Clicking at Graybar

The 132-year-old electrical switch and cable outfit has revamped its warehouse and distribution system

From its earliest days, Graybar Electric Co. had been fast, but not quite fast enough. Company lore holds that its founders thought in the 1800s they had invented a breakthrough improvement on the telegraph--only to be beaten to the patent office by hours. In 1997, the Internet was creating booming demand for technology goods, but the Clayton (Mo.) distributor of communications and electrical gear was being left behind again. Too often, Graybar simply couldn't get its products to customers quickly and efficiently. With a tangle of 231 local distribution centers, each run as an independent fiefdom, the company could take a week to fill an order and the goods could come from as many as eight different branches with eight different bills to pay.

Enough, said the company's leaders. Carl L. Hall, then CEO and now chairman, told managers that Graybar would have to dig deep, coming up with $144 million over four years to build 16 big warehouses to supplement its network of distribution centers. The goal was to centralize supplies of certain products so orders could be filled quickly and from one facility. It was a bet-the-company decision: The price tag to pay for the expansion was more than two years of profits for the 132-year-old Graybar. What's more, it risked undermining the culture at the employee-owned company, where the local bosses had long had almost complete control over their operations. Still, Graybar's top brass thought it had no choice.

The bet is starting to pay off. In 2000, Graybar's sales surged 21%, to $5.2 billion. That made Graybar the fourth-largest company on BusinessWeek's list of top private information technology outfits. The company's income hasn't accelerated as much because of the continuing heavy investments in warehouses. Net profits crept up 2% last year, to $66.2 million. Still, Graybar expects to climb in the years ahead. The plan "has certainly hit our bottom line. We knew it would," says CEO Robert A. Reynolds Jr. "But in the next five years, we'll have payback."

Certainly, customers are happier. SBC Communications Inc. (SBC ) and others often receive their orders overnight: In the past, shipments could take a week. Even better, the orders come from a single warehouse, so there's only one bill to pay. Williams Communications Group Inc. (WCG ), a Tulsa telecom upstart that buys cables and other gear from Graybar, has doubled its seven-figure business with the distributor in the past year, in part because of Graybar's new efficiency. The distributor's competitors "are doing the same thing, but [Graybar] has been a little faster," says Stan Shapiro, a senior buyer at Williams.

WHITE SHIRTS. Not that change has been easy. Graybar is, simply put, an old-fashioned company. Back in the late 1800s, it was part of Western Electric Co., the supplier of telephone gear to the Bell system. The distribution business was spun off in 1925 and bought by its employees in 1929. White shirts and ties for men are still de rigueur. And it's not uncommon for execs to spend their entire careers at the company. Reynolds, for example, has been with Graybar since he graduated from college in 1972. "We're not a glossy company," says Deborah Weis, the company's 37-year-old director of e-business. "It's a very old culture that takes a long time to change."

The biggest hurdle to overcome was the tradition that local bosses had almost complete independence to run their distribution centers. They stocked what they thought customers in their region wanted, and if they didn't have enough of a particular product, they called around to other centers to round up supplies. Having the relationship with the customer was critical because the person who took the order got the commission--even if he didn't fill it himself. "If we had a large order, we could end up shipping from seven or eight warehouses," says Terry Loveless, a Graybar manager in Alabama. "It was a huge burden for the customer. Every warehouse sent its own invoice."

Because of the deeply ingrained culture, Reynolds was careful about how he put together the new corporate structure. Rather than taking away local independence or closing any branches, he is building the 16 new warehouses to coexist with the local facilities. After the first warehouses were built, Reynolds didn't even order local managers to reduce their stock on hand. He wanted to make sure managers had the goods they felt that they needed. "We didn't want to cause service failures because of a change in business process," says Ed Keith, vice-president for logistics.

SLIM AND TRIM. With the new system, local managers have been reducing their inventories. They realize that they can rely on the warehouses for rarely needed goods and that it's easier for customers to get big orders from one place. Now, Loveless says his warehouse has about $2 million in inventory, down from $3 million in the past. Overall, the company's inventory fell by $95 million last year, to $748.7 million, despite the healthy sales growth.

Today, Graybar's biggest challenge is to keep sales growing fast enough to fill up all its warehouse space. With the telecom sector stumbling, Graybar is seeing sales growth slip. Revenues for the first quarter of 2001 were up just 2% over the same period of 2000. Reynolds says he's not worried. He says that Graybar sells telecom equipment largely to big phone companies, such as SBC, Qwest Communications International (Q ), and Verizon Communications (VZ )--not the legions of startups that have had trouble paying their bills. He expects strong sales in the second half and overall growth of 7% to 8% for the year. He's confident enough that the company plans to complete its last six warehouses on schedule in early 2002. "We have not slowed the investment at all," says Reynolds.

He has big plans after all. He set a goal of $8 billion in sales in 2004, up more than 50% from last year. Graybar's employees think that the new warehouse system will give the company a good chance of reaching the target. "It would have been virtually impossible to get there with the structure we had," says Loveless. Graybar, it seems, is beginning to learn the benefits of speed.

By Faith Keenan and Timothy J. Mullaney in New York

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