J&L Industrial Supply, a division of $1.8 billion Latrobe, PA-based business-to-business manufacturer/marketer Kennametal, spent the better part of the past two years reshaping itself.
As a marketer of maintenance, repair, and operations (MRO) supplies and metalworking tools, it was serving two masters, neither particularly well. Inventory fill rates were running in the 60th percentile. In fulfillment, the Livonia, MI-based company was making six errors per 1,000 orders, says Chuck Moyer, vice president of marketing and supply chain management.
And because of overall weakness in the domestic and international industrial markets, sales and earnings were rapidly declining. In 1999, operating income at J&L had reached $19.8 million on sales of $372.8 million. The next year, J&L posted operating income of $17.2 million on sales of $338.1 million. By 2001, operating income was less than $3.7 million on sales of $300.1 million. That’s an 81% decline in operating income and a 20% drop in sales since 1999.
“This was a broken company,” recalls Moyer, who along with chief operating officer Michael Wessner was brought on board in early 2001. Just as metalworking is the process of cutting, smoothing, and refining metal, J&L’s new team cut, smoothed, and refined its operations in order to turn the company around.
How do you begin to fix a “broken” company? “You start with a plan,” Moyer explains. “You do triage. You sit on the phones and find the big problems.”
They certainly weren’t difficult to find. For one thing, J&L did not even stock 70,000, or 44%, of the 160,000 SKUs of MRO products featured in its catalog.
The MRO portion of the business had other problems. With more than 12 million plumbers, heating and air-conditioning contractors, and building managers in the U.S., the $330 billion MRO market is more than 11 times the size of the $28 billion metalcutting market. But it includes some formidable competitors as well, including $4.8 billion W.W. Grainger and $650 million Interline Brands, the parent company of catalogers Barnett and Wilmar.
So with the January 2002 catalog, J&L exited the MRO business. In April 2002, it sold $50 million Strong Tool Co. of Ohio, a Cleveland-based subsidiary it had purchased in 1998. The previous year, it had sold another subsidiary, Salt Lake City-based ATS Industrial Supply, which had annual sales of $17 million.
By getting out of the MRO market, the company’s “pace of decline has moderated,” says Mark Koznarek, managing director of Cleveland-based private equity firm Midwest Research.
J&L had acquired Strong Tool and ATS, among other properties, during a buying spree in the late 1990s. Founded in 1970, J&L was sold by entrepreneurs Joel Shapiro and Irwin Elson to Kennametal in 1990. Encouraged by the availability of investment money in the mid ’90s, the publicly held Kennametal merged J&L with another metalworking subsidiary, Full Service Supply (FSS), in 1997 to form JLK Distribution Direct. Kennametal promptly spun off JLK as another public firm, of which it owned 83%.
Focused on growth, in 1997 and ’98 JLK bought eight companies. Sales grew from $275.3 million in ’96 to $372.8 million in ’99. But JLK had problems integrating the businesses, resulting in an organization scattered throughout the country. Making matters worse, in 1999, “the [industrial] markets went bust, and the company lost its steam,” Moyer says.
With JLK’s sales and earnings declining in 2000, Kennametal looked into selling its share of the company, but it couldn’t find a buyer. So in November 2000, Kennametal bought back the outstanding common stock, making JLK a wholly owned subsidiary once again and returning to the J&L name shortly thereafter. FSS, which provides onsite technical expertise in tool procurement, usage, and replenishment to large commercial customers, is once again a separate division.
“With more-focused business plans, J&L and FSS have clear growth strategies without conflicting or overlapping agendas,” Markos Tambakeras, Kennametal’s president/CEO, proclaimed in the company’s 2001 annual report.
In pulling out of the MRO market, J&L also extricated about 300 pages from its more than 2,000-page annual catalog. (In addition to its “big book,” J&L mails 64-page updates throughout the year, bringing its total annual circulation to 10 million.) At the same time, though, J&L added an additional 40,000 SKUs of abrasives, precision metalcutting equipment, hand tools, and safety gear to its 130,000-SKU product line.
Last year, Kennametal continued to shore up J&L. The parent company took a $2.5 million charge for severance of 115 employees, $1.8 million for closing 11 underperforming satellite locations, $600,000 related to obsolete inventory, and $700,000 for exiting three warehouses. Instead of shipping from five distribution centers (DCs), J&L now ships solely out of facilities in Detroit and Chicago.
“It made sense for us to centralize our operations,” Moyer says. “Before, we had duplicative inventory, which made us carry higher levels of inventory than we needed.” (The company still operates four contact centers, in Detroit, Chicago, Los Angeles, and Charlotte, NC.)
Also last year, J&L also purchased an inventory management system from Rockville, MD-based provider Manugistics. The software provides J&L SKUs with electronic notifications of out-of-stocks from manufacturers, as well as reorders on current stock, which enable a better in-stock position. As a result, J&L’s fill rate is now 99%, even though inventories are 25% larger than last year. And the company reduced its error rate to a scant one per 250,000 orders, or 99.96% accuracy.
“With our high SKU count the only way we could be effective was centralizing the DCs and having the ability to get product delivered the next day,” says J&L’s chief operating officer Michael Wessner. “Once we went through the stabilization process in the initial four to six months, we had to talk about strategy and going forward. Around that time, we began to offer 100% same-day shipping.”
For the company’s four contact centers, J&L purchased two phone switches with skills-based routing from solutions provider Siemans. Customer calls get routed geographically, and J&L can now answer 95% of all customer calls within 20 seconds. Another benefit of the system: When an inbound phone rep is idle, the system pushes outbound call information to the CSR.
To maximize sales, J&L bought software from Edina, MN-based Net Perceptions. For each customer, the software identifies products the customer is not currently buying from J&L but is statistically likely to be interested in, similar to what Amazon.com does with its music and book selections.
“At the point of sale we make additional product suggestions,” Wessner says. “But we also use it through field sales to manage the entire relationship. One of things that’s difficult for an industrial distributor is to get the full penetration of the market. It allows us to get more of their business dollars.”
The software also “helps our CSRs ask the right questions,” Moyer says. For example, a CSR might say, “I see you need abrasives with that machinery you purchased. Who are you buying them from?” Moyer says that by enabling CSRs to upsell and cross-sell, the software paid for itself within nine days.
Although Wessner and Moyer would not comment directly on the company’s costs for technological investments, according to the annual report, Kennametal’s capital expenditures for J&L totaled $2.7 million in 2001, $6.9 million in 2000, and $9.4 million in 1999.
With most of the improvements in place, J&L is now polishing its image among customers and prospects. To promote its enhancements, last year J&L rolled out its “Experience the Changes” marketing campaign. “Because the metal cutting universe is so small, broad-based advertising made little sense,” Moyer says. Instead J&L contacted customers with e-mails and fliers.
But Midwest Research’s Koznarek notes that the company still has a bit more work to do. Margins are running at 2%-4% of sales, far below the industry average of 8% of sales, he says.
And J&L currently has less than 2% of the $28 billion metalcutting market. But the company views that as an opportunity rather than a drawback; after all, it means that there’s plenty of business to go after.
“We’ve poised the company for explosive growth,” Moyer says, “and that’s our expectation.”