Big Interview: Supplies Network

OPI talks to Supplies Network, a distributor that has always given its full attention to the little guy and has bold plans for MPS.

The future looks managed 

Last year Supplies Network celebrated 20 years in business, but the landscape has significantly changed in this time. Set up as a regional wholesaler of IT consumables, the company now spans the US and is at the forefront of the drive to get dealers into the managed print services (MPS) arena. OPI talks to Sean Fleming, CEO, and Greg Welchans, President, about why managed print is the catchphrase of the future.

OPI: Supplies Network has a varied offering; what is your main business?

Greg Welchans: We are focused on, but not limited to, the distribution of IT consumables and hardware. This is a really tight margin business so we’ve built our entire model around a low-cost delivery mechanism with high-value tools to help dealers stand out from the competition and compete with big boxes.

Managed print is a key part of our future, so we’ve built a suite of software solutions that allow our partners to focus on this.

OPI: Who is a typical partner/customer?

GW: We focus primarily on the independent dealer. For years we focused on the guys that sold the things that were in our books, toner and ink, but we’ve now started spreading into other channels such as copier dealers.

OPI: Your product offering includes hardware; where do you draw the line?

GW: Over the past three years we’ve started selling printers and things that put images on paper. That’s what we’re limited to at this point.

OPI: What size business is Supplies Network? 

Sean Fleming: We closed 2011 with over $500 million in annual revenue.

OPI: How has the global economic crisis impacted the business?

SF: I wish I could say we haven’t been affected but that would certainly be wishful thinking. Since we are still a relatively small piece of the total market and remain privately held, the changes we’ve had to make in reaction to the economic slowdown have not been as dramatic as those of many others. It’s one of the advantages of being privately held.

In most product categories we have been able to gain market share. More than anything we’ve had to lower our growth expectations, which has limited investment opportunities. We all know business is more exciting when you can invest in greater and bigger ways.

I miss the good old days when the raw growth and inertia of the IT supplies industry provided some natural growth. These days we take a more cautious and detailed approach to budgeting and find ourselves studying consumer trends, political trends and market dynamics with much more scrutiny and diligence.

OPI: It almost sounds, Sean, as if you’re saying that the market is maturing.

SF: The market is absolutely maturing on the transactional business and since the economic slowdown. All of us are questioning what the demand of print and, consequently, imaging hardware and supplies is out there.

OPI: So with these challenges, how has the business had to adapt? How are margins bearing up?

SF: Gross margins in IT supplies never seem to rise; it’s a very competitive and mature market. That said, we are retaining gross margins; they’re not getting better, they’re not getting worse. In the near term we will continue to retain margins and focus on operational efficiencies to retain the net margin we desire. We recently launched an internal initiative called ‘Operation Slim’ to identify new savings and efficiencies.

OPI: That sounds a bit like United Stationers’ ‘War on Waste’

SF: They have had a lot of success with ‘War on Waste’ and hopefully we can as well with our version.

OPI: Do you have any business with the big boxes at all?

SF: A little. Our primary business has historically been with the independent dealer channel for two reasons. First, our DNA matches theirs because we’re independent and we plan on staying that way. The second is because we believe in them. I remember ten to 15 years ago I was reading articles about how independents may die in the shadows of the superstores and look where we are now.

I think independents are great street fighters and offer unique customised value many larger players can’t and won’t. We want to attach our wagon to the independents. The OEMs also continue to assure us that they’re seeing a lot of good growth from this channel.

OPI: Would you say that one of your USPs is your fill rate?

GW: Oh absolutely, because our drop-ship percentage is so high. We send stuff directly to the end-users and if we make a mistake or don’t fill a product the dealers get a black eye so we have to keep those accuracies high.

OPI: What is your drop-ship rate?

GW: We have reached a 90% drop-ship rate. We were at about 65% three years ago, so we feel like our model has really been validated. Because our category is single-digit margin, it’s really hard for a dealer to make money if you’re touching it a lot.

