Progressive Distributor - Redefining value

Redefining value

By maintaining a customer-centric focus, Applied Industrial Technologies strives to continually redefine its value in the markets it serves.

It is early morning on a cold day in the middle of January and a blinding snowstorm has slowed most activity around the Cleveland area. Its the kind of day where employees straggle in late to work, if they show up at all, and sneak out early.

While the storm raging outside puts most people in the foulest of moods, inside an office on the third floor of a futuristic-looking office building downtown, the room is alight with excitement, warmth and energy. Jack Dannemiller, chairman and chief executive officer of Applied Industrial Technologies, greets a visitor warmly and quickly falls into an animated discussion about the future of industrial distribution and his companys place in it.

He peppers the conversation with references to books he has read and authors whose ideas may offer clues to better manage the $1.4 billion business he heads. W. Edwards Demings writings on continuous improvement influenced Dannemillers interest in the development of quality improvement teams. He takes great pride in the fact that Applied employees often participate in performance improvement teams established by customers.

Up until a couple of years ago, customers seldom had outsiders on their teams, Dannemiller says.

He quotes from Peter Senges book, The Fifth Discipline, on the need to build learning organizations. Such corporations overcome inherent obstacles to learning, develop dynamic ways to pinpoint the threats that face them and recognize new opportunities.

He refers to The Profit Zone, the book by Adrian Slywotzky and David Morrison about how companies can achieve sustained, superior profitability to create enormous value. What I learned from that book is that you cant take any business model for granted, Dannemiller says. You must continue to change, to reinvent yourself and to be customer-centric.

Its this desire to think outside of the box, to continually search for new ways to stay relevant, that enables Applied to maintain its leadership position in the industry. The company is a leading distributor of bearings, power transmission components, industrial rubber products, fluid power components, linear technologies, and specialty maintenance and repair products. It has more than 380 service centers in 46 states, eight distribution centers and a network of mechanical, rubber and fluid power shops.

We constantly review our business model to keep it relevant and streamlined, he says.

Documented Value Added
One way that Applied stays relevant is to get customers to view it as more than simply a parts provider. That requires a multi-discipline selling approach to operations, maintenance, engineering and purchasing. To reach multiple layers within a company, Applied needed some way to demonstrate the value it brought to customers beyond parts availability.

Applied was one of the first distributors to emphasize documenting value when it introduced its trademarked Documented Value Added (DVA) program in 1996. This program identifies any cost savings opportunity provided in addition to the products and services customers purchase.

Applied employees are trained to look for ways to improve customers operations, reduce maintenance costs and recommend substitute products or processes to generate savings. The company tracks suggestions using a proprietary software program that calculates the savings. On an agreed-upon time schedule, Applied presents the findings to customers and asks them to sign off on the savings.

The effort works. In 1998, Applied documented $215 million of customer DVA and aims for $300 million in 1999.

It makes our company invaluable to the customer, and thats the way you retain business, says Rick Shaw, vice president of communications. Youre bringing something beyond being able to deliver product at a good price.

The benefits to customers are obvious. It enables a buyer or a maintenance manager, for example, to report actual cost savings to their managers in a timely manner. But Applied benefits as well. Customers in a variety of industries recognize Applied as a source not just for product expertise, but systems and engineering know-how.

According to Bill Purser, chief marketing officer, Applieds expertise is becoming increasingly important to customers that have downsized and restructured.

Whats happening is that a lot of the knowledge in the maintenance mans head just walked out the door with his retirement package, Purser says. If you dont find a way to capture that information, catalog it and share it, it leaves forever. Thats a concern. We have many customers that have lost a lot of experience because of restructuring.

The challenge for Applied is to capture that knowledge before its gone and to share it with customers and with other salespeople, who can pass ideas on to their customers.

We have a wealth of information. How do you get that knowledge on paper or in an electronic form where it can be shared with others in the same situation? Purser says.

One method was to equip service centers with copies of Lotus Notes software and develop user-friendly templates that assist salespeople in sharing valuable knowledge.

We started a chat room with our product specialists about four years ago, Purser says. If I happened to be calling on a poultry plant in Arkansas and Im online and I see a particular product thats a cost-savings idea, I can alert my brethren in the Southeast that have poultry plants where the processes are very similar.

