Omni Cable Corp. is helping CLS work out the kinks in its wire operations.
Welcome to the black hole of many distributors' warehouses: the wire aisle. It's a forbidding world stacked high with cable reels that glitter with the gleam of copper, aluminum and now fiber, and smells of a bewildering array of polymer- and rubber-based insulations. On the business side, a distributor's wire department has an insatiable appetite for attention, handling, warehouse space and investment. When one figures that wire and cable accounts for over 10% of the average distributor's inventory, you know that it demands an awful lot of their attention.
Over the past few years, the management team at CLS, Inc., Hartford, Conn., a 16-location distributor with $109 million in 1998 sales, spent many frustrating hours thinking about their wire and cable investment. Bob Compagna, president; Dave Donovan, director of purchasing; Larry Doughty, director of marketing; and other managers had wrung out the inefficiencies in many areas of their business. Yet, sitting in CLS's branch warehouses throughout New England was a huge living, breathing and constantly multiplying heap of wire that wasn't as profitable as it could be. A lot of the profit was cut out from "shorts," those troublesome lengths of wire snipped from larger reels when customers order specific lengths of cable instead of buying it by the full reel. Shorts are tough to track because once a cut is made from a master reel, the remaining unsold wire becomes a new stock-keeping unit (SKU). Many software packages can't handle this change.
Because of CLS's "We aim to please" service philosophy, its salespeople were always ready to make cuts for customers so they got exactly what they wanted in wire, and not a foot more--irrespective of the inventory-tracking and profit problems that this policy created. It's a dilemma that distributors have always wrestled with and complained about. But at a recent IMARK meeting, CLS's management team found a willing listener who actually had some ideas for solutions to this age-old problem.
As president of Omni Cable Corp., Westchester, Pa., a five-location wire specialist with $40-million in sales last year, Jeff Siegfried lives, breathes and eats wire and cable, and he knows all about its demanding nature and its importance to electrical distributors. He also was looking for a solid value-added service to offer CLS and other distributors in addition to the miles of wire and cable Omni sells them each year.
After hearing about CLS's problems with wire and cable, he developed a strategy that would produce the value-added partnerships that so many people in the electrical industry talk about, but don't always come to fruition in the real world. "Wire and cable is like the deep secret at every distributor," he says. Even the most sophisticated distributor with the most sophisticated distributor programs and MIS usually has a pile of cable somewhere that's growing, and they close their eyes and run around it. We think 25% of a distributor's wire inventory could be handled better. That could be a 20%-25% space savings."
Siegfried says wire and cable is inherently difficult to handle, process and store in inventory, and that because distributors' customers live in a just-in-time world, "they "want what they want the next day, and they don't want to entertain anything more than they need."
"When distributors react to that, they immediately go from being distributors to being processors," he says. "They are cutting, handling, wrapping, packaging and shipping wire. By itself it's a tough commodity. Now you are compounding that by having a customer base that says, "I don't care about your problems. You need to get what I want when I want it, and I don't want anything but what I want."
Complicating the problem with shorts, he says, are the miserable prices that distributors have to take when they finally get frustrated enough to sell non-moving shorts to scrap companies, as they can only expect to get 15%-20% of the ongoing copper rate for any wire that they sell. "It's a horrible return," he says.
CLS's Dave Donovan says while one of the first things that CLS discussed with Omni Cable was its need to upgrade its wire-cutting equipment, its relationship with the company evolved far past that. "We said, 'Help us look at new wire machines. Teach us how to sell wire and cable and not have all those big piles of wire.' Wire and cable is 10% of the business. It's a huge investment."
As Omni and CLS began exploring the company's wire dilemma, they developed a strategy that touched on all aspects of the distributor's role in carrying wire and cable:
*Purchase new equipment that would help workers cut the cable more efficiently;
*Fine-tune the company's business software and inventory-management system so that it could handle shorts;
*Retrain salespeople to sell shorts, and offer them incentives to do so;
*Offer warehouse workers financial incentives to help the company reduce shorts.
One of the first steps for Omni Cable was teaching CLS's management team about the impact that wire has on the company's profit picture. Siegfried says any efficiencies that distributors can squeeze out of their wire operations often drop right down to the bottom line, because wire is usually in a distributor's top three inventory investments, but it's usually at the bottom of the turn-and-earn investment category. It creates other problems, too, he says. "MIS and education becomes a problem. Shorts and randoms cause a 30% to 40% increase in the initial space requirements. The stuff is falling off the shelves."
These short cuts really wreak havoc with inventory, as can be seen in his following example:
"If you buy 10,000 ft of wire in 1,000-ft quantities, a lot of inventory systems just show 10,000 ft. Say the salesman takes an order, and his customer says, 'I want 6,000 ft, but I want ten 600-ft reels. The distributor makes ten cuts, but then he has ten shorts. His computer then shows 4,000 ft of that cable in inventory.
"The next salesperson sells the 4,000 ft, but the distributor doesn't have it (in the lengths that the customer orders), so he buys 10,000 ft more. This scenario keeps repeating itself.
"It eats up a lot of space at distributors, and we find that it creates a lot of inefficiencies. In addition, the shorts and randoms create a 25%-to-30% increase in the dollar investment. Not only are you buying more cable because you have to have usable lengths, you are waiting for people to need your shorts, or are waiting for some part of your shorts to go through your system. The lag creates low turns because you have so much hanging out. These inefficiencies create the black hole."