OPI: What’s driven that big jump?

GW: A lot of it has to do with the economy. When things are going really well, we all take our eye a little bit off how we can become more cost-effective. When margins slim down and sales start to drop off, people look at ways to save money.

So I think that’s forced a lot of dealers to really think about carrying that extra inventory, trying to free up capital to keep their businesses afloat.

OPI: What’s your physical infrastructure to service that 90% drop-ship rate?

SF: We have four distribution centres in Dallas (TX), St Louis (MO), Fresno (CA) and Carlisle (PA). That currently gives us about 98% two-day delivery and approximately 65-67% next-day delivery to the US population. We’re also investigating expansion into the southeast; we haven’t determined an exact location yet, but if business stays strong we hope to be down there soon.

OPI: How would that compare to some of your larger competitors, say the two main OP wholesalers plus some of the more IT-oriented distributors such as SYNNEX and Tech Data?

SF: We certainly don’t have the footprint that some of our competitors have and our plan is never to have that level of footprint. The capital and operating expense required to open distribution centres is extremely high. We try to retain a good balance of what is required to satisfy consumer demand, recognising that the more distribution centres we build and operate, the higher
the cost our company will incur, which may ultimately result in higher prices to our customers.

We believe a next-day, two-day model can be adequate as we continue to study the MPS market and everybody throughout the supply chain takes control of the actual distribution model as it pertains to MPS.

GW: With an MPS offering we don’t have to talk in terms of two-day or next-day delivery because our software processes can actually calculate days of supply based on user behaviour. As a result we can ship the toner the most cost-effective way possible before it runs out.

OPI: So will your competitors have to alter their physical infrastructure to cope with that change?

GW: Well, we’re really focused on about 8,000 SKUs, so we’re different. United, SP Richards and others have products that can blend up margins, so they can afford to have a bigger footprint when it comes to products outside our category. So I don’t know if they’ll necessarily change their footprint.

OPI: Apart from drop-ship rates, what other key differentiators do you have? 

GW: We have really focused much of our efforts on creating tools that help our dealers drive sales. We have dynamic marketing programmes and CRM abilities that give our loyal dealers an advantage over those that don’t buy from us, programmes and promotions that are not available from any other distributor.

OPI: I want to touch upon HP; they’ve been in the press, maybe more so than they would like in the last year. What impact have their issues had on you?

GW: We have a great relationship with HP. They’re a primary vendor for us. The changes at the top have obviously not been a good thing for them in the marketplace. The announcements that Léo [Apotheker, former CEO] made last year affected their hardware business more than it did the consumables business that we’re involved in.

OPI: Am I correct in thinking that Supplies Network is very much focused on original brands? Do you have a range of remanufactured products or compatibles?

SF: We do represent some of the leading remanufacturers; we’re not into private branding for those companies, but we believe there’s a strong market for remanufactured products and have established a very good relationship with a few of the major players.  The majority of our business is certainly OEM-branded products, however.

GW: It’s driven by dealer behaviour. We love our OEM relationships but dealers, or consumers, demand alternative products so we fulfil that demand.

OPI: We’ve interviewed a couple of your European counterparts recently, ACI Supplies and Alpha International, both similar-sized businesses to your own. Their philosophy is strictly to deal with the OEM brands.

SF: Given the economic challenges the US is facing, we all have to admit that consumers might consider alternative products. From what we see and study, the remanufacturer players are in a good place in the business; it’s a mature market, it’s evolved a lot over the last 20 years and I think it’s here to stay.

OPI: Let’s talk about MPS. I think I’ve been corrected this week that you’ve renamed your programme; it was Carbon Six, it’s now mpsSELECT, is that correct?

GW: We first came out with an all-encompassing programme in 2006 that wasn’t very flexible and was a very complicated sale. Since then we’ve changed to an offering we believe dealers can sell. We’ve broken it apart and set a kind of à la carte menu where we let the dealers pick and choose the software and the services that they want to provide.

