Once again, W.W. Grainger tops ID's list of the largest MRO distributors in North America. This year, we asked company CEO Richard Keyser to share his thoughts on the economy, the challenges facing MRO distributors today, and Grainger's role in the supply chain. What follows are excerpts from that conversation.

Industrial Distribution: What do you consider the greatest challenges facing MRO distributors today?

Richard Keyser: Three factors affecting the MRO industry are continued weakness in the economy, the long-term trend of manufacturing moving offshore, and a shift in customers' buying behavior. Here is how Grainger is addressing each of these issues.

First, the economy remains weak and has shown few signs of improvement. In fact, in a recent survey released by the Business Roundtable, 120 CEOs polled said they expect the economy to remain weak over the next six months. Though it's not certain when a turnaround will occur, Grainger remains committed to investing in our business to continue enhancing our service to customers. Grainger's strong financial position allows us to make strategic investments during these tough times, putting us in a unique position to help customers as they look to drive down their total cost of procurement. In 2002, we increased inventory levels throughout our branch network to position needed products closer to our customers, who have relied heavily on our inventory during this downturn. This investment also put Grainger in a great position to meet customers' needs when the economy rebounds.

Second, the long-term trend of manufacturing moving offshore started before the current recession, as U.S.-based companies shifted manufacturing jobs outside the United States, first to Mexico, and now, increasingly, to China. Grainger got out in front of this trend in several ways. First, in 1997, we created our Global Sourcing division to find sources of low-cost, high-quality products for our private-label brands. Grainger also strategically focused on serving customers beyond the manufacturing sector, such as government and healthcare. Grainger has a very broad customer base, which leaves us less exposed during economic downturns.

Third, there has been a shift in our customers' buying behavior, as businesses have a renewed sense of urgency to lower costs. Customers are now looking beyond the price of an individual product and are examining the total cost of acquiring their indirect materials. Our research tells us that 40 percent of customers' overall spend on indirect materials is tied up in process costs associated with searching for products, placing orders and paying invoices. For example, Grainger has helped the U.S. Postal Service significantly reduce their process costs for acquiring janitorial supplies as a result of electronic purchasing. Through our unique multi-channel service model, Grainger is well-positioned to help customers drive down process costs by having an extensive product offering, available when and where customers need them.

ID: What is Grainger's philosophy on dealing with a troubled economy?

Keyser: In Grainger's 76-year history, we have weathered several economic downturns and we expect to come out of this one much like in years past – ahead of the pack. Grainger's philosophy remains the same no matter what the economic climate. We focus on helping customers get the products they need to keep their facilities running. Our strong financial position allows us to stay focused and make strategic investments during these tough times, enabling us to respond to our customers' needs today, and when the economy rebounds. Many businesses have reduced their inventories to a bare minimum in order to cut costs. They now rely on a few key suppliers to keep plenty of inventory on hand that they can purchase quickly, as needed. To respond to this need, Grainger has increased inventory levels throughout its U.S. branch network during the past year, to ensure customers have the products they need, when and where they need them. Having the right inventory close to customers also helps position Grainger to continue meeting customers' needs when the economy ramps back up.

ID: To follow up on the last question, what steps has Grainger taken to stay on track these last couple of years?

Keyser: We are in the process of revamping our distribution network through the construction and/or renovation of nine new distribution centers. These state-of-the art facilities will be strategically located throughout the United States and will have the advanced technology to handle branch replenishment and customer order fulfillment. These distribution centers will provide the products our customers need, when, and where, they need them, more quickly and efficiently.

Second, working closely with our customers, we've also developed unique solutions to meet their specific needs for availability and proximity. For example, in 2001, Grainger opened its first on-site branch at a customer location on the campus at Florida State University. In 2002, Grainger opened a second on-site branch at Langley Air Force Base in Hampton Roads, Va., the first arrangement of this type between a supplier and an Air Force Base. These unique solutions provide significant cost savings and productivity improvements for the customer by having the right products in a convenient location nearby.

Third, we are continuing to make investments in technology, including the company-wide implementation of our enterprise resource planning system. Our enterprise system enables us to share information across our operations. As a result, we have access to the same product, availability and order-status information, whether customers order in person, over the phone, or online. This information also tells us where and when we need to move products to make sure that our branches are equipped to provide timely and accurate product solutions to our customers.

ID: What have been the greatest consequences Grainger has suffered due to the economic slowdown?

Keyser: The biggest impact on Grainger has been a lack of overall sales growth. However, while sales are down in some parts of the business, we've seen double-digit growth in several areas, including government and integrated supply. We've been able to achieve this by focusing on meeting the unique needs of these customers and offering solutions that help them save money.

ID: The eroding manufacturing base in the United States is a concern for all distributors. How should the industry respond to this problem?

Keyser: Though I can't speak for the industry as a whole, there are several things Grainger has done to address this trend. As I mentioned before, we got out ahead of the curve in 1997 by creating Grainger's Global Sourcing division. As a result of our export and sourcing activities, we've also gained a better understanding of overseas industrial markets.

Grainger has also focused on serving customers outside the manufacturing sector, such as government and healthcare. Because of the diversity of our customer base, Grainger is less exposed to risk in economic downturns.

ID: How do you see the MRO market shaping up in 2003? What changes do you expect?

Keyser: Though it is uncertain when a turnaround in the economy will occur, we remain optimistic. Additionally, a continued weakness in the economy will only intensify businesses' focus on reducing the total costs associated with purchasing indirect materials, which we are uniquely positioned to help them do. In the meantime, we remain focused on providing our customers with the products they need, when and where they need them.

ID: Do you see a distribution environment in which there will be larger, better capitalized distributors and few, smaller niche players?

Keyser: All I can say at this point is that the facilities maintenance market continues to be highly fragmented, with the top 10 industrial distributors claiming about 13 percent of the total. The next 80 players make up another 10 percent, and … the rest of the market is made up of small, local and regional distributors. We see a significant opportunity for growth and Grainger is well-positioned to enhance its leadership position within the industry through our unique multi-channel approach.

ID: Do you see continued consolidation in distribution or manufacturing? How will this change the distribution landscape?

Keyser: Yes, there will continue to be consolidation, but how this change will affect the landscape is hard to say. Grainger expects to remain the leader by focusing on helping our customers reduce costs and save time in getting the products they need to keep their facilities running. Grainger is doing this by adding inventory throughout our branch network, tailoring that inventory to the needs of the local markets, and giving customers convenient channels in which to get the products they need. In the end, it all comes down to service. Those who provide superior service to customers will succeed. Grainger will continue its commitment to this.

ID: How large a role will integrated supply play in Grainger's future?

Keyser: Grainger's integrated supply business is one of several solutions we provide to help customers reduce the time and costs associated with purchasing facilities maintenance supplies and it will continue to be part of our offering going forward. We've got a solid business model and we had significant success in helping large customers such as Goodrich Corp. and American Airlines take costs out of their supply chain in 2002. We look forward to continuing this trend.

ID: Could you describe Grainger's strategic growth plan for the next five years?

Keyser: [We'll] continue the rollout of our new distribution network. This should reduce our costs while improving our service. We will also continue to invest in technology, including our enterprise resource planning system.

At the same time, Grainger is committed to continually identifying ways to help customers save time and money in getting the facilities maintenance products they need to keep their facilities running. We'll also continue to leverage our strengths, including offering products and replacement parts through our extensive branch network, our 11 distribution centers, and our convenient multi-channel network.

All-in-all, we see a tremendous opportunity ahead of us, and Grainger is well-positioned to seize that opportunity by providing superior service to customers.