Focus On Master Distribution Industrial Valco's Relationship Business
The eye of this beholder finds a certain beauty when gazing upon millions of dollars’ worth of valves and fittings arranged row after row as precisely as Radio City Rockettes inside the headquarters warehouse of Industrial Valco (IV). Located in the Los Angeles industrial district of Rancho Dominguez, the facility’s neatness stands in stark contrast to the gritty applications all that PVF eventually will support.
A second quick impression has to do with the friendly atmosphere that permeates the ranks of IV staffers. It goes beyond routine courtesies that every business needs to cultivate with clients and persons of influence. Even before being told about it, a visitor can sense that this is a business built around relationships.
“We’re a family business,” notes President Rob Raban, “and most of the manufacturers we buy from are family businesses. It’s all about relationships, and the key to building strong relationships is very simple. Do what you say you’re going to do. If I make a commitment to a product line, I must stock it in depth and be able to ship it out the same day.”
Industrial Valco dates all the way back to 1947, when Raban’s maternal grandfather, Charles “Nick” Nichols, put his entrepreneurial wiles to work capitalizing on post-WWII material shortages. America was by far the leading manufacturer in the world and a big exporter in helping to rebuild the ruins of both our allies and former enemies. PVF materials were hard to come by and Nichols built a bustling business scrounging surplus material from scuttled Navy ships and any other place he could find them. By the early 1950s he transitioned from surplus materials to new supplies and settled on a strategy of selling solely to wholesale-distributors.
“Many companies think of themselves as master distributors but sell a lot to end users,” said Raban of their current business model. “That’s a different definition than we see it. We sell only to wholesalers.”
Nichols continued working in the business all the way up to his death in 2002. His working life outlasted the family’s second generation, as his son-in-law, Rob’s father, retired from the business in 1995. Rob Raban came aboard in 1988 after graduating from the University of Southern California, and found stewardship passed directly from his grandfather to him. “Our business success, in particular these last seven years, would not have been possible without the amazing foundation my grandfather and father worked so hard to establish,” Raban said.
Nowadays, Raban seeks business guidance from a five-person board of directors that includes himself, another family member and three business associates recruited from the outside. “At first I was against reporting to an outside board, but they have really challenged me and given me valuable advice with regard to our overall business operations and structure,” he says. “You can get so involved with buying and selling you overlook the big picture.”
Much of IV’s business comes from the power and energy sectors, and from basic carbon steel product lines. In addition to L.A. headquarters, IV operates stocking facilities in the San Francisco Bay Area, Bakersfield, Denver, Chicago, Houston, Bridgeport, NJ (Philadelphia) and Baton Rouge (opened last year). A fabrication shop at L.A. headquarters enables them to customize product to meet special needs.
Raban spent several hours with me discussing the master distribution business. Here are excerpts from our conversation:
Supply House Times: Theoretically, a sour economy ought to benefit master distributors because wholesalers cut back on inventory. Has that been the case?Raban: This one has been so bad, everyone is hurting. I don’t like these periods, but there’s always a silver lining. In 2001-2002 we were also in recession, but we used that time to retool and figure out how to go to market. Now that we’re in another downturn, we’ll use this time to get our house in order for the next upsurge, and to strategically plan.
We have advantages in being a third-generation family business with a capital reserve built up over the years. Some firms have to look at every nickel and don’t have the luxury of keeping people on board when work slows down. We’re overstaffed right now, but I don’t look at quarterly profit the way big companies do. Just like there’s a return for us in slow-moving inventory, we feel there’s a long-term return in trained people.
We have very little employee turnover. One of our board members told me that maybe we have such little turnover because we’re paying too much! Maybe so, but we’ve been profitable every year for 62 straight years, so if paying more is the tradeoff to avoiding the turmoil turnover brings, then I’ll take that.
