Nine months after taking the reins of Tech Pacific's Australian operation, managing director Kerry Baillie spoke to Gerard Norsa about how things are progressing at the country's largest distribution operation.
ARN: How do you think things have gone since you joined the Australian operation?
It has been nine months and it has been fantastic. The staff have been quite brilliant. In the course of the last eight months the sales run rate has doubled. Our sales for this [calendar] year will be well in excess of what they were last year.
Have margins increased with revenue?
Across the company our margins have come down but our costs have also come down more than the margins as a percentage of sales. So there is a delta of profit in there.
How have cost savings been achieved?
Across the board. Everything from lunches to buying new things. When you are cutting costs, it becomes a mentality. It is a cultural thing. If everybody is aware for the need to cut costs, they all do so. It is amazing how much you can reel things in. You think twice about everything that you spend. We have saved money in the warehouse and we have reduced staff numbers. Our staff numbers are about two-thirds of what they were at the peak in 2000. So we have reduced the staff by a third and still doubled the sales. That's a good result.
You have spoken in the past of giving your sales team the ability to match the market. Is that where the sales success has been?
One of our competitors, who shall remain nameless, said to me a few months ago he had been trying to figure out what we had done to come back so strongly. When I asked him what he thought we had done, he said that we had "unleashed the sales force". That is pretty close to the truth. I just told the sales team to do what the customer wants. Meeting the market was not just a pricing strategy, it was also a service-level strategy.
They are now implementing whatever service or pricing strategy is needed to stay in the market in a sensible fashion. That goes across the board in terms of how we deliver product, how we stock product, how we offer and repay good credit.
Decentralising was also a big thing in increasing service and lowering costs. We previously had a large call centre in Sydney and quite frankly it just wasn't working. Putting those people out into the branches has markedly improved the relationships with some of our small resellers who previously thought they were being ignored and/or unwanted.
It is interesting that you went for the decentralisation of the call centre, whereas Ingram did the opposite and centralised theirs into Sydney. Why do you think that was so?
I think Ingram had no choice. They didn't have the critical mass. You need to have the critical mass to be able to afford the decentralised sales and service staff. We had to get to that critical mass to get closer to the customer. Otherwise you have to be like Dicker Data and centralise into one site and do it by phone and by personality. Ingram is in the middle. It is not broad-based all around the country like Tech Pacific and it is not a personality-based company like Dicker Data.
Synnex claims that having warehouses in four locations is a value proposition. Have you ever considered opening a warehouse in Melbourne?
I looked at putting a warehouse in Melbourne but the economics of it did not add up. The economies of scale we can generate by doing it all from our large warehouse centre in Sydney far outweighs having a second one in Melbourne. We can ship something to Melbourne for an additional 20 cents on what we ship it within Sydney, given everything else is the same and it is shipped overnight.
If you have a warehouse in Melbourne, how do you know what stock to carry? The customer has the expectation that they can get it all from there, but in fact they can't. Unless you are going to have a full warehouse in both locations, it doesn't make sense.
I think that in the white-box market, where Synnex is strong, customers like to drive in and pick up their orders. That is the nature of that market. If you are in their market, then you need to have small warehouses stocking components. If we were in that market as a core competency, we would probably do the same thing.
You told me about eight months ago the warehouse was only running at about 60 per cent capacity and that you were planning to get into third-party logistics. What is the update there?
Our main warehouse is full and is probably as close to capacity as is possible. On the last day of September we did 10,200 individual picks in the warehouse in one day. It is double what we were doing at the beginning of the year. Meanwhile, we are doing third-party logistics for a major customer. We have been doing that for Harris Technology for three or four years. Then there is the second stage of the warehouse, which we have leased out to Fox Studios for most of this year. They are using it as a studio to make movies.
You have also mentioned in the past that you wanted to move into value distribution. Has that been happening?
We have been doing that, but in all honesty we are struggling a little bit. We are working towards having three pockets of expertise: licensing, networking and high-end server and storage capability. These are the key value opportunities at the moment where we think we can be successful at value distribution. The first two are up and running while we are developing the high-end server and storage capability.
We have almost completed an online configurator for software licensing which will be comparable to the system that Express Data currently runs. We have also developed a specialist help desk just for licensing. So our sales people or resellers will be able to call into Sydney and ask for help on how to do a licensing configuration. We have a software licensing team helpdesk which is generating excellent feedback and the new online configurator is designed to complement the helpdesk team. Then we also have a Net Assist helpdesk. The staff are all Cisco trained. They can do all the quotes for networks and they can help our staff around the country as well as in Sydney.
