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.
MDM: Mike, let’s go back to 2012 when you started in your role at Lawson Products as an SAP implementation was coming on board. Can you talk about that as well as the digital and analytics journey you’ve been on?
DeCata: Certainly. SAP went live in 2011. We have a line of sight today that we never would have conceived of prior to that. For example, every morning we look at about 141 variables that are updated every day on a chart for us. We have the goals for the current month and, as the month goes on, that data gets populated. I will say you need reading glasses, but it’s 141 variables that consist of everything from loan balance to gross profit margins by segment, backorders, operational metrics, lines picked per labor hour, inventory turns by product classification, commissions paid to our sales reps, etc.
All these metrics are updated every day at about 4:30 a.m. It’s a huge asset beyond just static metrics and enables us to look at pulling the levers very quickly. If we see something askew or going in a direction either that we don’t understand or that we know is not the direction we want, we can take very quick action.
Beyond the daily snapshot, we look at what’s called a missed-cycle report because our business is so much of a service business for maintenance mechanics who have unique needs versus the production engineer. And while we’re very proud of our product, 60 percent of which is highly engineered private label, it is the service and vendor managed inventory that differentiates us. We call on customers on average every 10 days across 75,000 customers. This means either every week or every other week, averaging 10 days, we’re putting product away and we’re counting inventory.
The customer can fully outsource all of their consumable MRO needs to us. Because service is so important, the “missed cycle report” gives us near real-time visibility to that service. What we’ve determined is that if we miss more than two cycles for any reason – the sales rep is ill, they get busy with a larger account – because we’re in the short-cycle, consumable business, if we miss a couple cycles, there’s a chance we will lose that customer. So now as a result of SAP, we do an analysis of every transaction for every customer and if a sales rep misses more than two cycles, we communicate to the sales rep. If they miss more than three cycles, we communicate to the district manager, and if necessary assign it to somebody else. And there are a dozen similar examples to that real-time data analysis that is changing our behavior.
MDM: Can you describe the primary customer segments you serve?
DeCata: Very broad segments – we serve anyone who is running machines of any kind. They could be machines like an infant incubator in a hospital, a John Deere excavator at a construction equipment rental shop, equipment for an oil well services company, an injection molding machine or a die cast machine, an automotive collision repair shop or a firetruck. So the common denominator is if you’re running machines, they need to be maintained and, the more you run them, the more frequent the maintenance has to be. We would say that at the application level, though not at the market segment level, about 40 percent of our customers are in fleet.
Now, a fleet could be a fleet of construction equipment rentals. It could be a fleet of oil field equipment. It could be a fleet of Abrams tanks. It’s really any machine not bolted to the floor. It could be an over-the-road tractor trailer fleet, too – a traditional definition.
MDM: So unlike traditional manufacturing MRO, where we see pretty stable patterns of ongoing consumption and replenishment, you have a more volatile situation based on purchasing and usage behaviors.
DeCata: That’s right. One might think that every week we’re replenishing the same things. Well, every week we are going in and replenishing, but all of those line items, all of the hundreds and over a few months it’s thousands of SKUs at each specific site are being consumed at different rates. So, while customers are purchasing on a regular schedule, the items they purchase vary depending on which machines are being used more, what maintenance projects they have planned or underway and the season.
The fact that there’s going to be a transaction is completely consistent. What is being transacted is driven by varying machine usage and maintenance, special projects and the season.
MDM: How are you supporting that model with your digital efforts and e-commerce platform?
DeCata: Our e-commerce platforms continue to reinforce our primary channel to market, which is our in-person sales rep. The e-commerce channel provides tremendous analysis and research. It provides the reference material and application information for our customers, but what our customers are primarily buying is the labor, the physical labor of counting, opening boxes, putting it away and placing purchase orders.
It might be a bit of an exaggeration, but I could almost say that, in the perfect world, our customer would like it to just magically appear and not have to even think about it or deal with it. Now the other value-add, and our digital effort is helping this way, when I look at the elapsed time within a sales call, it’s as if you’re hiring our sales rep for about 45 minutes a week as if they were your employee. Our sales rep often walks in as your employee. They have free reign of the place, as your employee, and in a sense you’re hiring our rep for 45 minutes. That’s the service component and most of the elapsed time has to do with counting inventory, placing purchase orders, putting stuff away, and importantly, a percentage of the time is dedicated to unique problem solving.
Our executives make frequent sales calls, and what we see is inevitably every sales call or every other sales call a customer is going to come up to our sales rep and say, “I’ve got this problem. How do I solve it?” It could be a fastener problem, could be an electrical problem, could be a chemical problem. While that is the minority of the elapsed time and a 45-minute sales call, it is tremendous value-add.
In the course of their day, our sales reps experience a wide range of applications and they are exposed to application innovation through their relationships with mechanics and their customers. They have the opportunity to translate that application innovation from one industry to another. For example, this morning we might be calling on a food service production company and this afternoon we’re calling on a construction equipment rental company or the DOT repair shop in your town. How one customer uses a reamer or a seam sealer adhesive can be translated to a completely different industry and how they use the product. There is tremendous innovation that we see at the mechanic and application level beyond what the original designer originally envisioned.
MDM: Shifting gears, describe what your sales model looks like today. This was a major transformation that was taking place in the company.
DeCata: At its core, I knew that we had a tremendous and differentiated value proposition which integrated the best of product – 60 percent private label, highly engineered for the maintenance mechanic and their unique needs – with the best of service and labor. It’s interesting to note that our average piece price is 94 cents. So if you’re running a shop of any kind, of any size, how much time do you want your extremely limited labor, even more so your mechanics, dedicated to finding 94-cent parts? And yet the 94-cent part shuts down your $400,000 excavator. So it is necessary, and that’s the reason that the integration of service and product is so critical. So the value proposition was solid.
Some of what’s happened has evolved slowly, culture, for example. But, we also see very discreet progress – installing SAP and beginning to fully utilize it. In 2013 around April, we brought online our large distribution center in McCook, IL, which is about 308,000 square feet. So very specific foundational improvements have been made as far as infrastructure goes. We also brought Lean Six Sigma into the organization in January of 2013. It has had a huge transformational effect on our culture. It has turned our culture into a far more analytical and process-oriented culture.
Look for part 2 of our interview with DeCata in the next issue of MDM Premium.
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