You may have read about the recent launch of Oatey Supply Chain Services in these pages or from company literature, but you need to read between the lines to understand the revolutionary nature of this announcement. Oatey SCS, which became effective Jan. 1, represents a business structure not seen before in this industry, and as far as the participants know, maybe not in any other.
The company is a joint venture formed by Hercules Chemical Co. and Oatey Co., two of the plumbing industry's venerable privately-held firms. Each has been around at least 85 years and they have established themselves as trusted brand names within the pipe trades. So, too, have other brands purchased over the years by the two firms, including Cloroben by Hercules and Cherne, United Elchem and the Arfco lines of Oatey.
Hercules and Oatey remain distinct entities, while Oatey SCS exists as a separate operating company to handle sales, marketing, logistics and customer service for all of the aforementioned brand names. This leaves Oatey and Hercules to concentrate their efforts on manufacturing. "Wholesalers have their buying groups. You can think of Oatey SCS as a selling organization," is the way Hercules president Dave Siegal described the new company.
Although Oatey and Hercules compete on a few lines such as plastic pipe cement, most of their products do not conflict and often complement one another. These factors would seem to make them ideal candidates for an acquisition of one by the other, except the companies treasure their independence. In Hercules' case, such a deal would be filled with complications owing to its ESOP status.
Independence for companies the modest size of Hercules and Oatey is hard to sustain given today's supply chain economics. Prior to forming Oatey SCS, the two companies maintained inventory in 20 different locations nationwide. Think of how much duplication of effort and expense that entailed. Oatey SCS now ships from merely six locations.
Oatey SCS has around 125 employees. The sales forces, mainly independent reps, were consolidated. Oatey SCS is beginning to combine customers, thus enabling them to order any of the brand names falling under the Oatey SCS umbrella via a single purchase order or EDI transaction, resulting in a single invoice and single shipment. Instead of needing to meet separate freight requirements for the different brands, wholesalers can meet free freight volume levels through orders for any combination of Hercules, Oatey, Cherne, Cloroben, United Elchem and Arfco products.
The most distasteful part of this merger, according to both Oatey's chairman Gary Oatey and Siegal, was trimming their respective rep forces. About 70 rep agencies got culled to 35. "Between us, Oatey and Hercules had the best reps in the business. It was an agonizing process," said Siegal. Of course, it would have been no different with a conventional buyout. Manufacturer consolidation is one of the thorniest problems facing independent PHCP reps, and this amounts to one more puncture wound.
Let The Customers DecideThe most interesting aspect of the new venture is that each brand name continues to promote itself and fight for market share, even in relation to other Oatey SCS products. "The brands are really what we are hanging our hat on," said Gary Oatey. "They are all strong in their respective markets, and it's the brand names that contractors are really interested in."
Doesn't the potential exist for favoritism with Oatey SCS employees pushing one line over another? I asked Siegal. "Maybe," he replied, "but these are products that are well known in the industry. I think it will be the customer deciding which brand he wants to buy."
After merely three months of operation, it's way too early to declare success for the new company. But it's fascinating to watch this experiment unfold, and to wonder whether this might represent the first wave of a new way to go to market for many more firms in the industry.
It's also great to witness a PHCP example of the business ingenuity that makes the American economy the strongest in the world. While the media and politicians pontificate over Enron's shell game, equally clever but more constructive endeavors such as Oatey SCS slip in under the public's radar screen. This much better represents the way American business adapts to challenges and change.