Shaped Up, Shipped Out
When cutting tools manufacturer Kennametal Inc. sold off its J&L Industrial Supply catalog division to maintenance, repair and operations (MRO) supplies cataloger MSC Industrial Direct Co. in a deal that closed June 8 for a cool $349.5 million, the seller said it would recognize an estimated $215 million to $225 million pre-tax gain in its fourth fiscal quarter ended June 30. These are striking figures, considering that as recently as five years ago, most people — both within Kennametal and on the outside — would've laughed at the idea that J&L could fetch that much, never mind find a buyer.
But beginning in 2001, with a mostly new management team in place, J&L, which sells saw blades, drill sets, milling cutters and other metal-cutting tools to machine shops that cut and finish metal, began an aggressive turnaround process to make itself a more salable entity for Kennametal. The parent firm had wanted to unload the catalog since the late 1990s when it realized that J&L didn't fit into its long-term growth plans.
J&L's downfall started shortly after Kennametal spun off the unit in 1997 as a public entity, much like similar industrial marketers were doing at the time, on a specialty retail/catalog platform. And to build up some mass, J&L used the proceeds of the initial public offering to buy some companies, each of which had varying business models. "There was never really a cohesive strategy to make it all work together," recalls J&L's vice president of marketing and strategy, Chuck Moyer, who joined the company in 2001.
As the '90s wound down, J&L's sales fell, operating expenses rose and its stock plummeted. Kennametal brought in four presidents over the course of four years. The parent firm tried to sell J&L, but couldn't get good value for it. So it brought the cataloger private at the end of 2000. Over the next couple of years, the firm hired Moyer; Michael Wessner as president; Nick Darin as vice president of finance, technology and supply chain; Chad Spawr as vice president of human resources; and Joe Scime as vice president of sales. They set out to reinvent and reinvigorate the company.
Early in 2002, they refined the catalog's focus to just the metal-cutting tools niche of the MRO business. They also began selling off some of the companies that J&L had acquired in the '90s, such as ATS Industrial Supply and Strong Tool Co.
"The company was in a tremendous level of flux, which led to a high [order-taking] error rate," Wessner says. "The retail model didn't make a lot of sense, because it's not a retail-type business. We needed more centralized inventory. The metal-working business is a long-tailed business, requiring thousands of SKUs."
Having built up a retail chain of 35 locations by the middle of 2001, J&L began shutting the stores down in favor of building up the direct and online sales channels. It also began to fix up its fulfillment center, which was shaky at best at that time.
J&L kissed away $50 million in sales — about $42 million in retail and some $8 million in major MRO accounts. It's also winding down sales to original equipment manufacturers, having shrunk sales from more than $8 million in fiscal '03 to less than an estimated $2 million in fiscal '06. By fiscal '07, sales will be far below $1 million.
But all the changes would prove to be valuable investments. The company's call abandonment rate was 3.8 percent for fiscal 2001, ended June 2001. In comparison, that figure dropped to 1.9 percent for fiscal 2005. Even more striking was J&L's error rate in fulfillment, which was 6,000 to 8,000 for that year, compared to just 175 to 200 last year. And the company's fill rate was just 78 percent back then compared to 96.4 percent last year. For fiscal '01, sales had fallen 9.6 percent over the prior year.
By getting out of the $400 billion MRO market and focusing on the $7 billion metal-cutting tools niche market, J&L's focus has been on a fragmented market that gives it a chance to grow through customer penetration, product line expansion and customer acquisition — all of which are considerably greater in scalability.
As Moyer points out, there are only about 250,000 potential customer locations in J&L's addressable market. "Most metal-working customers buy from multiple distributors, both local and national," he says. "Local distributors tend to charge less than national, which is the opposite from the big box retail stores," such as Home Depot and Lowe's.
In fact, local and regional distributors own more than 80 percent of the metal-working tools market; national distributors, including J&L, own just 16 percent of the market. As a result, J&L sees a huge opportunity ahead to make inroads nationally.