The economy will come back, and everybody should have learned from 2004 to 2008 that it’s very difficult to get qualified people after the market has recovered. We prefer to retain our knowledgeable people, and have them fill extra time with getting caught up on overdue projects and maintenance, telemarketing, outreach to customers and such. It’s also a great time to pick up good people who ordinarily wouldn’t be available.
Q: Unlike wholesalers who buy from hundreds of vendors, master distributors like Industrial Valco are limited to a dozen or so. Taking on a vendor is a serious decision. What are the things you look at to determine if a company is a good fit for you?Raban: The first thing I would look at is how well does this manufacturer fit with how our customers see us. Second, can we add value to the channel? If the manufacturer has stocking warehouses around the country already, we wouldn’t be of much value. When a manufacturer doesn’t have regional coverage, we can add value. Then you factor in things that distinguish the line in terms of product quality, competitiveness, ease of doing business and so forth.
It’s interesting that the manufacturers we buy from tend to be family businesses. These are companies like Bonney Forge, which we’ve represented more than 30 years, Tube Forgings (35 years), Walworth, Westbrook, Boltex - these are longstanding family businesses. We don’t have anything against bigger corporations - we have a relationship with Crane, for instance - but there are a lot of advantages in dealing with smaller family businesses similar to ours. In a big company people get reassigned, and I like to deal with someone who I know is in charge and will be in charge if we ever have an issue - instead of going through corporate channels and waiting for a committee to decide on things.
Q: Most of the lines you carry are made by American firms. Is that your preference?Raban: I do prefer to buy from American firms. We already have quality product here in the U.S., the logistics are easier and culturally we already understand each other. If an issue ever arises, they are right here and easy to reach. The freight allowances are less as are the product lead times. So all things considered American firms have the most advantages. But customers ultimately dictate what inventory to carry. In a recessionary market competitive pressures point more toward price than other factors, and foreign goods tend to take more of the market. Distributors have to fall in line with that. We do represent several quality foreign manufacturers, who again tend to be family businesses.
Q: Will American manufacturers be able to survive the onslaught of low-cost goods from overseas?Raban: U.S. manufacturers are invested heavily in plant, equipment and processes, and can handle foreign competition from that standpoint. The big costs in manufacturing, besides machinery investment, are energy, material, freight and labor. Energy is higher in almost every other country than in America. U.S. manufacturers also have a big advantage when it comes to raw materials and shipping costs. Labor is the only big cost advantage foreign manufacturers have.
U.S. manufacturers can deal with cost disadvantages of 5-10%, but we’ve seen 50% differentials on some products. Weigh the cost advantages of foreign vs. domestic and they don’t add up to a 50% differential. So the big question is, how do overseas manufacturers do it? This question, I believe, will lead us into the uncomfortable waters of government subsidies.
Political factors make it tough to resolve this issue. Will we be able to withstand China’s trade practices, as an example, when they hold $800 billion of our bonds? We’re in a compromised position as far as our debt is concerned.
Q: What are some of the operational details that contribute to your success?Raban: One of the biggest things is our experienced staff and live people answering the phones. When customers call in they get directed to a qualified inside salesperson who understands what they’re looking for, and if we don’t have it, they can direct you to someone who does. We have a knowledgeable warehouse staff as well, which is important because if you have a will call customer waiting for an hour until someone locates the product, it defeats the purpose of a pickup. (Editor’s note: IV derives more than 50% of its business from pickups. This owes a lot to their locations in major metropolitan hubs.)
We’re about speed and convenience. The value we offer to customers is they can get all of the materials they need at one place quickly and conveniently. They can go to individual manufacturers or wholesalers and get it cheaper, but that involves a lot of running around, paperwork, labor expenses, automobile expenses, hassle. We make it easy.
Recently we changed our operational structure to encompass regional managers, who essentially are sales managers that spend time with customers. This used to be the job of branch managers, but we found out the branch managers spent too much time trying to fix problems in the warehouse. We determined that warehouse managers really need to be managers, not just report everything to a branch manager. So we appointed a national operations manager, Vernon Preston, who oversees all operations. The warehouse managers report to him and he’s the guy to call if a problem arises beyond their ability to resolve. This enables the regional manager to focus on sales and not spend half his time in the warehouse solving problems.
