Progressive Distributor - Shifting gears

Jim Thompson, Vallen Corporation Shifting gears

Vallen Safety moves from pushing products to selling services

Five years ago, the management team at Vallen Corp. in Houston saw the writing on the wall. As a distributor of safety products to industrial, commercial and public sector customers, what they read made them uncomfortable.

We discovered that safety was clearly becoming a commodity, says Jim Thompson, president and chief executive officer.

Through surveys and interviews with customers, they learned that 80 percent of customers demanded more from distributors than just products. Customers wanted consolidated billing. They wanted to deal with fewer suppliers. They also wanted to obtain services traditionally handled by outside contractors such as fire extinguisher repair and inspection, instrument repair and rental from a single source.

They concurred that distributors that continued to focus on just selling product were in peril.

So Vallen made the gutsy decision to begin focusing less on products and more on services.

It was no easy task. We had to make fundamental changes in the company, Thompson says.

First, it meant changing the way people were compensated. They alerted salespeople that gross margin is a driving force for earnings. Selling services enhances gross margin. Therefore, field salespeople and customer service representatives are paid extra incentives for making presentations on knowledge and training.

Some salespeople quickly adapted to the change. Others were slower to adjust.

With products, you have something tangible youre selling, says David Dewey, vice president and managing director. You have to do more conceptual selling when youre selling services. Its tougher because some customers dont necessarily think that way.

Thompson says he expected the transition from products to services to take three years. He admits the goal was too ambitious and says the real benefits are beginning to surface now that the effort is entering its fifth year.

Weve had tremendous success in the last six months, Thompson says. Our people now realize that by just selling personal protective equipment, they werent going to make a living. They need to add technical products, services and training.

Back to school
he second step involved increasing educational efforts so salespeople could gain a better understanding of services and technical issues. The sales organization spent hundreds of hours on training to progress from product-oriented thinking to managing more complex customer problems.

They reorganized the sales force to better focus on specific geographic regions. Teams located in the East, Central and West are designed to bring decision-making closer to customers.

During the first year, our knowledge-based strategy also evolved, Thompson says. We went from products, to services, to knowledge. Those three pieces became the focus for what we refer to today as our total safety solution.

Since instituting the change in philosophy, sales have steadily increased.

Today, about 10 percent of Vallens sales are attributed to service, a figure Thompson expects to grow to 25 percent over the next three to five years.

Sales of Vallen services catapulted 60 percent in 1997, with much of the increase coming from existing customers.

Net sales for fiscal year 1998 were $294.9 million, an increase of 14.4 percent over 1997 sales of $257.8 million. Earnings were up 16.8 percent to $10.2 million, or $1.39 per diluted share.

For the nine months ending Feb. 28, 1999, net sales were up 6.8 percent to $229.8 million, from $215.1 million for the same period in the prior year. Diluted earnings were $6.8 million, or 93 cents per share compared to 92 cents per share during the same period the prior year, but included a 4 cents per share restructuring charge.

Management says earnings gains result from service-based business that includes training, fire services and technical support.

We discovered that if we offered training, such as confined space training, fit testing or noise level measurement services, customers would migrate to us because we offered one-stop shopping, Thompson says.

Still, 20 percent of customers continue to address safety as a transaction item, particularly with products requiring less technical expertise, such as gloves, eyewear and hard hats. To help meet the needs of those customers, in 1996 Vallen acquired All Supplies Inc., a distributor of welding, industrial and safety supplies based in Baton Rouge, La., and added mill supply capabilities to existing locations in Texas and Tennessee.

Adding mill supplies enabled us to provide a solution for customers who feel a transaction solution is more important than a safety solution, Thompson says.

For customers focused on bottom-line results, Vallen improved its system for demonstrating savings, says Jeff Whetzel, vice president of marketing and business development.

We have a proprietary reporting package where we work with the Vallen field representative and the customer to document services, performance and cost savings, he says. Documentation of savings is an important piece to the customer, so we want it done professionally and accurately.

Safety first
Despite expanding into other product lines through the acquisition of All Supplies, the emphasis remains on safety.

Our mission is to protect peoples lives, Thompson says. We look for customers who believe in safety, believe in protecting their people and are looking to reduce workers compensation rates for the purpose of protecting people and enhancing their profitability.

The shift from products to services also required shifting attention to a different end-user target. Salespeople continue to talk about the technical aspect of respirators and air monitoring equipment with safety directors and maintenance people. But Vallen now strives to develop relationships higher up the corporate ladder.

Safety directors and chief financial officers talk in different languages, says Dewey. The way to talk to CFOs, CEOs and plant managers is in business terms. Part of our job is helping the two sides communicate with one another.

That means explaining how a safety program can impact the number of lost workdays due to injury or accidents, or what effect a reduction in incidence rates can make on a companys bottom-line profitability.

You can save companies millions of dollars by helping them reduce their risk management cost by reducing their incidence rates and accident rates, Thompson says.

Some salespeople made the transformation easily. For those unable to move at multiple levels within a customer organization, Vallen uses a team management selling style.

It gets to be more of a consulting relationship with the customer, says Whetzel. What are your cost reduction objectives and how can we fit into the overall solution to make sure you do not have an increase in incidence rates and insurance rates?

In some cases, customers have credited Vallen with helping them achieve major reductions in workers comp rates.

There are some examples where companies have explained in their annual reports how we helped them lower rates by more than $150 million annually, Thompson says. When you see them writing that in their annual report, thats excellent material to show the difference between a commodity supplier and a total safety supplier.

Outside competition
A recent survey of safety distributors by Progressive Distributor showed that 79 percent lost sales to alternate channels in the past year. Vallen continues to fight the trend by customers to purchase safety products from general-line distributors. One way is to point out how its staff differs from general-line salespeople. Thompson says salespeople from mill supply houses often lack the technical expertise to make safety product recommendations.

For example, take something as simple as goggles, he says. A non-technical supplier will give an end-user a foam-lined goggle, which doesnt provide a seal. Vapors can actually penetrate the lining and get into the workers eyes. What the salesperson has done is made the worker feel more comfortable, but they arent protecting the worker. The general-line distributor doesnt realize theres a lot of liability that goes with selling safety.

Thompson adds its not uncommon for financial liability to be in the seven-digit range.

It usually surfaces 15 to 20 years after you sell the product. Theres a cost to being in the safety business that general-line distributors dont recognize, he says.

The evolution continues
The latest step in Vallens migration from being a products provider to a service-oriented company is a recent cost restructuring program that included branch structure changes, replacing warehouses with service centers and adjusting personnel levels.

Were looking to have locations provide services in individual markets, but not necessarily stock a great number of products in every market, Thompson says.

The moves are intended to generate $3.2 million in savings a year.

We anticipate making additional changes to continue lowering our cost of operations, he says. We think it is imperative for distribution to continue lowering the cost of product distribution. Even though were shifting to services and knowledge, we need to be competitive in that arena to compete as an overall package.