And it already has: Sales have grown from $197.6 million in fiscal 2003 to $219.8 million in fiscal '04 to $257.5 million in fiscal '05 to an estimated $275 million in fiscal '06.
And to get a leg up on local distributors and national competitors, J&L has, over the past five years, focused on improving its product selection and availability — both typical traits of national distributors — and emphasized expert technical support. Personable, responsive tech support typically is better handled by local distributors. But J&L has thrived on one-upping the locals in this regard. And its sales gains have come from getting more business from existing customers.
"You need good national support, so we beefed ours up and trained our team," Moyer says. Customer satisfaction has risen as a result. According to J&L customer surveys, 25 percent of customers in 2002 said they were "extremely satisfied" with J&L compared to 32 percent last year. Even more significant, 26 percent of metal-working customers contacted said they had placed at least one order through J&L last year compared to just 14 percent in 2002.
The firm's centralized technical support team leverages a systematic process for gathering information, uses intelligent databases, such as those that contain history on what has worked successfully for different customers, and it also collaborates with supplier partners. For instance, representatives from various product suppliers frequent the technical support telephone center and will field calls for a day at a time with J&L reps.
Broadened Product Line
The company has developed its product line to emphasize the technical applications of the tools sold. Combined with its heavy emphasis on technical support, J&L's customers prefer the value they get out of their purchases. Naturally, J&L's primary emphasis is to offer Kennametal-branded products, and the cataloger's relationship with Kennametal will remain intact under MSC's ownership. (MSC, too, is a major Kennametal distributor.)
But in addition to offering other value-add-oriented brands, such as 3M, DeWalt and Niagara Cutter, J&L has developed the Hertel private label. "The label helps us compete in the general purpose arena," Wessner says. "It represents good quality at a low price — the same approach as Costco's private label."
J&L acquired Hertel, then redeveloped and relaunched it in 2003. Since then, Hertel has become the cataloger's second largest supplier. What's more, Hertel has risen to become the fourth most recognized brand among J&L customers.
Although it's a national business-to-business distributor of a highly technical product line, J&L emphasizes a multichannel approach as much as any other cataloger. But unlike the standard catalog-online-retail model, J&L's primary vehicles are catalog-telesales-online.
The company goes to market with its catalogs and Web site, as well as its telesales force and field sales reps. Like other marketers, J&L is processing a rapidly increasing number of orders online. Broken down by channel, telesales have grown the most since 2003, from 16 percent to 39 percent. All other channels, including direct marketing decreased (from 35 percent to 15 percent), although government and wholesale sales emerged since 2003.
J&L launched a new Web site a little more than three years ago. "The old one was like a glorified fax machine," says J&L e-commerce manager, Thadd Tucker. The newer site gives customers the ability to convert a price quote to an order and is fully integrated with the call center. That means customers can start an order online and complete it on the phone, and vice versa.
The site has been well received by customers. In the fourth quarter of fiscal '03, 4.5 percent of orders were placed online. Last year, 30 percent were placed online; this year, 35 percent. In addition to offering full views of all its products, J&L also offers a virtual catalog on the site with flash functionality. "You can set cookies to return to pages," Tucker points out. "It works seamlessly back and forth with search."
The changes have also included a heavy emphasis on making J&L a better place to work. The numbers speak for themselves: Compared to 2001 when the average annualized employee turnover rate was 41 percent, last year's turnover rate was just 9 percent, according to Spawr, and most of those among that 9 percent were terminated for misconduct, as opposed to employees who leave on their own.
Better Work Environment
"Five years ago, you couldn't find a performance review here," Spawr says. "Now, we do monthly and quarterly reviews." What's more, 25.2 percent of J&L employees have made at least one internal career move over the past two years.
