution model.
DeCata: It is, and we believe that again, because of the service-intensive model, it is the lowest cost alternative our customers can have.
MDM: You had a really strong third quarter in 2018. What’s your outlook?
DeCata: We’ll see more of the same. There are a number of market dynamics which we see continuing. I don’t know how they could get better than they were in 2018, so we don’t see a change for better or worse versus 2018, which is actually great. Our ability to execute continues to improve. As we’ve traveled this path around holding costs, around delivering technology which enables our sales reps to be more productive, as we’ve integrated acquisitions, as we have changed, very slowly, aspects of our culture, we believe that in a stable market we can do better. We demonstrated that from ‘17 to ‘18 and we believe that from ‘18 to ‘19 we will continue to do better. We will continue to improve our bottom-line results, in absolute dollars and percent, and with even modest topline sales growth we can become much more profitable.
Our message internally and externally has been, “Stay the course,” which means winning share, and differentiating ourselves with service. We believe our shareholders will be well rewarded as a result of staying the course and most importantly, we believe our customers will continue to be well rewarded and we will continue to differentiate the quality and service intensity of our business to the benefit of the profits of our customers.
MDM: Beyond the “stay-the-course” theme for 2019, what’s your biggest initiative this year?
DeCata: There are so many. The continued rollout of analytics is an initiative. We continue to expand our inside salesforce. We continue our commitment to Lean Six Sigma and reengineering non-value-added work out of every aspect of the company – whether it’s distribution centers, sales processes or accounts receivable or accounts payable. Our goal is to optimize cost, productivity and quality of work life for all of our teammates and enable sales reps to do more in a given period of time.
All of these are initiatives, but all of them are a continuation of things that we’ve been implementing for years. We continue to accelerate. I would always like to go faster no matter how fast we go. Faster is better. And that continues to be the goal for the year.
The company reported profit of $12.5 million, compared to $4.1 million in the same period…
CEO Michael DeCata reports the company is positioned for solid future growth, including acquisitions.
Full-year sales grew 6% to $370.8 million.