Salespeople become solution sellers
Focusing on value-added has required a change in thinking for most salespeople. Weve had to train them to become solution sellers, says Dannemiller.

It requires salespeople to ask a different set of questions, such as: What part of the process wakes you up at 3 oclock in the morning? Where are you having the most frequent outages? Where are you spending time and energy and not seeing many results?

We cant solve all of their problems, but our approach has to be different, Dannemiller says.

Initially, salespeople didnt believe the customer would be willing to share information. But Dannemiller says that has changed over time.

Weve noticed that customers have become more open to sharing operating and maintenance information than they were in the past, he says. They realize that its not in their best interest to keep you out of the plant; its in their best interest to pick the most knowledgeable people and bring them into partnership.

Marketing DVA to customers
In addition to documenting value for customers, Applied leverages its value-added activities in marketing and sales efforts. Awards and letters of commendation from customers fill the walls of Applieds Customer Jubilation Center in the companys Cleveland headquarters, where customers are brought to hear Applieds success stories. DVA is the focus of an advertising campaign that demonstrates actual examples of documented savings. They explain:

" how Applied saved $750,000 for a major aluminum producer by designing, manufacturing and replacing a gear box in a critical plant operation;

" how Applied saved $47,000 for a manufacturer of industrial machine knives and saws by automating an existing grinding machine rather than replacing it with an automatic model; and,

" how Applieds drive products group engineered new drive models to replace 400 faulty drives used at another major customers plant. Total savings: $1.98 million.

Applieds strategy appears simple enough: continually focus on defining what customers value and then deliver those products and services cost-effectively. But one of the hidden dangers to such a strategy is what some people in the industry call scope creep, the tendency for customers to gradually expand the scope of a project to the point where its difficult for a distributor to know if all of the activities being performed for customers are profitable.

Purser acknowledges the danger of being spread thin by customers who ask them to take over engineering functions, by purchasing departments who shift procurement responsibilities to distributors and even by manufacturer suppliers who are increasingly shifting marketing activities to distributors.

Distributors are being pulled in many different directions, he says. You cant do all of them and be profitable. Heres the key: Survivors are going to be those who develop their strategy and stick with it. Youve got to have a plan of where youre going. Know what your capabilities are and know what you want to do.

Dannemiller adds that Applieds goal is to stay where we have expertise, rather than lose our focus and try to be all things to all parties and bring no value to anyone. Customer segmentation is one way to maintain that focus.

Were looking at markets by industries and segments within industries. Market segmentation is a strong focus for us. It didnt used to be, he says. Our focus was primarily geographic. You put in a branch and service all the industries that used your products. Now were saying industries drive technological change, and segments within industries lead it. Were ramping up our marketing efforts in key customer segments.

The ability to provide a variety of services for customers hinges on a companys understanding of its own costs of operation and continually improving processes to streamline activities and internal costs.

Last October, in response to a slowing manufacturing environment, the company instituted several cost-cutting initiatives. These included capital spending cuts, a wage-and-hiring freeze (which was later lifted) and closing or consolidating 20 service centers in under-performing markets. It also downsized a number of other service facilities and reduced the workforce by 210 full-time positions.

At the same time, Applied was investing in new technology and marketing initiatives to improve customer service.

All of these actions, according to Dannemiller, reflect a more streamlined approach. As weve increased our productivity, the system interface with our suppliers, the speed with which our system operates, were able to get more done with less manpower, he says. Where were headed with all of this is to be able to improve our revenue per associate and profit per associate.

Applieds current revenue per associate is in excess of $400,000.

Despite these efforts, earnings for the fiscal 1999 second quarter that ended Dec. 31, 1998 were 20 cents per share on sales of $371 million, compared to earnings of 35 cents on $368 million in sales in the same quarter in 1998.

Still, Dannemiller remains confident that the company is on the right track. He says Applied determined six years ago to become less dependent on cyclical markets such as heavy industry. Since then, it has made progress targeting major customers in food processing, beverage, pharmaceuticals, utilities and consumer-driven industries.

We would like to capture the flagship companies, he says. We want to have people that we can hold up as testimonials and say, Were their best suppliers. What weve done for them, we can do for you, if you give us a chance.