Hose assembly standards. Lean manufacturing. Activity-based costing. These may sound like the latest industry buzzwords, but for hose and accessories distributor GHX Industrial LLC they're a way of life. The Houston-based company has spent the last 15 years honing its focus as a specialty distributor, strengthening internal operations and growing by acquisition to serve customers from Texas to Florida.

In an industry with few large players, GHX is fast becoming one of the nation's largest specialty distributors of hose and related fluid transfer products. GHX recorded more than $50 million in sales in 2007 and company president Dan Ahuero expects sales to top $85 million this year. Acquisition, specialization and a disciplined approach to account management are the cornerstones of that growth, he says, and will fuel the company's continued expansion.

Founded in 1937 as Houston Gasket & Packing, GHX built a reputation over the next 30 years as the premier hose and gasket distributor on the Gulf Coast. The company was founded by Herb Crawford, whose family ran it for two generations. Ahuero's father, Ivan Ahuero, joined the company in 1967, helping to expand the business by opening a branch in Corpus Christi, Texas. Ahuero joined his father in the business in 1978, and in 1992 the pair partnered with a third company manager to purchase the firm from the Crawford family. A Houston-based merger and acquisitions firm, The Spinnaker Group, oversaw the transaction. Spinnaker's president, Ben Andrews, became a valuable asset to GHX, and eventually joined Ahero as a partner in the business.

With Andrews' help, GHX's management team spent the next six years expanding the business, making three acquisitions that helped grow the company from $15 million in sales per year to more than $28 million by 1998. GHX also got involved in integrated supply, becoming a single source for hose and gaskets for many multi-location customers. With customers looking to buy more from one source, Ahuero says GHX began to look for ways to expand its product offering.

“We knew that to continue to grow our business we had to find more key product lines,” says Ahuero. “And we realized that our customers were starting to buy fasteners with their gaskets. They were bundling those products together.”

So GHX began offering bolts, selling them in “kits” with gaskets. Up to this point, GHX's acquisitions primarily consisted of hose companies, but now they were interested in buying a bolt company. That led to the June 1998 merger with Industrial Holdings, a public company that happened to own two bolt companies and was looking to buy a gasket firm. Things went smoothly for the next couple of years, but in 2001 Industrial Holdings began to struggle as the economy slowed. When Ahuero and Andrews (who by now were equal partners in the business) discovered the holding company was looking to sell all of its assets to a large energy firm, they decided to take action, buying back GHX in December 2001.

“The economy had kind of turned down in '01 and '02. Our markets were struggling in that time frame,” Ahuero explains. “So timing is everything. We bought [GHX back] and then we struggled for a while.”

But things got better. With a new focus on hose, fluid sealing products and related fasteners, GHX decided to work on improving internal operations and refining its service offerings. The company became ISO 9000 certified as part of its hose and fittings fabrication business and under Andrews' direction began to pursue a lean manufacturing strategy that is ongoing. GHX also became one of the first NAHAD Listed distributors. That program, run by NAHAD—The Assn. for Hose & Accessories Distribution, establishes guidelines for making hose assemblies and requires listed companies to undergo training and adhere to standards for receiving, stocking, building, shipping and servicing hose assemblies (custom-made hoses used to transfer fluids on equipment or machinery). GHX also embarked on an activity-based costing program, led by Andrews, that dramatically reduced its customer base and improved its profitability.

The end result was a healthier company and a return to the acquisition trail. Following a private equity re-capitalization by Houston-based CapStreet Group in May 2007, GHX made two key acquisitions: All Hose and Specialty Co., with locations in Houston, Broussard, La., and Houma, La.; and SSC, with locations in Mobile, Ala., and Pensacola, Fla.

“For the first time in a long time, we began seeing our industry consolidate and we decided that if we were going to be a part of that, we needed more financial backing,” Ahuero explains. “The economy on the Gulf Coast is very strong. We feel those are very timely acquisitions for us.”

Today, hose and accessories comprise about 65 percent of GHX's business, with the remainder made up of fasteners and fluid sealing products. GHX's acquisition strategy mirrors that split: Andrews and Ahuero continue to look for companies that specialize in either area and then focus on integrating the other specialty with support from existing operations. To date, GHX's expansion strategy has focused on energy markets on the Gulf Coast, but Ahuero says the distributor will likely expand into other markets and geographic territories.

