This article is part of the MDM series: The Shifting Competitive Landscape.
One of the most popular examples of a collaboration between distributors that has worked is that of APR Supply, Schaedler Yesco and Industrial Piping Systems in Pennsylvania. The three have 11 locations together, and continue to uncover new opportunities to benefit from the arrangement. They’ve inspired a new program from Affiliated Distributors called Co-Ventures. This article looks at why the distributors’ collaboration has worked and what to consider when going down a similar path.
Jim Hoffman saw a common thread in his first three clients after he launched his consulting business. “By the end of my first year working in those three companies, I thought, ‘Except for what’s in the boxes, they’re in the same business,’” he said. If he could get them to work together, he thought they could accomplish great things.
More than six years later, the co-venture between plumbing supplies distributor APR Supply Co., electrical distributor Schaedler Yesco and PVF distributor Industrial Piping Systems continues to grow. The three distributors also continue to uncover new ways to benefit from working together.
Today, the companies have 11 shared branches in Pennsylvania – some housing two of the partners, others with all three – and more planned.
Inspired by the success of its three affiliates, marketing group Affiliated Distributors announced a new Co-Ventures initiative in October, with Hoffman in the position of director. Through the program, AD will become a matchmaker of sorts, pairing companies in common markets across industries and providing support for the collaborations.
“There’s no question that these companies are significantly stronger, bigger and more successful than they would be (without this co-venture),” says Bill Weisberg, CEO of AD. “And this isn’t a pet project of one or two people at their companies. Their Co-Venture drives strategy and delivers everyday value for their entire organizations.”
The Original Co-Venture
Jim Schaedler, CEO of Schaedler Yesco, Harrisburg, PA, and Scott Weaver, president of APR Supply Co., Lebanon, PA, agree that Hoffman instigated the plan. But both were intrigued by the possibilities.
“Selfishly we thought it would be a beneficial concept in growing our business at a location where we currently were not,” Schaedler says. “It would be a less expensive, easier geographic expansion than it would have been to do on our own.”
But everyone quickly learned they had to check their egos at the door. “If you think of it just in terms of what’s best for you, we wouldn’t have gone past that first venture. It wouldn’t have worked,” Schaedler says.
The “courting process” – as Hoffman refers to it – began in early 2006, with Schaedler Yesco, APR and Industrial Piping Systems, York, PA, officially opening their first joint location in Chambersburg, PA, in November of that year.
The biggest challenge in some ways was getting everyone to slow down, Hoffman says. “If you rush into it, I wouldn’t be surprised if you have a bad result.”
The relationship is not a formal joint venture; no legal documents bind the companies together beyond lease agreements at the individual locations. And the three companies often refer to the arrangement as cohabitation. “We’re not married, we just live together,” is one of the sayings the companies use to describe it.
In some ways, this kind of alliance is “more than a marriage,” says Brent Grover of Evergreen Consulting. In a marriage you decide who takes out the trash or who does the dishes, he says. “This is a lot more complicated than that.” Grover has no direct connection to this alliance, but is an expert on strategic planning in wholesale distribution and has worked with several companies to develop ways to improve their competitive edge.
APR, Schaedler Yesco and IPS have managed to keep lawyers out of the arrangement for the most part, but the model of continuous communication between the parties keeps them working together. The lack of binding contracts to continue doing business together means that getting out can be as simple as letting a lease expire and moving on, Weaver says.
“Because we have agreed to disagree at any time, we’ve also agreed to listen to each other and trust each other all of the time to make it work,” Weaver says. “Because it’s so easy to get out, it keeps us in.”
“I don’t want to sugarcoat it too much, but there really haven’t been that many challenges,” Hoffman says, “probably because we spent so much time in the beginning really getting to know each other.”
The process laid out by Hoffman starts much like a dating process: “You have lunch together, then you have breakfast together, then you start visiting their locations and talking with their management teams,” even sharing financials with each other, he says. “You have to take the time to build trust.”
When it comes to decision making, “We compromise hundreds of little decisions because the big decision to be business partners is so much more important,” Weaver says. And that value must be communicated throughout the entire organization.
Employees have an inherent desire to protect the company they work for, Weaver says. “Their inclination is to make decisions that are best for us. But if everyone makes decisions that way, it just doesn’t work,” he says. “The partnership will disappear as quickly as it began.”
It may not be an intentional decision, but it happens. And it needs to be addressed quickly. There were two cases of employees who weren’t entirely on-board with the collaboration early on, Hoffman says. But management stepped in and made it clear: “This partnership is more valuable than any one person in any of the organizations. It’s more important than me, it’s more important than you,” Hoffman says. “It was a not-so-subtle message of get on-board or you may not have a place here.”
In addition to trust and communication, culture has to be aligned. “All companies service their customers; that’s what they’re in business for,” Schaedler says. “But the truth is, some distributors view servicing customers differently than other distributors. You have to make sure that you all have the same philosophy about it.”
Grover agrees: “It takes a pretty unusual set of circumstances to make this work.”
The Measures of Success
But if you can make it work, as these three companies have for six years, the benefits may exceed expectations.
“We had two goals when we entered this venture: entrance into a new market and, if the partnership worked, finding other ways to improve our efficiency by working together,” Schaedler says.
Savings come from shared buildings, shared equipment in the warehouse, even shared coffee service in the lobby, Hoffman says. And the expense of expanding into a new market can be cut nearly in half by sharing the start-up costs between partners – and by needing to have fewer of your employees at the new location “to cover lunches and breaks and the like,” Hoffman says.
While all of the companies have seen financial benefits from sharing overhead costs, “those are dollars and cents,” Weaver says. “But it pales in comparison to the other benefits.”
One of the greatest benefits is the ability to share – and build – best practices based on the experiences of the other companies, Weaver and Schaedler say. Through an all-day “management exchange program,” managers from different departments can get together with their counterparts at the other companies to discuss best practices.
“We started it two years ago,” Weaver says, “but we should have started five years ago.” In addition to developing best practices, the discussions have accelerated the understanding between the companies and helped to build the trust.
Another benefit for APR Supply was its introduction to Affiliated Distributors by the other two partner companies. “That was one of the examples of best practices that came out of this for us,” Weaver says. Previously, APR had been part of another group and hadn’t thought of looking elsewhere until it became part of this venture.
The companies are also looking at ways to further cut costs by improving joint logistics, Schaedler says. “We’re not a transportation company, and we don’t want to be a transportation company,” but covering deliveries for partners in select geographies is one of the newest pieces of this co-venture.
In the month following the announcement of the new AD Co-Ventures initiative, 40 companies signed up to be a part of the AD database. “And we already identified three potential matches,” Hoffman says. The goal is to have six co-ventures in place by the end of 2013 and to keep building from there, he says.
The announcement of AD’s Co-Ventures program garnered mixed responses from Schaedler and Weaver.
“If it’s something that can benefit the industry as much as it’s benefited us, then it’s a great move,” Schaedler says.
Weaver is more measured in his response. “It’s just so powerful, it’s just been so good for us,” he says. “How much of that do we really want to share? Now that it’s in print, someone can buy a manual and take our experience, and potentially become a competitor with us someday. We don’t have control over who gets that information.”
That said, it also creates motivation to keep innovating and to always stay ahead of that potential competition, he says. “We’ve had six years of experience with this already. If we rest on our laurels and let them catch us, shame on us,” he says.
“Even after six years, I don’t think we’ve uncovered all the value that can come out of a co-venture,” Hoffman says.