To keep track of shorts, CLS and Omni developed a spreadsheet that lists every short, so every salesperson now knows what lengths are in stock. "The spreadsheet offers a salesperson the opportunity to solve customers' problems," says Dave Donovan. "Typically, our people will get a call from a customer saying, 'I need one 375-ft piece of 500MCM, and I need it in an hour. Our wire department is set up so we already have the runs of what they are going to cut that day. This random inventory will allow a salesperson to jump in and say, 'If you can take 390 ft, I can sell it to you immediately.' It raises our ability to satisfy the customer."
"If you train salespeople to look at the list and ask that question, you save the warehouse guys from making a cut," adds Siegfried.
It took more than just giving the salespeople a computerized report on what wire is available in the warehouse for CLS to trim inefficiencies in its wire operations, Doughty says. The sales force had to be retrained to realize that their decisions to cut any length of wire that a customer wanted had a real impact on the company's bottom line. Salespeople are so used to doing anything for customers to get the order that it didn't come easy for them to ask customers if they would take one of the short lengths in inventory. "They now understand that CLS has a new philosophy and culture," he says.
"The culture has always been that we are a sales company and salespeople are making these decisions. The salesman is being paid a commission to sell and make his customer happy all the time. He is making a decision about an inventory investment. He can make a decision to cut it or to ask the customer about a random. A hundred out of a hundred times, that salesperson used do what the customer wants. CLS changed that."
To remind the salespeople of what shorts are available-and to take the decision to always cut a new length out of the hands of the salespeople--CLS appointed Warehouse Manager Mike King as "wire czar," to move the shorts before cutting off of a fresh reel. "You need someone like that who becomes the entrepreneur of that area," says Doughty. "It's their domain. Taking the decision out the salesperson's hands is very difficult culture-wise."
Cuts That Count. A major investment of any distributor's wire operations is the wire-cutting machinery. Wire cutting and paralleling is a time-consuming processing. Omni Cable was able to help CLS streamline its operations in this area by assisting the company with the purchase of new wire-cutting equipment from some of the vendors that it buys from for its own warehouses.
"We don't sell machinery, but we understand the most efficient machinery," says Siegfried. "The machinery that we use shaves about 12-15 minutes off of a cut cycle. We buy a lot of machinery, and in a partnership situation, we offer it to them at our cost to a distributor because it is going to make them better at what they do."
CLS is consolidating much of its wire cutting and paralleling at its hubs with this new equipment, but it will stilldo smaller jobs at the local branches. The time savings the new equipment produces adds up, because the old wire cutting equipment took 25-30 minutes to set up.
Siegfried says one reason that the Omni-CLS partnership has worked is that it focuses on a side of the business that many vendors neglect in their distributor relationships. Vendors all have suggestions on how distributors can or should sell more of their products, but few have new ideas that help distributors run their business more efficiently, he says. "You can make a lot more money in the distribution business with efficient purchasing and handling of materials than you may do on selling."
Larry Doughty likes the thinking behind his company's partnership with Omni because it follows his company's general business philosophy of finding out what vendors and customers do best and trying to integrate those best practices, where applicable, into CLS's operations.
"Handling wire and cable is a core competency of Omni," he says. "It's been an opportunity for us to move forward and take Omni's expertise and mirror it in our own operation. We try to do that with a lot of manufacturers, We like to visit a lot of our manufacturers' sites to see how they handle material. It's part of our marketing program to visit key manufacturers on-site." (See sidebar, "Learning from the Masters" on page 35).
He says CLS has cut randoms in its inventory by 75% since partnering with Omni, and that there has been a significant change in the company's inventory and an improvement in the company's "whole wire situation."
Omni's Siegfried believes all distributors can benefit if they partner with vendors who are "solution sources."
"We know how to look at their situation and help. This adds value to our relationships with CLS and other distributors, because if we make our distributors more efficient, they will become better distributors.
Larry Doughty says CLS looks anywhere and everywhere for new ideas that can help the company become a better distributor. Some of the best sources of new ideas are his company's vendors, particularly its Gold-Plus suppliers with which it spends 90% of its marketing time. Because the company gets to know these companies so well and regularly visits their operations, they often come back with new ideas on handling materials.
Doughty cites an example of a visit to a manufacturer that ended up saving the company a ton of money in handling costs:
"We have a track manufacturer from whom we were buying about 500 sticks of track every week. At the manufacturing facility, they would manually palletize 500 8-ft pieces of track and ship it to us. A third of it would get damaged, because it's hanging 2-ft off of each side of the pallet. We would then manually unload it off a truck, put it on a pallet on a rack and sometimes damage a few more pieces.
"We were in their plant, and coming down an aisle was a big steel rack with about 3,000 pieces of track-totally protected. We said, 'Would you ship us that rack if we placed orders every six weeks instead of every week?'
"Now we don't touch it. We take it off of a forklift, pick out of that rack and ship back the empty rack. We were handling that product three times. Now we only handle it once. Those are the kinds of things that working closely with manufacturers allows you to learn."
CLS uses this same philosophy in its efforts to teach its customers to be better businesspeople. Along with running classes for electrical contractors in construction-business basics such as accounting, collections, and bookkeeping, CLS helps contractors with marketing.
"We are helping them market themselves, and it creates a stronger partner for us," says Doughty. "Our hope is that we are going to take some guys who we feel are strong long-term runners and help them improve their business. We are only as good as they are."