Published In August 2001
Electrical distributors are the most vital link between the manufacturers of thousands of different electrical products and the designers, architects, specifiers, contractors, and service professionals that order, install, or use those products. Total industry sales exceed $67 billion and about 44 percent of all electrical distributors’ customers are contractors. For the past several years, the electrical distribution market has experienced a steady, but moderately slow pace of consolidation, which is now seriously quickening. According to the National Association of Electrical Distributors (NAED), St. Louis, Mo., the capital costs and challenges of technology implementation and the pressure on margins and costs in today’s competitive economy is encouraging many distributors to sell to larger acquisitors. At the same time, however, the number of supply outlets is not decreasing with these ownership changes. The 25 largest of these distributors now represent more than 28 percent of the total market and over the last five years their market share has increased almost one percentage point per year. Graybar Electric Co., headquartered in St. Louis, Mo., has experienced sales growth at an average annual compounded rate of more than 12 percent over the past five years. According to the June issue of Industrial Distribution magazine, Graybar Electric ranks first on a list of the top 100 industrial distributors, with sales in 2000 of $5.1 billion—a 21 percent increase from $4.3 billion in 1999. “Graybar is dedicated to providing quality distribution services to our customer base,” said Robert A. Reynolds, chairman, president, and CEO. Graybar’s history coincides with the beginning of the electrical industry when Elisha Gray, an inventor, and Enos Barton, an entrepreneur, founded Gray & Barton in Cleveland in 1869. Four years later, the partnership changed names and Western Electric Company began supplying telegraph components to the Western Union Telegraph Co. After the telephone was invented, the company became the exclusive manufacturer of telephone equipment for the Bell System and grew to be one of the largest manufacturing concerns in the world. Western Electric also managed an electrical distribution business by furnishing its customers with other manufacturers’ non-telephone products. This side of the business eventually separated from the parent company and, in 1926, became Graybar Electric Co., Inc. Today, Graybar is an employee-owned company with 10,500 employees in 292 stocking locations throughout the United States and Canada, with additional operations in Mexico, Singapore, and Puerto Rico, as well as authorized agents around the world. The company’s customers are primarily electrical and voice/data/video (VDV) contractors, commercial and industrial firms, telephone companies, and power utilities. In 1997, a five-year rollout plan to create a system of zone warehouses was begun. Carl Hall, who has since retired as company president, wanted to launch a strategic initiative that would strengthen Graybar’s position as a value-added channel in the distribution industry. “The zone concept has a twofold mission, which is to deliver products to customers within 24 hours and to replenish inventories at branch locations for some products,” explained Ed Keith, vice president of logistics. The plan to build a total of 16 zone warehouses by the end of 2002 is now two thirds completed with the opening of the 10th facility. When the network is completed, Graybar estimates that the result will exceed 98 percent customer-base coverage, and 95 percent geographical coverage of the lower 48 states. Locations outside the zones’ coverage areas, such as Billings, Mont., or Alaska or Hawaii, have been deemed by Graybar to be stand-alone branches and will function as mini-zones. “Each zone serves 12 to 25 branches and has a nominal radius of 300 miles,” said Keith. For the most part, 300 miles is the outer limit of next-day delivery by truck capabilities. The zone warehousing concept is focused on the customer and the physical delivery of products. The entire network is designed to provide next-day, anytime delivery to the customer, while Graybar’s branch locations continue to support same-day or time-specific delivery. “The goal is to provide the highest order fill rates and customer service levels at the lowest possible cost,” said Keith. A dedicated network of trucks delivers products to the branches overnight. “The zone concept has a low cost per transaction and inventory costs at branches are reduced since they don’t have to stock as much material, yet can still fulfill customers’ needs,” Keith added. If the first focus of the zone warehousing concept is to deliver the goods, the second focus is having the goods to deliver. Before deciding where to place the company’s zone warehouses, Graybar analyzed the sales of each of its branches in each of its geographical districts. The goal is to use that information to customize each zone’s inventory as much as possible to reflect what the local marketplace is actually purchasing. “By virtue of having a customized inventory on hand, each zone and branch is more able to quickly and more fully fill the electrical contractor’s orders,” said Keith. A company with a distribution network of four or five locations could make deliveries anywhere in the country within 48 hours. “But to condense that delivery time down to 24 hours, you need more distribution, or zone, centers,” Keith said. Although the strategy of zone warehousing could be implemented by anyone, a major barrier in the form of capital investment does exist, Keith cautions. “A company must have the resources to secure the facilities, purchase the necessary material and handling equipment, hire the staff, and purchase the necessary technologies and the large inventories,” he said. The U.S. Navy is an extremely large organization that must warehouse and ship millions of parts and pieces of equipment to some of the most far-flung areas of the world. “Zone warehousing is how higher customer service levels are achieved and a viable system for getting parts to the customer,” said Commander Brian Forsyth. For the Navy, the “product” is readiness, for which it maintains inventories in multiple locations around the world to immediately deliver whatever parts or components are needed by the fleet. Forsyth agrees that most of the companies in the private sector that successfully use zone warehousing are larger and able to operate their own distribution centers. “There are, however, third-party providers that specialize in managing distribution centers, making it possible for smaller companies to accomplish zone warehousing,” he said. Regardless of size, whether a company can or does implement zone warehousing is a business equation. “The costs of maintaining zone distribution centers must be balanced against the cost of other product delivery methods, all of which is based on the required customer service levels that are needed to maintain a company’s competitive advantage,” Forsyth said. Operating the warehouses Until all Graybar zone warehouses are fully automated, the company relies on a warehouse management system (WMS) with the latest bar-coding technology. “A good WMS provides a 15 to 20 percent increased productivity rate, high accuracy rates in order fulfillment, and a higher rate of resource optimization,” Keith said. For example, Graybar’s ninth zone warehouse in Rogers, Minn., is equipped with the latest state-of-the art WMS, which uses Provia software to interpret the bar codes that are scanned by radio frequency. “All orders are processed through the company network to the on-site WMS server, where they are downloaded to hand-held scanners for the pickers in the warehouse,” Keith said. The 144,000-square-foot facility has 14 dock doors, uses Bendi forklifts and, in keeping with the company’s strategy of providing the best customer service, is semi-automated, semi-mechanical, and is supported by state-of-the-art shelving and picking techniques. The bottom line Does the zone warehousing concept increase sales? Possibly. Approximately 30 percent of all of Graybar’s warehouse shipments are currently flowing through the 10 completed zones. “That equals warehouse sales under the old system of 240 locations,” said Keith. The new zone warehouse locations have added 1.8 million square feet of capacity and Keith believes the company could not have handled the 21 percent increase in sales between 1999 and 2000 without that extra capacity. And customer service? Definitely. “By providing next-day delivery, we are demonstrating to our customers how much the company values them,” Keith said. Graybar has even formed a new service organization that focuses solely on customer service and devising ways to improve levels of satisfaction. In the long term, Keith predicts that in the emerging business-to-business world of e-commerce, the electrical distribution industry will have to continually reposition itself to remain the channel of choice against such competition as dot-coms, catalog houses, Do-It-Yourself (DIY) chains, and vertical exchanges. “Zone warehousing is one way that electrical distributors, including Graybar, can improve customer satisfaction and continue to increase market share, help electrical contractors fulfill their needs, and maintain a highly visible presence in the supply chain,” Keith said. BREMER, a freelance writer based in Solomons, Md., contributes frequently to Electrical Contractor. She can be reached at (410) 394-6966 or by e-mail at email@example.com.