Supply-side economics

There’s a reason our annual ranking of private companies is stock full of wholesalers and distributors of every stripe.
By Ana McKenzie
 

Around midnight, the spring sky spawned a twister that tore through Belmont, a small town just across the Catawba River from Charlotte. It ripped an 82,000-square-foot warehouse in half, strewing structural steel and sheets of siding like shrapnel and soaking the ruins in rain. As he surveyed the damage that morning in 2008, CEO Charles Lingenfelter didn’t know it would cost $8 million to rebuild and restock the warehouse beside his company’s headquarters. But he knew just how quickly the job could be done.

That’s because Industrial Distribution Group Inc.’s business is supplying whatever a customer needs and knowing how to get it where it’s needed, when it’s needed. A distributor sees a hospital not only as a place doctors treat patients but also as thousands of light bulbs and miles of gauze. A ballpoint pen is not just a writing tool; it’s plastic parts and ink shipped from all over the world. As business grows increasingly global, distributors of every stripe have become bigger players, as evidenced by their prevalence on Grant Thornton’s North Carolina 100, the annual ranking of private companies based in the state that the accounting firm’s Carolinas practice compiles for this magazine. For most of its 27-year history, manufacturers dominated the list. Since the mid-2000s, the wholesale-distribution category has been the largest sector in number of companies and in total revenue.

Though not the largest distributor on the list, IDG is moving up fast, leaping from 22nd last year — its first appearance in the ranking — to 13th this year. Some new contracts could move it into the top 10 by 2013. In March, the company won a bid to supply and manage all indirect material — anything utilized outside the production process — for the North American operations of Ingersoll-Rand PLC, the Dublin-based manufacturing conglomerate whose headquarters on this continent is just up the road in Davidson. There had been more than 2,000 suppliers. Now, there’s one. “Everybody was bidding on that deal,” Lingenfelter says.

But everybody is not IDG, which is not only a distributor but also what industry types call a supply-chain manager. IDG will dispatch specialists to a customer’s operations to probe everything from the janitor closets and storerooms to warehouses to review what the company uses or might need. They will recommend organizational software programs, new, more-efficient equipment and even look for inconsistencies in vocabulary — maybe a widget in a company’s tool room in Fort Worth, Texas, is called something different in Trenton, N.J. — then recommend ways to organize or update inventory. Each customer is given a catalog that resembles in size and heft a metro phone book listing everything IDG has in stock at its 27 locations in 16 states and China. It also will store customers’ indirect materials in its own warehouses, distributing them as they’re needed. “A lot of companies aren’t willing to take inventory and supplies off the books to help with cash flow,” says Billy Moore, leader of Grant Thornton’s Carolinas consumer- and industrial-products industry team. “That’s unique to IDG.”

Like the inventory in those warehouses, IDG is made up of many parts — 31 companies that were acquired or came together in a giant roll-up of distributors. Originally private, it went public and is private again. After working 15 years for Ingersoll-Rand in a variety of positions, Lingenfelter left the company in 1987 as a vice president of sales and marketing. In 1988, he bought Ensco Supply Co. in Greensboro, which soon merged with Tucker, Ga.-based Boring-Smith Industries Inc. They became Industrial Distribution Group, which acquired Shelby-based Dixie Industrial Supply Co. (in which Lingenfelter was a shareholder). To enlarge the company’s footprint even farther, it merged, again, on Sept. 23, 1997, this time with eight other companies across the U.S. The next day, IDG went public. Making Atlanta headquarters, it sent the companies involved in the roll-up — some retaining their names but operating under the IDG umbrella — hunting for other distributors that offered new customers and lines of business. It acquired 20 within 15 months, eventually dividing the nation into four regions. Lingenfelter ran the Southeast division until he became CEO in 2005. He moved the headquarters to Belmont, near his home in Charlotte. Wanting to concentrate on long-term goals rather than on meeting analysts’ estimates, he persuaded his board to take the company private, which it did in August 2008.

Aside from the general benefits of being private, including less oversight, a distributor’s business model is inclined to yield unpredictable results, which aren’t in line with the consistent revenue stream analysts usually expect from a public company. Fully stocked shelves over long periods can lead to poor quarterly statements. “There’s an old term in wholesale distribution called turn and earn,” says Randolph Smith, Charlotte-based national leader of Grant Thornton’s transportation industry team. “You turn inventory as fast as you can, so margins are lower. The faster you turn inventory, the more money you make.”

 

Employee-safety handouts and calendars are all that decorate the walls of IDG’s headquarters. Carol Marks, vice president for business-management systems, points to one cubicle, then to the next, then to the next, explaining their different purposes. It’s a dizzying maze of padded walls lined with every shade of gray in that spectrum of the corporate rainbow. The flashiest thing on the property is Lingenfelter’s new orange ’57 Corvette parked out front. The gift to himself is probably deserved. Though sales declined 30% during the recession, the company increased revenue more than 20% in 2010 and should reach “about a half-billion” this year. As a private company it’s not obligated to disclose financials, but things have “significantly improved” since the dark days of 2008, a spokesman says. IDG employed 1,050 at the end of its latest fiscal year, when Grant Thornton cuts off the list, but had 1,118 on the payroll in mid-September. Lingenfelter says it will add 100 over the next year.

Two new contracts — Ingersoll-Rand and one in a new market segment the company declines to discuss — have helped, but this year the company also introduced an “e-catalogue,” which puts all the products housed in its warehouses just a click away. A digital copy of the print catalogue it provides customers, it’s Amazon.com for the industrial world. All this growth begs a question: Can the company afford to remain private and independent? Lingenfelter essentially ignores the inquiry. An acquisition by a bigger company, scared by the competition IDG poses, is a possibility, or it could go public again. Who knows? With two big contracts about to unfold, today, for now, trumps tomorrow.

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