Q: What are some of the biggest changes that have occurred during your years in the business?Raban: A big factor right now is manufacturers acting as master distributors. Traditionally manufacturers invested in plant and production facilities and generally didn’t stock inventory. What’s changed is so many goods being outsourced to China. Orders come to the U.S. in large lots and it forces manufacturers to store those goods. It could also be that distributors are putting pressure on manufacturers to carry inventory due to long lead times from overseas.
The problem for manufacturers is it’s difficult to be a master distributor of one product line. They’re like the specialist in medicine, while we’re more like the general practitioner. We carry a lot of variety, and very deep.
Another big change is private labeling. We’re starting to do some of it ourselves strictly for competitive ball valves.
Q: Doesn't that annoy your vendors?Raban: It hasn’t been an issue because we’re filling a competitive niche they don’t serve. For example, in ball valves, we carry Kitz, which is a quality valve that’s approved everywhere. We’re not selling our IV ball valve to the approved marketplace. They don’t reach the same markets we are trying to serve with our approved manufacturers.
Q: Where do you see your business headed in the future?Raban: Eventually I see opportunities in South America. We’re a sophisticated market in terms of distribution in the U.S., but distribution down there probably is the way it was 50 years ago here with distributors buying from other distributors and doing whatever they can to get materials from wherever they can find it. They don’t have the efficiencies we do in this market. This is long-range. First, we have other opportunities to tap here in the U.S.
The trend toward renewable energy, solar and geothermal as an example, is going to force changes in a lot of areas, but it shouldn’t negatively affect the PVF business. Our products will still be used, with valves and piping moving fluid that will turn turbines and produce energy.
At the end of the day, whether you’re a master distributor, distributor, manufacturer or whatever, if you stay close to your customers and simply do what you say you’re going to do, you’ll be okay.
A Cautionary Tale Of EmbezzlementRob Raban was gracious in sharing with me and our readers a business story nobody likes to contemplate. Unfortunately, it’s a familiar tale that I’ve written about several other times during my career.
Industrial Valco (IV) suffered a loss totaling about $830,000 over a five-year period from a former controller who last fall pleaded guilty to embezzling from the company. He was sentenced to a prison term and restitution.
According to Raban, “He was a hard worker and people liked him.” The man’s performance seemed good for a long time, but eventually he got fired in April of last year because Raban had continual problems getting timely financial reports - “all we heard was computer problems and other excuses.” After his termination, IV contracted with a financial expert to sort things out, and within a couple of days discovered a phony payroll scheme.
I asked Raban to share with fellow industry citizens what he learned from the experience, and what to do differently. Here are key points:
Ten years ago I wrote an article about a large mechanical contractor who got victimized to the tune of $1.9 million over an eight-year period by a bookkeeper with a gambling problem. On another occasion I reported on a plumbing contractor who told me of attending a lavish wedding of a key employee’s daughter and wondering how the man could afford the extravagance - financed, he later learned, by his own coffers. I also recall a couple of small PHC trade associations whose staff executives had gotten away with hanky-panky due to lack of oversight from the volunteer board members.
Small businesses and trade organizations in all industries are vulnerable to embezzlers who seek them out precisely because their proprietors tend to be inattentive to bookkeeping and are happy to hand over those duties. It’s harder to get away with in larger organizations with greater division of responsibilities. It’s recommended that accounts receivable, payables and payroll always be separated, for instance.
Embezzlers often have engaging personalities and ingratiate themselves into positions of trust with small business owners. Heed what Ronald Reagan famously told Soviet Premier Gorbachev during nuclear arms negotiations, “Trust, but verify.”
And keep a really close eye on employees who like to gamble!