How A $15 Million PVF Firm Cut $339,000 In Expenses -- Painlessly
He was talking about his decision to come to work for the company a couple of years ago after 20 years in the trucking industry. He and owner/CEO Brian Tuohey had been best friends in high school and Mike had done a little business with Collins over the years, though not much because the company mostly delivered using its own trucks.
Hall made the job switch based mainly on Collins' aroma. Other members of the top management team, Brian and IT manager Mark Tuohey (Brian's brother), also came to the company from other industries. These outsiders help lead a company that achieves the startling performance of $15 million in sales with only 31 employees. That's a personnel productivity ratio about a quarter to a third higher than the norm for PVF firms in the annual ASA Operating Performance Report.
Most of the people who work for Collins have been there awhile, because there is virtually no turnover. Brian Tuohey, who also came from the trucking field, has been a part owner since 1989 and sole owner since buying out his partners in 1998. He almost formed the company as an ESOP, but backed away in the face of stiff government fees. Instead, he came up with a profit-sharing plan that gives people a sense of ownership as strong as one would expect to find under an ESOP.
In recent years the company has grown from $10 million to $15 million in sales with the same number of people. Incentivization is Tuohey's guiding management principle, and it seems to work wonders.
The Charitable ChallengeTuohey is involved with several community and charitable endeavors, especially Habitat for Humanity. The well-known organization raises funds and sweat equity to build homes for deserving people down on their luck. Last year he agreed to have his company become a "house sponsor" for the group, a $60,000 commitment over five years.
Because everyone shares in the profits, Tuohey left it a group decision whether to take the donation out of earnings, or try to cover the pledge through cost-saving initiatives. The employees took it as a challenge to save their way toward funding the Habitat house. Many of them also volunteered their labor to help "blitz build" the house - a concentrated construction effort that puts up a house within days rather than months.
Only they didn't stop at 60 grand. In 2002, the company realized about $339,000 in savings without eliminating jobs, reducing pay or diminishing customer service. In fact, some of the cost-cutting measures enhanced their ability to serve customers.
It was an eyebrow-raising performance that holds lessons for all wholesalers. What follows is an itemized review of their savings:
$100,000 via delivery service reorganization
Mike Hall's trucking background paid big dividends here. Several elements came into play in changing the way Collins shipped products to market.
Since the company had five trucks in service, the tendency was to parcel out the delivery load among all five trucks, even if the orders could fit on three or four. It's a variation of Parkinson's Law, in which work expands to fill the time allotted for it - only substitute PVF for work and trucks for time. Collins was hardly the only firm in the industry falling under its spell.
Personal delivery was a source of pride, even when it didn't make economic sense. If a truck were headed on a run with a full load of pipe and another customer with a 10-lb. order was in the same general direction, the company would give the 10-lb. package to the driver and send him miles out of his way to drop it off. Collins saw this as great customer service, except ?
"Point of fact is, the customer doesn't care who delivers," says Hall, "only that he gets it on time."
Collins measured its average cost of delivery at $33. UPS could do it for between $3 and $4. So the company stepped up its use of UPS for small packages and common carriers for off-line deliveries.
In the process Collins was able to reduce the number of company trucks from five to three, one a flatbed. The company also reduced the size of the flatbed it leased to the largest size not requiring a commercial driver's license to operate. The CDL requirement meant delivery disruptions every time the sole CDL licensee took a day off. Now all company drivers can be used interchangeably.
The company also established targets of 250 miles a day and 10 stops per day for each driver. These numbers are metrics derived from the trucking industry based on similar company and delivery parameters. Drivers don't meet the goals every day, but over time the metrics pretty much define a good day's work. "I'm a firm believer that if you are to be successful in business, you must measure everything," says Hall.
Helping drivers to meet those goals was a new policy of loading trucks in the evening for next morning delivery. The old system had the trucks loaded first thing in the morning, with the drivers helping out with the loading. That took about 45 minutes and ate into road time. Now warehouse workers do all the loading at night.
Adding up all of these savings, CFO Hall calculated around $100,000 in reduced expenses.
$30,000 saved in freight rate reductions
Once the company committed to greater use of common carriers, it hired a third-party logistics consultant who specializes in bundling customers to freight carriers in return for discounts -- 30% in this case. The consultant also audits and pays Collins' freight bills.
Separately, the company negotiated reduced rates with UPS due to increased volume of small package deliveries. "UPS has an interesting way of pricing their products, but you can work with them to get volume discounts," says Hall, who saved 20% for Collins' business.
$17,000 saved via freight recovery
Per industry custom, Collins does not tack on a delivery charge for its own shipments. However, the company discovered that it is possible to pass on costs from common carriers or UPS. "If you have a $400 delivery and pass along a $3-4 UPS charge, people usually don't say anything. We don't say anything when people do it to us," says Hall.
Since stepping up outside deliveries, Collins has been able to increase the percentage of freight billed from 42% in 2001 to 53% last year, and 61% at last report for 2003. Grand total saved, around $17,000.
$77,000 saved in transaction costs
Collins also conserved an estimated $77,000 from a program that identified customers that were costing the company money and then changing the way it did business with those clients. The company targeted accounts with low average gross profit per order (APO) ratings, and focused on educating those customers on ways to reduce transaction costs. In some cases this meant combining orders or imposing minimum order sizes, and sometimes simply raising prices. On occasion Collins even "fired" a customer.
"It's just sound business practice to do things like deliver once a week instead of five times," says Hall. "Most of what we did saved money for customers as well as ourselves."