We are also in the process of setting up the helpdesk for people to be able to quote high-end servers and storage solutions.
Do you have the staff skills to support a value distribution push?
One thing we have done is to see that every sales person sits and passes the online Cisco networking 101 course. Even the retail sales team does that. It teaches them the basics of networking, which is the basis of any high-value products. You can't understand complex technology unless you know how a network is put together. We are trying to get a mindset of training and education across the entire sales force.
The biggest problem is the perception. People don't see Tech Pacific as being a value-added distributor when in fact we sold more value-added products than some of the others who call themselves exclusively value-added distributors.
The value-added part of the business is still in the development stage, but that will be a focus going forward next year. We will get better and better at it in the future.
How does it mix with traditional broad-based distribution?
If you look at the traditional distribution business, we are already doing that well now after cutting back on all the costs to where we need to be to continue to thrive in that space.
We have got over the customer dissatisfaction and increased the service levels. We can now deliver product accurately and answer the phones in a timely fashion. Now we need to develop the expertise so that it is available to people that are looking to resell more complex products and solutions.
Do you have any accurate figures on the market share or volume that you hold in the market?
My research would indicate that we are about twice the size of our nearest rivals. All indications are that Ingram Micro and Express Data each do about half as much each month as we do in the volume business. I am pretty sure that those figures are reasonably accurate, but it is impossible to be 100 per cent sure.
Is there any talk at all about Tech Pac still being for sale?
None whatsoever. It would not be my agenda if it was still for sale, but I have actually asked Hagemeyer [Tech Pac's Dutch parent company] that question recently and was told the answer is no.
Is there any consideration for trying to achieve growth through acquisition?
Again, none whatsoever. There is no need to. If I was to acquire another large distributor to get additional market share, there is no guarantee that we would be able to maintain the culture that might have been the success of the company. Dicker Data is the only significant player for sale that I know of. So if you take that as an example, if I was to acquire Dicker Data, how could we be sure that we would get Fiona [Dicker]. She drives just about every aspect of that business.
Tech Pacific doesn't really need to get bigger, we just need to get better. We have to get better at some of the things that we don't do very well. We can also achieve growth through partnering with vendors who have new and interesting products, which help resellers extend their solutions.
Are you finding that your competitors are getting better and that you have to combat their strategies and efforts?
I think that our competitors in Australia are great at what they do. It is a constant battle to stay ahead of the others in the game. Everything that Tech Pacific has achieved this year, it has had to fight for. That makes it all the more satisfying to have achieved so much.
It has been very rewarding for the staff. They went through quite a tumultuous period last year and earlier this year and now I have empowered them to do what they thought they should be doing and fortunately they have done the right thing.
So the changes that have been implemented have been successful?
As I said before, sales are double and we will make more money this year - net profit - than we did last year. Meanwhile, our staff, suppliers and customers are all much happier. So, yes, if those are the criteria by which you judge success, then we have achieved it.
Our competitors have crowed that we have moved into an unsustainable business model, but in fact we are more profitable than last year.
What is your opinion about the so-called price wars that are raging in the distribution channel at the moment?
Price wars are a bit of a myth. People will always be competitive on commodity products. It is a battle because the market is flat. Where once it was a battle to manage growth, it is a now a battle to manage the existing situation when there is no growth.
Now it is all about how you participate in a flat market rather than how you manage in a growing market.
In this environment - and it sounds cliched - you need to be either niche or big. If you are not a very specialised and skilled small player you have to have a large volume to maintain the service levels. There is no in-between. Tech Pacific has built the volumes to get the service levels that this very demanding market requires. If competitors don't give that same service level and they haven't got the same product breadth, the only way they can compete is on price. That is a problem. All we have done is meet the market's street price. Because of the volume we are doing, we are in a better position to achieve that than anybody.
Where are the opportunities for Tech Pacific going forward?
For Tech Pacific it is all about getting better at what we do. We have talked about driving costs out of the business and value products but I think the real opportunity is in continually trying to be a well-balanced company. We have to be able to look after the smaller resellers and the big resellers. We have to look after the niche products as well as the volume products.
We have to be able to supply the bread-and-butter products as well as support the complex products. By achieving that balance in both market presence and product type, then you have a mix that is sustainable in the marketplace and in terms of the bottom line.
So what are the challenges facing Tech Pacific?
We have to get better at the supplies business and we have to be better at the complex products. We have also hardly touched the OEM market.
I also think we can still improve our service levels further.