Breaking the mold

In year one, supplyFORCE doubled its national accounts and delivered an e-business backbone

By -- Industrial Distribution, 1/1/2001

When Deere & Co. awarded supplyFORCE a $200 million contract last spring, the equipment manufacturer chose a supplier model it believed would surpass what most integrators and alliances offer.

"As we took a series of suppliers through the selection process, it became evident to us that we wanted to select a supplier that had North American coverage with a local touch and feel," says Chris Gleason, supply base manager for MRO items at Deere. SupplyFORCE members now manage electrical supplies, hand and power tools and some perishable tooling at 42 factories.

"They fit the mold for us that gave us national coverage, providing all the brands that all Deere units might need to use, and through their affiliate network provide the local touch and feel," Gleason says. "A lot of them are local distributors already doing business with Deere factories."

Barely a year old, supplyFORCE may in fact be breaking the distribution mold. The company was formed by Affiliated Distributors, a well-established buying group, to handle its national accounts and provide an e-commerce backbone for future growth. Members credit supplyFORCE with providing independent distributors a means to compete with national chains while in many cases allowing end users like John Deere to continue buying from local distributors, who are valued for their product expertise and technical support.

During its first year, supplyFORCE's national contracts nearly doubled from 40 to 77, and its revenue run rate reached $440 million by December. The list of distributors who signed up in recent months-bringing membership to about 350-speaks for itself: from nationally-known firms like Motion Industries and Airgas to C.L. Watt, a $2 billion cooperative of plumbing, HVAC and piping distributors, and regional players like Platt Electric in the Pacific Northwest.

Not everything went smoothly, of course. In December, supplyFORCE announced it would stop targeting small end users with its e-procurement offer, and focus only on large national accounts and integrated supply customers for the foreseeable future. This coincided with layoffs of 20 percent of its workforce, to 158, while another 10 percent of employees were redeployed to support national accounts.

CEO and chairman Bill Weisberg says the company concluded that small end users had showed only "minor movement" toward Web-based procurement.

Still, Sam Drago, executive vice president of Drago Supply, Inc. in Port Arthur, Texas, sees great potential in the business model and a marketing strategy he says supplyFORCE will unveil in the next few months. After supplyFORCE negotiates pricing and service levels with end users, Drago Supply and other members manage and fulfill the contracts.

"The customer wants to be able to get all the benefits of doing a contract with one company and the local plant wants to keep doing business with one supplier, all with one set of terms and conditions," Drago says.

"They [local plants] know they get the most attention" from local distributors, he says. "They know we are entrepreneurially run. They know we can provide those unusual services they ask for and also the everyday services they ask for."

First year benchmarks

Weisberg says key benchmarks of the past year included acquiring Affiliated Distributors Northeast, a group of about 30 companies that had successfully provided integrated supply services. Then last spring, I.D. One, a large cooperative of bearing, power transmission and industrial supply distributors joined supplyFORCE, adding more than 500 locations.

Remarkably, the firm also raised more than $87 million in venture capital, including a second round of $52 million late in the spring when funding for dot-coms began to dry up. Weisberg says he is interested in taking the company public in the future "when the market is ready" and suggests employees would be offered shares.

The company also invested heavily so its network could conduct e-commerce. To prepare product data for a searchable, online catalog, it partnered with providers such as Sun Microsystems for storage and server solutions, webMethods for real-time communication, Requisite Technology for content development and more. Early on it also acquired a software developer, IDP Solutions, to place all stock keeping units online.

However, like everyone else the company hit some bumps here as well. It opened an Internet marketplace hoping that customers would link to distributors' catalogs, place and track their orders. But as mentioned, by the end of November it abandoned marketing that to small end users, and dropped the "dot-com" from its name.

"Our view is that in the year 2001, the greatest return is going to be on large integrated supply and larger customers," says Weisberg, referring to ordering through an Internet market. "We don't see smaller ones participating yet. It's still easier for the small customer to pick up the phone."

Meanwhile, he says the company will continue to broaden its scope of products to compete even harder for national contracts. While electrical supplies make up the bulk of members' volume-about $10 billion-its coverage in power transmission, bearings, safety and other segments like welding supplies and gases also grew rapidly, and he says adding other vertical product categories is possible.

"A nice part of being multi-industry is we can get in the door with general line or electrical contracts," says Weisberg. "Many customers like to have awards around a product category and we work with them as part of their e-commerce solutions. We can either bid on the whole as an integrated supply [contract] or bid on the buckets separately."

"We think about 40 percent of the industrial market is moving toward national contracts," he adds. "It's really important that this company is here for the long haul. To do that you must be financially sound."

The business model

One of the reasons so many small and mid-sized distributors joined supplyFORCE was the opportunity to sell to national accounts and integrated supply customers without spending heavily on new technology themselves. They also have a direct ownership stake-distributors own the largest share, about 40 percent, compared to about 20 percent by private investors, Weisberg says. Employees and manufacturers own the rest, and no one distributor or manufacturer's share is more than about three percent.

Distributors may also benefit from a pool of performance-based equity that is pro-rated over each of the company's first five years, based on its sales in supplyFORCE national accounts. About half of the distributors have made cash investments as well, and each is charged a transaction fee.

SupplyFORCE's model builds upon 18 years of relationships that Affiliated Distributors established with end users and suppliers. The original network was essentially expanded to woo and support end users more effectively. Many member distributors lost big accounts in the mid- to late-90s to national chains that often had no local presence, and say they are now on a level playing field with those large competitors.

In the Houston area, for example, Drago says supplyFORCE supports his company's work at two large Rohm Haas chemical plants and has two field reps scouting for more accounts. Before his firm entered the plants in September, Drago says supplyFORCE set up a database and gave it other technical support to get started.

Weisberg says the firm addresses three limitations many independent distributors face: geography, product category and information technology.

For example, supplyFORCE's e-commerce backbone can conduct transactions with different e-procurement engines like Ariba or SAP. That should ease many distributors' expenses and headaches putting catalogs online and trying to reconcile those with different customers' computer systems.

"Distributors typically don't have quality electronic content for a buyer to make a decision on," says Weisberg. "So we made the investment to provide it to them." m

MEMBER BREAKDOWN