Independent means Featured

11:45am EDT December 21, 2004
President and CEO John Kreidel says is.group (Independent Stationers Group) is all about the little guy -- the independent office supply dealer. The goal of Kreidel's organization, a national cooperative for independent office supply stores, is to supply its more than 600 members operating 950 stores with the ways and means to survive in the face of increasingly steeper competition.

And it may be thanks to is.group that independent office supply stores are surviving. Despite intense competition from national chains such as OfficeMax and Staples, the independent stationer is still going strong.

"Clearly, the independent's market share suffered because of predatory marketing and pricing by the big box stores [national office supply chains]," says Mike Gentile, the cooperative's executive vice president. "If not for us, they would have suffered more."

In fact, Gentile says, there has been a resurgence of independents in the industry. Is.group's members represent about 30 percent of the total number of independent dealers in the nation, making it the largest cooperative in the industry.

Gentile says is.group's members are able to compete with those big box stores because of the combined buying power and resources the cooperative offers. Member stores, locally owned and operated, can purchase about 3,000 products through the organization.

Last May, is.group opened three regional distribution centers (RDCs) -- in Indianapolis, Fontana, Calif., and Mechanicburg, Pa. -- allowing dealers to reduce their inventories and save costs. Says Gentile, "The RDCs were developed to help the independent dealer get products at a lower cost and more quickly."

Kreidel says the new system, coupled with is.group's acquisition of IT wholesaler Express Computer Supply, could save member companies millions of dollars. The RDCs, he says, have been well worth the risks.

"The biggest risk to the new RDC system was if we decided to not move forward," says Kreidel. "Another big risk was that some members would decide to take sucker prices in the short term. That will make our volume go down in the start-up phase and losses will be higher."

But the impact of the new system has been mostly positive.

"Dealers are now experiencing lower inventory levels at their companies," he says. "In fact, we believe we have freed up over $90 million in dealer working capital. Also, the savings for IT [computer supplies] for our dealers is huge.

"Predistribution, our dealers were buying 100 percent of their IT products from wholesalers. This was, in most cases, about 40 percent of the dealers' cost of goods sold. So the savings just on a vendor like HP is in the millions for our members."

Kreidel says members are already benefitting.

"Dealers are seeing higher margins and finding themselves more competitive and gaining new business," he says. "Also, after distribution, dealers could order a combined vendor order of office products and IT products with a very low prepaid freight, just a few thousand dollars. With a much wider breadth of product available at direct costs, many dealers are choosing to increase the number of SKUs they stock, which increases their gross margins versus buying wholesale. Is.group's distribution is simply a much better way to buy direct."

Kreidel believes the system could be so successful that is.group may open it to other industry cooperatives, an innovative strategy for all independent dealers to remain competitive.

"In the long term, we believe this system may even service more than just us," he says. "Why? We are stronger by working with other co-operatives that are our competition -- we have coined that 'co-opitition.'"

Logistically speaking

The RDC system wasn't born overnight. Kreidel and his team conducted months of research before moving cautiously.

"Is.group completed an exhaustive supply chain and market share study conducted by A.T. Kearney," Kreidel says. "The conclusion was that we should open regional distribution centers to achieve a much more efficient supply chain and thus, significant savings for our members."

Still, before he could move forward, Kreidel had to convince is.group's board of directors -- comprised of member companies.

The board agreed the RDC system should be part of the cooperative's strategic plan, which is based on a survey of members, and Kreidel says it isn't always easy to come to a consensus.

"It's a challenge with more than 600 entrepreneurs, but the plan is our guiding light," he says. "We simply execute to that plan."

Kreidel then began to reduce the financial risk involved in the system.

"We are using two very fine outsource companies, Exel for warehousing and Meridian IQ for logistics. That way, we own no real estate or major leases," Kreidel says. "We do own the intellectual property for the warehouse management and the freight management connectivity.

"If we have issues, we could easily move to another provider. This mitigates the start-up risks and potential losses."

So far, the system has worked fairly well, and . despite a glitch in user software that is being worked out, the system has been embraced.

"There are a few drawbacks, such as special orders taking a little longer for a dealer to get," says Kreidel. "But we are working on solutions for that issue."

Kreidel is keeping his eye on the costs of the new system, as well.

"We have capitalized the group over the last several years," he says. "Some we will simply expense and the rest will be simply a reduction in dealer rebates in the short term. We aim to keep our debt in line."

Most important, Kreidel wanted the most talented logistics experts to run the new system, knowing that the skills didn't exist in the cooperative's structure.

"We actually were working with another company to set up a joint venture," Kreidel says. "That did not work out so we hired their logistics man. He was passionate about the program, so George Maney joined the team."

"We were looking for people that shared our vision and commitment to helping the little guy," adds Gentile. "We found the right people, and that was the key -- and they had all been in the industry for some time."

A not-so-vicious cycle

Is.group's new system has been a boon to its recruiting efforts.

"We have already recruited nine new members since the system launched," Gentile says. "These nine new members recognized the value of the distribution centers."

The more members the co-op recruits, the better it is for both is.group and its existing members, adding to the combined purchasing power of the group. And that, after all, is what it's all about.

"We are dedicated to serving the independent dealer in an increasingly competitive environment," Gentile says. "We try to anticipate the needs of our members. Sometimes, it's like herding cats -- these are independent entrepreneurs. You don't tell them what to do or how to do it. We offer services to help them run their businesses more effectively."

Kreidel is especially passionate about serving the independent dealer, since he was one for several years before selling his stores to Corporate Express, a move he later regretted.

"Before coming to is.group, I was part owner in an office products dealership for 10 years as a member of is.group," he says. "During that time, I contributed a lot of sweat equity in a few dealer groups and as director of is.group. We sold our dealership to Corporate Express during a time when Wall Street was paying stupid money for dealerships.

"I worked for them for two years during an earn-out period, and then realized it was a mistake to sell the business. My penance was to come back to the world of independent office products dealers and do all I could to help them compete."

And if the RDCs' results are any indication, Kreidel's efforts and passionate commitment are paying off.

How to reach: is.group, (317) 845-9155 or www.isgroup.org.