Virtually all of J&L's improvements over the past five years add up to a bonanza for MSC. With a customer base of more than 74,000 metal-working shops, J&L's presence gives MSC a significant growth opportunity to sell maintenance, repair and operating supplies to these customers — something MSC has done in the past with other metal-working customers.
When he announced the J&L deal, MSC President and CEO David Sandler said J&L's technical expertise and value-added metal-working solutions will appeal to MSC customers. "Combining the two companies increases our value basket," he said, "and will allow us to leverage the best attributes of both companies across the combined customer base."
What's more, adding J&L "not only expands our presence in the marketplace," he noted, "but also significantly enhances our customer base, and broadens our product and service offerings." MSC aims to leverage its combined relationships in the industry to maximize cross-selling opportunities, while cutting costs.
Upon announcing the sale, Kennametal President and CEO Carlos Cardoso said that J&L "has been a great success story with a committed team that has consistently delivered strong growth and margins." He added that Kennametal's goal was to find a partner for J&L that could accelerate its growth, add incremental value to customers and ensure that J&L employees are kept happy.
Kennametal benefits from the deal by continuing to use J&L as a major distributor of Kennametal products and as an important strategic channel partner. MSC will have access to the Kennametal portfolio of brands, and the Kennametal brand will be marketed through MSC and J&L as the premier brand of indexable cutting tool products.
About J&L Industrial Supply
Headquarters: Southfield, Mich.
Merchandise: Metal-cutting tools
Customer demographic: Small- and medium-size durable goods manufacturers who cut or finish metal
Sales per channel: Direct/telesales: 65 percent; online: 35 percent
12-month housefile: 74,000
Total housefile: about 300,000
# of employees: 580
# of SKUs: 130,000
Catalog printer: Von Hoffman, Donnelley
E-commerce platform: ATG with Endeca for search
List manager: MeritBase, balance in house
Inventory management: Manugistics
Phone switch: Siemens
Call center scheduling software: Blue Pumpkin
Predictive selling tool: NetPerceptions
Six Keys to J&L's Turnaround
1. Shifted product focus from maintenance, repair and operating supplies to the metal-cutting tools subcategory.
2. Closed most of its retail stores.
3. Made drastic fulfillment and order-taking improvements to slash its error rate and improve its fill rate.
4. Major investment in technical support.
5. Upgraded Web site to drastically increase online orders.
6. Maintained exhaustive selection of metal-cutting tools in the print catalog.
Key J&L 'Lifer' Spurs
Call Center Success
Spend five minutes with J&L Industrial Supply's vice president of call centers, Kim Shacklett (pictured), and you come away either dying to work for her or in need of a good, stiff drink. Having started working the phones herself at J&L 15 years ago, Shacklett's boundless energy and enthusiasm easily rubs off on a majority of her staff.
And why not? Having risen from the bottom to the top of the telesales game, she's spearheaded many call center projects at J&L over the years, and has been at the core of such noteworthy numbers as a 1 percent call abandonment rate and all calls being answered within 20 seconds or less.
One of the only top managers at J&L not to join the company over the past few years, she patrols J&L's Southfield, Mich., call center like a hawk, but clearly all those she oversees love to see her and are inspired to heed the department's two primary goals: sell and service. She's particularly proud of the systems that support the center, such as Siemens switching technology. For instance, out of a given 3,000 to 3,200 calls received per day, 35 to 39 are abandoned. "We can see who those 39 callers are," she notes. "We could then call them."
While it might be natural for someone in her shoes to be less than thrilled that more than $2 million worth of business has shifted away from the company's phone reps over to the Internet, Shacklett is proud of this instead. "The company's been growing, but we haven't added any CSRs," she proudly proclaims. At the same time, because of J&L's steady growth, the company hasn't needed to cut back on telesales reps either. What's more, additional growth-related funds have been reinvested in outbound telesales.
A key member of the team that turned J&L around, Shacklett was instrumental in implementing resume routing, a system in the call cue that channels different incoming calls to the appropriate reps.