Industry Outlook 1991: SERVICES
THE PRACTICE OF MAKING PERFECT
When Peyton L. Gannaway, president of Anthem Electronics Inc. in San Jose, Calif., visited Octel Communications Corp. a couple of years ago, he thought he was simply paying a courtesy call on a key customer. Evidently not. Instead of merely chatting, Gannaway spent three hours probing how quality-improvement practices pay off for Octel, a maker of voice-mail systems in Milpitas, Calif., that buys disk drives for its products from Anthem. Then last year, Gannaway sent 16 of his executives off to study for four days under W. Edwards Deming, the guru who taught quality improvement to the Japanese.
Across the $1.8 trillion U. S. wholesaling industry, quality improvement is catching on. As the economy weakens and squeezes profits, distributors are finding that providing better products or service is the surest path to survival. "The real weak ones are going to disappear in this economic downturn," says Don A. Rice, a distribution expert who has noticed a recent uptick in attendance at his $1,995 quality-improvement seminars at Texas A&M University.
'GETTING TIGHT.' Octel says it has stayed with Anthem because it tops other suppliers in making on-time deliveries of error-free products. Indeed, such performance is the primary way that distributors, who have felt the pinch of a lackluster economy for a year or more, are fighting slow growth. Last year, wholesalers' gross profits grew 4.8%, to $358.4 billion, down from an 11.3% gain as recently as 1987. This year, the industry will be hard-pressed to match even 1990's increase, according to the National Association of Wholesaler-Distributors. "Things are getting tight on the bottom line," says NAW Vice-President Ron Schreibman.
That's partly because price-cutting abounds among the nation's 322,000 wholesalers and distributors--who in turn are trying to compensate with cost cuts. Take Quill Corp., a $300 million-a-year office-products distributor in Lincolnshire, Ill. Struggling with weak markets and facing discount competitors, Quill cut its prices an average of 18% early last year, then trimmed some $300,000 from its annual payroll with staff cuts. Profits fell by roughly 50% in 1990 at the privately held company, though they may rebound a bit this year. "What's happening in wholesaling is a tremendous, tremendous margin squeeze," says Quill President Jack Miller.
The current credit crunch for small businesses is another problem. Most wholesalers depend heavily on bank credit to finance their inventories. But bankers, under pressure from federal regulators to scrutinize loans, are rejecting applications they would have accepted a year ago. NAW Chairman Don Carlson, who is both president of a $70 million-a-year fasteners distributor in Omaha and a board member of a small bank, says lending policies are so restrictive there that many smaller players are being forced to close or sell out to healthier rivals.
Still, not everyone is being battered by the recession. For instance, drug distributors such as Cardinal Distribution Inc., in Dublin, Ohio, are doing well. Cardinal's earnings should rise 30%, to $12.8 million, on sales of $1.15 billion in its fiscal year ending Mar. 31, says Chief Financial Officer David Bearman. Acquisitions account for some of this gain. But the main reason it will happen is because Cardinal distributes drugs. "We're recession-resistant," says Bearman.
In more vulnerable markets, salvation lies in doing things better. One company successfully following this approach is Wallace Co., a $79 million Houston distributor of pipe, valves, and fittings for the oil and chemical industries. Despite a weak Gulf Coast market in the past few years, Wallace has boosted sales since 1987 by more than 69%, has increased operating profits more than sevenfold, and has hoisted its market share from 10.4% to 18%. Last year, Wallace became the first wholesaler to win the Commerce Dept.'s prestigious Malcolm Baldrige National Quality Award for small businesses. Wallace has "a passion for the total quality-management system," says Curt W. Reimann, the Baldrige award program director.
The key to Wallace's success is building worker motivation through training. It has spent $2 million since 1987 to develop teamwork among its 280 employees, create an atmosphere where everyone's opinion counts, and to sensitize workers to the need for top-notch performance. They have responded. Where only three of four Wallace deliveries arrived on time in 1987, 92% did last year, and the company aims for 98% by July. "We've empowered people to do their jobs, where before they'd hunt down some manager for every decision," says Michael E. Spiess, sales vice-president.
BACK TO SCHOOL. Buyers, too, are making wholesalers more quality-conscious. Chemical processing companies started pushing quality improvement in the early 1980s. Now, they're politely arm-twisting suppliers as well. Several major customers, for example, advised James W. Bernard, who runs Univar Corp., a $1.5 billion-a-year Seattle chemical distributor, to attend executive-level quality seminars. "What they're saying is, `if you want to supply us, you'd better have a quality program in place,' " says Bernard. He has set one up, and only half-jokingly describes himself as Univar's CEO and head of quality control.
Wholesalers' drive for quality gains is sure to accelerate. The trick in early 1991 will be to find ways to fund such programs. This could prove easier than it sounds, though. The payoff from quality-improvement investments can start immediately and snowball, experts say. That would be a boon to many wholesalers who otherwise face a cold winter.Joseph Weber in Philadelphia