The simplest programme we have is called Power Supply. It offers the easiest form of managed print and integrates with dealers’ back office. On the high end we still have Carbon Six, which includes rental agreements, service software and consumables, all in one big package.

SF: Let me tell you where our mindset resides on MPS. Our core business remains that of a transactional-based wholesaler and we have no intention of abandoning that strategy.

That said, we’re working very diligently on the services business as a supplement to our core, and most visible in that are our MPS initiatives. It’s a perfect adjacent opportunity and we believe a lot of the OEMs we partner with, like us, are getting into this space because it gives them a path to resellers and consumers in the form of contractual business in one form or another.

OPI: How do you see dealers getting their arms around the challenge and the opportunity?

GW: Independent dealers are still trying to figure out MPS. It’s not a transactional sale, the compensation programmes are hard to figure out and the selling cycle is really long. Right now, the copier dealers are moving quickly into this space where in the past they walked away from printers.

It’s my belief that OP dealers will not really invest in MPS until someone starts taking business away from them, but if they do wait, they will have lost that customer for a very long time. These are contractual sales with five-year minimums. It’s an area dealers will have to get into, but it’s going to take a while.

OPI: What sets your MPS offering apart from the many others that have evolved since Carbon Six was first launched?

GW: MPS has a lot of different meanings, and the landscape has dramatically changed since 2006. Most distributors have their own managed print offering and the manufacturing community has really stepped up its pace. Everybody believes in it, it’s just really hard to make money on it.

We do a lot of research in this space and there’s no doubt in my mind that we have the best assets in the business. We’ve got seven patents on our processes and software, and I really believe we have the best people from a mindset standpoint.

OPI: So you’re confident that you’re ahead of the competition?

GW: Oh absolutely.

OPI: Tell me a little bit about the dealer groups. You have a partnership with TriMega and you’ll have seen the recent merger news with INTEC; does that development have any significance for Supplies Network?

SF: From what I’ve heard the merger will be a very positive rollout. Many of the INTEC members have an extremely different business model to TriMega members so it will be interesting to see how they learn from each other. INTEC’s been a very good group of customers to us over many years. Our relationship with TriMega continues to evolve; we had a good growth year with them in 2011. We appreciate the opportunity given to us by Charlie Cleary [TriMega President].

OPI: How about your relations with Independent
Stationers?

SF: We’re very excited to have a seat at the IS table as we worked for that position for several years. When Mike Gentile and his team opened the door to us last year we jumped through it pretty fast. Our goal with IS is to help its members reach outside of their core geographic areas and offer a lean, cost-effective, drop-ship programme.

OPI: I guess a key part of your aim to help dealers expand comes down to e-commerce and internet solutions. What are your views on the third-party solutions and technology providers within the industry?

GW: We have strong relationships with most of them. I used to sell side-by-side at ECi with Ron Books so we have a great relationship with them. Andrew Morgan is a good friend; Red Cheetah is a great business and plays a really key role in the supply chain for our industry. Their importance will continue to grow as e-commerce continues to become a bigger part in how people buy things. ECi’s acquisition of Digital Gateway will help accelerate MPS as a staple in our business.

OPI: What about your relationship with MBS Dev which, of course, is owned by United?

GW: That’s a really good question. I understand why United Stationers wants to play in this space and that customer information is really valuable from a merchandising standpoint. We just haven’t integrated with them yet; that doesn’t mean that we won’t at some stage.

OPI: Staying on the internet, a name that we’re writing a lot about now is Amazon and it’s become an important customer for many wholesalers across the world. Is that true of Supplies Network?

SF: I can’t say we are aligned at this time with many of the large dot com companies. However, the independent dot com resellers are a pretty good growth segment in our business right now. They’re not as high profile as an Amazon, obviously, but they’re certainly making traction.

