There are two primary reasons for a company to be a low-cost supplier. Reason No. 1 is to increase its sales volume. Reason No. 2 is to improve its bottom line. Pentacon, Inc., the Houston, Texas-based provider of fasteners, small parts and advanced component services, has come up with a third and even better reason: to help its customers be more competitive. It’s this third reason that has positioned Pentacon for success now, and success down the road.
“Success now” can be seen in the company’s current customer base, which includes giants such as General Electric, Harley-Davidson, Boeing, American Standard, Lockheed Martin, Cummins Engine and other manufacturers found in the Fortune 50. The current orientation of this high-powered group provides an excellent reason for Pentacon to adopt low-cost approaches to its distribution of fasteners and other small components, according to Mark Baldwin, the company’s chairman and chief executive officer.
“If you think of the Fortune 50 as your customer base and realize the competitive forces they’ve faced over the past 15 years, it has been essential for them to concentrate on continuous improvement and efficiencies from suppliers,” Baldwin says. “We’ve responded to that. We’ve been aligning our sources and automating to take non-value-added costs out of the supply channel. We do this to help our customers become more competitive.”
Plus, according to Baldwin, helping its customers has helped Pentacon. He says, “We continue to be a just-in-time supplier so that our customer isn’t doing any day-to-day buying or management of materials. He’s asking us to keep his bins full and his production lines flowing. For so long, customers would beat up suppliers on price, price, price. Now the customer says, ‘Why should I have to manage these inventories and activities when my supplier can do that for me?’ There is real value in that, and it is what we do.”
The Fast Track
Pentacon has combined this extraordinarily customer-focused outlook with a strong acquisition strategy to become, in just three years of business, one of the largest U.S. suppliers of fasteners and small components. Incorporated in March 1997, the company completed its initial public offering exactly one year later, and simultaneously acquired five fastener/component producers: Alatec Corporation, AXS Solutions, Capitol Bolt & Supply, Maumee Industries and Sales Systems Limited. Since March 1998 – the month in which both the IPO and these acquisitions took place – Pentacon has also purchased Pace Products, D-Bolt Company, Texas International Aviation and ASI Aerospace Group. Its 1999 revenues totaled $272.9 million.
This was quick work, but Pentacon is well accustomed to moving fast. Rick Ehrensaft, corporate director of marketing, notes that this early strategy put Pentacon into a strong market position immediately. “The fastener industry tends to be fragmented, without a major player,” Ehrensaft says. “This combination has given us critical mass. Now we’ve organized the legacy companies into two groups, aerospace and industrial. We’re already among the largest distributors servicing the aerospace industry. Our presence in the industrial markets is defined by highly innovative, integrated supply programs for some of the most successful companies in the industry.”
Pentacon’s mission statement dedicates the company “to providing the highest-value supply chain in the industry.” Its strategy in achieving this goal is twofold: First, it strives to meet its customers’ just-in-time delivery schedules; and second, it provides innovative supply-chain management services. Both prongs of this strategy are targeted at helping customers improve their own operating efficiencies and reducing their costs.
A look at the details shows how Pentacon succeeds in both supply-chain management and deliveries. Through its widespread distribution and sales locations, the company receives product from a vast community of suppliers, inventories the materials and performs various value-added services depending on specific customer requests. The latter includes product enhancements such as secondary machining, quality-assurance testing, kitting and subassembly. These activities may be performed in one of Pentacon’s 34 service centers in North America and Europe, or may occur on location at the customer’s facility. If the customer requires just-in-time services, Pentacon may assign one or more of its employees to the customer’s location to receive materials, deliver these products to the work area and reorder and replenish products, as needed.
As complete as this process sounds, Pentacon is positioning itself to further enhance its services. Pentacon has formalized its supplier alliances into a format it calls the “vendor mall” – which, simply stated, integrates an OEM’s many suppliers into a common replenishment process, with Pentacon serving as the single source of contact. The vendor mall assigns materials sourcing to the least costly provider, thus eliminating the redundancies that come with multiple suppliers and keeping product costs contained. At the same time, Pentacon operates the vendor mall in a way that supports consistent value-added services throughout its entire group of suppliers.
Baldwin says, “The vendor mall is another example of Pentacon bringing our integrated-supply concept to a broader community of our customers’ supply base. You should build a company based on what is valued by your customers. Our promise to our customers is, one, that we will buy from the best value suppliers in the world, wherever they are; and, two, we’ll have the people and technology to provide solutions to improve their efficiencies.”
But Pentacon isn’t stopping with the vendor mall. The company sees e-commerce as a way of streamlining the supply chain further, and has introduced an advanced inventory system called XCHAIN as a means of using e-commerce functions to optimize inventory management for its customers.
Ehrensaft refers to XCHAIN as “probably the most significant development in e-commerce. XCHAIN is a supply-chain integration tool that enables all participants in a private exchange to communicate and transact business regardless of computer system, level of sophistication or geography.”
Links in the Chain
Baldwin says XCHAIN will permit Pentacon’s customers to leap over “a major hurdle in their supply chains. This Internet-based tool effectively communicates across the many disparate information systems a customer and its supply base might have. The suppliers might have varying levels of sophistication in their systems and processes, but XCHAIN integrates these suppliers without major ripples in the chain and major costs to the customer.”
But, as advertisers are fond of saying, there’s more. Pentacon has gone to great lengths to develop a suite of Web-based supply-chain integration tools. As introduced in a presentation prepared by Ehrensaft, the new suite of products is called ecOptimize. Its offerings include XCHAIN, the integration tool mentioned previously, with its exchange function crossing over disparate computer systems; XMARKET, an online request-for-quote product that establishes market costs for materials; and XFILL, which, enabled by XCHAIN, provides the customer with the “arms and legs” for physically moving materials and the managing-the-fulfillment process.
The reason Pentacon continues to push the bar on efficiency is simply expressed by Baldwin: “Our customers demand that we be efficient, and the only way we can do this is to continually refine and improve our processes, and demand that our suppliers be equally as efficient. Our customers have been and will continue to be under intense global competition. That means we now have to go beyond just lowering material costs and our internal costs of doing business to the next step, which is to look at the whole supply chain. With these additional services, we’re giving them the means to make their whole supply chain more efficient. If we can demonstrate this commitment to our customers, they can assure themselves, ‘We’re not going to find a better, more efficient supplier.’”