“We're looking for opportunistic acquisitions that really fit our ideas on what we need to do in the market and that could mean expansion outside of the Gulf Coast,” he says. “Also, we've been so focused on energy markets that we tend to forget that there are some other good markets out there that we need to participate in.”

GHX's founding strengths were in the petrochemical and refining industries. The company still serves those markets, but has added the upstream oil and gas industries—such as drilling, exploration and oilfield service companies—to the mix, mainly as a result of last year's acquisition of All Hose and Specialty. Potential target markets include the marine, power generation and pharmaceutical industries.

The company's recent buying activity has made it one of three key players on the hose industry acquisition scene. The other two are Lewis-Goetz Inc., which has nationwide coverage and $250 million in sales, and Singer Equities, owned by private equity firm LLR Partners, that to date has purchased six industrial rubber products distributors with coverage in New England, Pennsylvania, Maryland, North Carolina and Texas.

“The companies that have the purchasing power and a little more leverage seem to be the ones that are going to win more of the battles, especially when you're looking at national account business. That was one of our main reasons to grow geographically; we wanted to service our customers at more than one location,” Ahuero explains. “I think we'll see some more consolidation in the next year or so and then it will slow down a bit. The money is not as easy to get as it was a year ago.”

GHX will continue to be one of the acquirers, he adds, noting that the company will stick to its “specialist” roots.

Goodyear's Keith Collett isn't surprised by that approach, pointing to GHX's “consultative” sales strategy.

“They operate along the lines of consultant-level selling,” says Collett, Goodyear's North American marketing manager for industrial hose and a supplier to GHX. “People come to them, and look to them, for solutions.”

Collett should know. He's worked with GHX for the past three years, though Goodyear has had a nearly 50-year relationship with one of the firm's acquired companies—CV Harold, purchased in 2005. GHX is one of Goodyear's “Star” distributors, which means they adhere to certain standards for cutting and coupling hose and maintaining equipment, and offer value-added services such as hose inspection and replacement, among others.

“They should take a lot of pride in that,” Collett says, noting that Goodyear has just 50 Star distributors in the country. “We want the best of the best, and that's what [GHX] is. Not a lot of distributors go to the effort that these guys go to—and they are superb.”

GHX's commitment to safety and quality drives its behavior as a specialty distributor. The company has been a NAHAD member since 1992, and Ahuero was a key player in revising and re-packaging the trade association's hose assembly guidelines program. NAHAD introduced the guidelines in 2000, but after finding that they had become a static document little used by members, developed a concentrated “re-packaging” effort to make them more useful. In 2004, NAHAD began revising the guidelines, creating a marketing program for distributors to use in promoting them, and has since added training, development and certification programs for building hose assemblies. The hope is that the NAHAD Listed logo becomes as familiar a quality indicator as the UL symbol in the consumer market.

GHX was one of the first NAHAD Listed distributors. The program has gained such credibility that Goodyear now requires its Star distributors to be NAHAD Listed as well. The benefits of both programs are self-evident, Ahuero and others say: Hose assembly standards ensure quality and safety, reducing the risk of on-the-job accidents due to faulty construction. For example, a hose assembly that doesn't meet the right pressure requirements for the job can burst, injuring anyone in its path. Similarly, an assembly constructed of the wrong materials can cause injury or illness—in situations where the transfer of volatile or caustic chemicals is required, for instance.

There's great value in distributors that can provide customers with this peace of mind, Ahuero says. He says chemical plants and refineries were the first to embrace this kind of service, but notes that other customers are coming around. He credits NAHAD with raising the bar on the issue, and says being NAHAD Listed and a Goodyear Star distributor are feathers in GHX's cap.

“You go to these large chemical plants and refineries and they are so safety-focused,” Ahuero explains. “This differentiates us from other companies. It makes it easier for [customers] to do business with us and it helps justify the price that distributors charge.”

Ahuero points to GHX's business with Houston-based international energy company Marathon Oil as a prime example. GHX's Hahnville, La., location services Marathon facilities in the New Orleans region and began promoting its use of the guidelines in the last couple of years. Marathon was so impressed, it wrote the guidelines into its own requirements for constructing and testing hose assemblies, says Jim Reilly, general manager of GHX's Hahnville location.

“We'd worked with Marathon a while, but it wasn't long before they adopted the [guidelines] themselves,” explains Reilly, who's been in the hose business since 1985. “All of these plants and refineries are trying to make sure they're getting the best, most reliable hose assemblies that they can and they want to make sure that the supplier they've got is meeting industry standards.”

