The industrial PVF industry is in the midst of a rough patch. And the usual culprit is driving the bus.
“The price of oil drives everything else,” says Michael Taylor, president of Long Beach, Calif.-based Columbia Specialty Co. “The oil industry has become really good at boom and bust. When the bust comes, it triggers action quickly. In a snap of a finger thousands of people get laid off and capital projects get cut. When the price of oil goes down to a certain point, everything gets shut off and things get slashed and the PVF industry gets caught in a big part of that.”
Taylor was one of four industrial PVF executives who took part in a recent Supply House Times interview in Oak Brook, Ill., following a meeting of the American Supply Association’s Industrial Piping Division Executive Council. Taylor was joined by fellow council members Brian Tuohey (Collins Pipe & Supply), Kip Miller (Eastern Industrial Supplies) and Bill Zielinski (Chicago Tube & Iron).
“The swings in oil and energy are strong,” says Zielinski, vice president of marketing at Romeoville, Ill.-based Chicago Tube & Iron. “There is a lot of material in the pipeline and then the market goes down, manufacturers and distributors are stuck with too much inventory and the competition heats up. Whoever purges the most inventory quickest wins. Customers are putting more and more pressure on distribution to carry all the risk of inventory.”
Miller, president and CEO of Greenville, S.C.-based Eastern Industrial Supplies, believes other factors also are contributing to the current uncertain business climate. “A strong dollar is curbing the appeal of commodities as alternative assets and has cut down on exports — hence slowing productivity,” he says. “Other factors include the unknown outcome of Greece’s financial struggle, falling economic growth in China and investors nervously watching the Fed’s monetary policy for any indications as to when it might raise interest rates.”
The big squeeze
Taylor says beyond the current energy situation there’s an additional major reason distributors, and specifically those in the industrial PVF marketplace, are feeling an increased pinch in the P & L ledgers.
“The PVF business has been a relatively stable margin-type business over the years, though I’m not saying its stable today,” he explains. “There is a squeeze going on between the cost of doing business and the amount of gross profit dollars we are generating from the materials we sell. Companies are having a hard time dealing with that squeeze and it has become more prevalent especially between the recession and now.”
Taylor’s comments elicited equally interesting responses from his counterparts. Tuohey, president of East Windsor, Conn.-based Collins Pipe & Supply, says his company’s engineered products focus has helped alleviate the ever-present margin pressure, but he’s also seeing changes in the PVF landscape.
“We didn’t have any engineers on staff 15 years ago and now we have nine or 10,” he says. “The end user no longer wants to employ a large engineering staff. They would much rather use our engineers on an ‘as-needed’ basis. We have customers that pay us an upfront engineering fee to design a project. Then they put the project out to bid and we have to compete for the bid package we designed.”
Zielinski says his company constantly is looking at how to balance providing a competitive price along with a high level of service. “With energy being as weak as it is there is more competition going after a smaller piece of the pie,” he says. “We have to be more efficient. If a customer has everyday delivery we talk to them about the possibility of combining deliveries to reduce transportation and picking costs.”
While providing the lowest price in the marketplace generally is not a viable option for an independent distributor, panelists note leaning on time-tested service truisms is essential for survival in modern times.
“You have to out-service people,” Miller says. “Building relationships is what makes independents so different and gives us opportunities.”
Taylor calls it a value proposition. “We know there are many players that can do our job,” he says. “What drives our company is how we create value that motivates our customers to choose us rather than the other guys. We constantly are trying to put together another trick in the bag that other major players can’t duplicate. We’ll never be the lowest cost provider because we’re too small. But we do provide value and service and we target customers who care about that.”
Zielinski says a request such as specific placement on the back of a delivery truck may be what it takes to deliver that added value. “It might be the customer wants to be on the back rear quarter of the truck or they want delivery between 6 a.m. and 8 a.m.,” he says. “People talk lowest price, but what are your customers’ true needs? What can we do to improve their business and make them more profitable?”
Protecting the bottom line
Tuohey notes his company recently adopted a “big data” business analytics program to more clearly understand which customers and products produced the most net profit.
“Imagine our surprise when one of our biggest and ‘best’ customers turned out to be our biggest loser,” he says. “Through the analytics program we identified 50% of our account base where we were losing money and it’s not always the people you think. We had 400 accounts that we had to either fix or fire. We explained to these customers we needed to increase their order size and/or limit their services to best benefit both of us. Half went away and half understood and adjusted their buying habits to become valued and profitable customers.”
Zielinski says paying attention to customer profitability must be adhered to along the same lines of providing competitive pricing and superior customer service. “You have to be the most efficient player in that system,” he says. “What is a customer’s contribution to operating profit? If a customer is not profitable we have to figure out how to move them up or move them out.”
Miller has heavily invested in teaching his staff about the importance of margins. “I try to teach everybody to be business owners,” he says. “We’re in a low-margin business. It’s a journey to increase margins, but you have to constantly watch the bottom line. If you persevere with this, you will have victory.”
The interview panel also talked about the critical need to find, train and retain young talent and lauded ASA, the ASA Education Foundation and the IPD in helping achieve those initiatives as well as providing other tangible benefits. “We get our book-learning education from ASA,” Taylor says. “The majority of our industry networking happens at ASA events and that’s another important dynamic. The benchmarking and advocacy are unique and extremely valuable to us.”
Tuohey adds: “When you are inside your building you know what you know. When you become involved in ASA, you get to know what everybody else knows.”
Despite the turbulent market, the four industrial PVF executives interviewed are moving forward via a variety of growth strategies, but Tuohey cautions every growth strategy needs to be closely monitored and managed.
“In a rapid growth environment, you have two drains on your operating capital (inventory and accounts receivable) and only one net profit source to fund both,” he says. “Without proper oversight, you easily can grow yourselves out of business. Early in my career my mentor gave me two pieces of advice I’ve never forgotten. ‘You’re not in the business of selling pipe, valves and fittings. You’re in the business of making money.’ Secondly, ‘There is no sale more expensive than the one you don’t get paid for.’ Those two simple tenets have served our company very well throughout my career.”