This initiative and others described here are premised on acquiring detailed cost information. Mark Tuohey, who serves as the company's IT and marketing manager, is the person in charge of that. He came to work for Collins about a year and a half ago after 18 years in sales with a company that marketed computerized systems for hotels, restaurants and casinos.
Collins' IT system uses customized software revolving around the Chrystal Reports program. "We collect real good information," says Mark. "Who are the top 150 customers? Who are the 80/20 customers? Our people tell me what they need, and our system can come up with the data. A lot of these reports are used daily and being able to use them in real time has become our lifeblood."
$55,680 saved in error reductions
Historically, Collins had delivered orders 96% error free. That may sound impressive, but with an average of 2,500 orders per month, it meant the company was making about 100 errors every month, or about five for every working day.
As is his wont, Brian Tuohey came up with an incentive program that paid people to eliminate mistakes. The company set a goal of 99% error-free, which meant every month its order fulfillment people made fewer than 25 errors, they received a bonus. Last year, Collins recorded merely 7.16 errors per month, and the warehouse personnel and drivers split an average of $840 per month in error avoidance bonuses.
After absorbing those payments, the company still realized more than $55,000 in savings from this program, and the people are committed to doing even better this year.
$4,000 in A/R incentives
Collins implemented a program in June 2002 to provide a daily incentive to the accounts receivable department for achieving an average days' outstanding of 35 days or below - about a third below industry norms. This enabled the company to reduce borrowings and take advantage of more vendor discounts, thus the savings.
$50,000 in improved bank financing; $5,000 in insurance premium reductions
Maybe it's a stretch to attribute these to the cost-cutting program inspired by the Habitat contribution, then again maybe not. One should always be on the lookout for better deals from bankers and insurers, but the reality is the press of business tends to make these good intentions slide by. Bankers and insurers tend not to send notices about how you can save money renegotiating with them.
"The Habitat project energized the concept of looking for savings everywhere," says Hall. "Should we have renegotiated even without the Habitat commitment? Yes. Would we have done so? Probably not."
The result was about $55,000 less in interest and premium payments last year.
Some of the $339,000 saved was a one-time reduction in 2002, but considerable sums resulting from error reductions, the APO program and other savings will continue to accrue to the company year after year. Moreover, whether it's for charity or their own profit-sharing bonuses, the employees at Collins have been imprinted with a mindset for reducing expenditures every day in every way.
Sidebar:Collins Pipe & Supply serves as a prototype of how a small company can thrive in the PVF field by not trying to be all things to all people. The $15-million company also demonstrates that being small does not equate with a lack of sophistication.
Collins Pipe & Supply: A PVF Niche Player
Stainless steel, exotic alloys and automated valves are Collins' specialties. A power plant division services clients such as Bechtel and Raytheon. The company operates an in-house valve automation shop, and a degreed engineer on staff gives it the ability
to handle virtually any technical challenges tossed its way. About 80% of the
company's industrial business comes from negotiated MRO contracts.
"If we had to compete in the 'bid-buy-bargain' world, we'd get killed," says owner and CEO Brian Tuohey. "People who do business with us WANT to do business with us because they see real value. We have to constantly keep that bar rising so the price choppers can't reach it."
Collins Pipe & Supply is among the older PVF firms in the industry, dating to 1921. The Collins family sold the business in 1972 to Larry O'Toole, who in 1989 sold one-third of his interest to Tuohey, who had spent 10 years with the Consolidated Freightways trucking organization. "I liked it there," Tuohey says, "but I'd always wanted to run my own company, and this opportunity presented itself. It allowed me a chance to apply some of my big-business training to a small business." O'Toole's son and son-in-law retained one-third ownership positions in the company as absentee owners until Tuohey purchased their shares in 1998.
Most people who work in the PVF industry were born and raised in it. It's refreshing to encounter outsiders like Tuohey who were attracted solely by business opportunity. I asked him for his most striking observations about the industry compared to the mainstream business world.
"The biggest surprise for me was how family-oriented everything is," he replied. "It is our industry's greatest strength, and maybe the biggest weakness at the same time. The strong point is our core values with people who are very committed to the business. Yet, certain parts of the industry tend to be behind the times. A lot of technological advances are available to the industry. It's just a matter of applying them."
When he took over sales and marketing in 1983, Tuohey found a somewhat tired company that was doing $2 million in sales with 15 employees. "There was little growth, and there were a lot of frivolous activities taking place," he recalls. "For instance, I used to go out on sales calls and hear the salesmen ask everyone, 'Give us the opportunity to quote.' And the customers did exactly what the salesmen asked. We had quotes coming out of our ears - but no business."
The company today is a lean, incentive-driven productivity dynamo. More than half of Collins' 31 employees have sales titles, with eight defined as inside salespeople and eight outside sales reps. Roles get blurred, though, and Tuohey is fond of emphasizing that "everybody sells."
The company doesn't employ much support staff, so the inside salespeople do the jobs of several people in handling orders from cradle to grave. They will size, select and sell the valves, design the system and order all needed components for their customers. Frequently they find themselves working side by side on the phones with their outside sales colleagues.
"The role of the traditional outside salesperson is changing," Tuohey notes. "We still make face-to-face sales calls, but they
are diminishing. This isn't our decision. It's because customers don't have time for so-called 'courtesy calls' where people drop in just to chat. Our outside salespeople are still in contact via e-mail, faxes and phone, but not driving every day. Our philosophy is, if you don't have a compelling reason to see someone, don't make the call."