The NAHAD guidelines lend the company an unmatched credibility in the eyes of the customer, he adds.

“When the standards came out, we were excited [because] we finally had something we could go to our customers with—some basic standards for storage, choosing the coupling and hose in combination, preparing the hose and testing it, and checking for connectivity,” Reilly explains. “Now we have something we can refer to every time we have to do something. This program helps us do it right and do it better.”

GHX is taking the quality standard to an even higher level with InfoChip, a software program that tracks hose performance. A radio frequency-readable microchip is inserted into the hose so that GHX can scan the product regularly for maintenance and testing. The chip contains the entire history of the hose—when it was made, who manufactured it, what kinds of fittings are on the hose, when it was tested, the results of the test and so on.

“It's all in the chip,” Ahuero explains. “The value is, now we know when [customers'] hoses need to be re-certified and tested. We're seeing more and more interest in this as well.

“We can manage all of the hoses in your plant with these microchips and this technology. It can help the customer stay out of trouble.”

In many ways, GHX's focus on quality begins at home. A move to a new facility half its size in 2000 prompted the company to pursue a lean manufacturing strategy that continues today, with employees and managers alike continually looking for ways to become more efficient and effective in their daily tasks.

When GHX merged with Industrial Holdings in the late '90s, the holding company asked GHX to move from its 100,000-square-foot downtown Houston location to a 50,000-square-foot facility on the city's outskirts. Ahuero likened the situation to putting a square peg in a round hole. His reaction was to hire a consultant to evaluate the firm's existing layout and train all employees on lean manufacturing concepts—with the initial goal of reducing the company's footprint in its fabrication area, where they make the hose assemblies.

“It also helped us look at the product flow and throughput to see if there was a more efficient way to make some of these products,” Ahuero explains. “It was a real neat exercise. And it was so successful that [Ben Andrews] and I both got very interested in lean.”

Today, all 11 GHX facilities participate in lean manufacturing concepts to some extent. And in January of this year, the company moved to yet another, smaller facility—43,000 square feet—that includes room for growth.

“And our business has gone from $20 million to $50 million [since undertaking the lean initiative],” Ahuero points out. “You can just see what's happened. We've become more efficient.”

GHX takes a similar approach to managing its customer base. In 2001, the company embarked on an activity-based costing program designed to identify its profitable and unprofitable customers. After working with a sales consultant for more than a year, GHX closed nearly 1,000 open accounts and honed in on a handful of remaining customers to build business.

“Today, we're not looking at quantity as much as quality,” Ahuero says. “We're targeting 150 customers rather than 2,000. It's a dramatic change in your business when you find that 90 percent of your profit comes from 150 customers out of 2,000, but that those 150 customers made up 40 percent of your transaction cost. That means that 60 percent of what you were doing accounted for 10 percent of your profit.”

GHX does business with more than 150 customers, but Ahuero says they do it “on our terms.” The company uses a customer service matrix to identify each customer's profitability level, then serves them (and charges them) accordingly. Customers that bought less than $2,000 a year from GHX were essentially fired, Ahuero says, explaining that the company simply couldn't afford to do business with them. For everyone else, profitability became front and center.

“We were underselling our service,” Ahuero explains. “We raised it to a point where, if a customer stayed, it was very profitable and if they left, it didn't cost us that much.”

Predictably, GHX's sales force reacted with fear at first, but the company guaranteed that each sales rep would not earn less than the average of their previous two years during the first year of the program. In the end, each salesperson earned more than that, Ahuero says. Today, GHX's 35 outside sales reps maintain 15 to 20 accounts, instead of 50 to 75, and five of those accounts are the competition's best customers. Special incentive programs make it “exciting” for the reps to call on those particular accounts, Ahuero adds.

“They have time to live and breathe with their customers now,” he explains. “You can get to know a customer very intimately if you're in there twice a week rather than once a month.”

That kind of commitment and dedication doesn't surprise Goodyear's Collett. He says Ahuero's energy and vision is evident throughout the company and especially in the field. It's something he hopes will continue as GHX extends its reach across the Gulf Coast and into new markets.

“Dan and his team are up on the latest business initiatives, they do a lot of planning and they're just committed to excellence,” Collett says. “Dan is a true gentleman, he's extremely detailed and his business shows it—and that transcends down through his organization.”