Our business model fits in well with many of them as they are often stockless dealers and desire effective same-day delivery and drop-ship programmes with high org-to-org connectivity for efficient order flow.

OPI: Presumably some of your dealers have shops on the Amazon Marketplace and you may well be inadvertently getting involved in it anyway.

SF: Absolutely.

OPI: You mentioned the historically much-talked-about potential demise of the independent reseller. Now we’re talking about the potential demise of big box retail in the US. What are your views on the future of superstore retailing?

SF: I think that they have too massive a market share at this point to fathom that they’ll go away. More than anything it creates a very clear window of opportunity for all non-superstores, specifically for the independent dealers.

OPI: Let’s talk about Supplies Network’s future. Where’s the company headed?

SF: It’s difficult to look past five years but we do a lot of strategic planning to figure out how to get through them and prosper. We’re going to stay very very true to our core; protect that core, nurture it and make it better year after year. In addition, this year, we intend to enter the third-party logistics service business.

As this plan evolves, more will be shared and we’re always seeking logical and strategic diversification opportunities. We’re known in the industry to operate our business with a classic mid-western conservative mentality. Some like that, some question it, but that mindset has served us pretty well for 20 years. We are very interested in acquisitions as well. We are now staffing and structuring our business to make that a potential part of our growth strategy.

OPI: Acquisitions in what category?

SF: We’ll certainly be looking throughout the office products and MPS industry, specifically at imaging supplies, but with our entry into the third-party logistics business, there may very well be things outside the industry that look appealing as well.

OPI: Any plans to venture north or south of the US border?

SF: Dialogue continues on that topic, yes, that’s all I can say.

OPI: We’ve discussed in the past about finding you some friends in Europe; have you made any moves in that regard?

GW: We have not. I’ve not connected with anybody over there and it would be nice to understand that space and develop relationships. As we grow our business, inevitably we’re going to have to get out of the US at some stage, so when the time is right, it would be good to have friends abroad that share similar philosophies and business models and that could be potential partners.

OPI: So if they’re reading this now should they give you a call?

GW: Absolutely, absolutely, you can’t start too soon.

Company beginnings 

OPI: When was the company founded?

SF: The business was founded in 1991 by Tom Fleming, my uncle, with significant contribution from Barney Kister. Tom was an IBM typewriter salesman in the early 1970s and his first entrepreneurial avenue was to start a reseller in the St Louis market. He sold typewriter ribbons, which evolved into additional product lines as technology changed in the market. Ultimately he became frustrated trying to find a good wholesaler, especially in the Midwest. So he started one. The rest is history.

OPI: What challenges do you face from being related to the founder?

SF: I grew from the bottom up, from being a warehouse employee before I was even 16 years old. Over the years, there was probably a level of reverse discrimination that challenged me at times. But when I reflect back, that’s probably been good for me and the company. I always felt I had to push a little harder than others. Most of that was probably self-inflicted pressure but let’s be honest, if you apply yourself, gain a true passion for the business and develop a strong work ethic, it doesn’t really matter how you got there and good things can happen.

OPI: I was reading about Tom quite recently; he seems to have a lot to say, particularly as it pertains to management. What were the main lessons you’ve learned from him?

SF: First of all, Tom remains very active in the strategic direction of the business today. The list is pretty extensive and many lessons have been more about character and life. On a business level, I’d say one of the biggest lessons is how important it is to treat our employees well, express appreciation for their contribution, give them as much room as you can to be creative and to spread their own wings. We have a Wall of Fame outside Tom’s office. This wall has pictures of all employees who have been with the company ten or more years. We have an annual dinner with this group and celebrate the company’s success. We’ve spent a lot of time with this group and they mean a lot to us.

OPI: Sure.

SF: And for what it’s worth, Tom also taught me how to water ski, snow ski and fish and I figure that’s got to be worth something! I’m very grateful for the mentoring and opportunities he has given me. He remains very active in the business today and will for many years to come.