MRO  "Still a Local Business"

One dot-com survivor targets national contracts with regional presence

Tempe, AZ  January 3, 2003  Does a $500 billion maintenance, repair and overall (MRO) industry dominated by the likes of W.W. Grainger, G.E. Supply and Graybar still have room for a dot-com-era startup? Jim Piraino, CEO of upstart supplyFORCE, thinks so.

Back in 1999, after two decades working in the brick-and-mortar distribution business, Piraino jumped into the dot-com world just as the Internet bubble was reaching its peak. Piraino joined BuildPoint, which at the time was trying to build an e-marketplace for construction contractors.

By mid-2001, the bubble had burst, BuildPoint was repositioning itself as a software company and the brick-and-mortars looked to be resurgent. But Piraino, rather than heading back to the safety of the old-line distribution business, opted instead to join supplyFORCE.

"After 21 years of positive industry experience and a year-and-a-half of dot-com, you might wonder why I came back to this," Piraino says with a laugh.

A group of about 300 regional "blue-collar MRO" distributors had joined forces to set up supplyFORCE in 1999 as a hedge against the rising dot-com wave that looked set to overwhelm these smaller players. "Remember back in 1999, the whole world was going B2B," Piraino says now. "All customers  large, small, from the industrial customers to the contractor customers  were going to be going to the Web and transacting business. And if you were a regional distributor that didn't have a presence on the Web, you were most likely going to be disintermediated by the dot-coms or destroyed by the national chains."

With an initial stake of some $30 million from its original investors, King of Prussia, Pa.-based supplyFORCE set about creating e-marketplaces for its member companies in the each of the 300 geographies where their investors were located. Secondarily, the company worked to tie all these e-marketplaces together to form a national platform for national contract customers, primarily in the industrial segment.

By mid-2000, with the dot-com craze subsiding, supplyFORCE chose to scrap the technology platform it was trying to build. Like many a dot-com dream, this particular vision simply never took off. "It never was really going to get wheels," Piraino says now. Instead, the company refocused on selling national MRO contracts to Fortune 500 companies, and that's the business that Piraino came to run in early 2001 after leaving BuildPoint.

Today supplyFORCE's CEO says the company acts essentially as a procurement service solution for large, process-heavy enterprises with geographically dispersed operations that are buying industrial supplies (such as electrical, pipe, valve and fitting supplies) from hundreds or thousands of distributors across the country. Piraino says that by plugging this type of enterprise into supplyFORCE's national network of regionally-based MRO distributors, the large enterprise can achieve the process, inventory and product cost savings of using an e-procurement solution under a national contract while maintaining the benefits of dealing with local distributors that can meet local requirements.

"MRO is still very much a local business," Piraino argues, suggesting that, for certain products, local representation remains a necessity, for example, to do fit testing for respirators, or to do training on confined space and fault protection, or to plan and manage a lighting retrofit project. "For some commodities, you still need a brick and mortar solution, with a local technical sales rep working the plant floor on a regular basis, solving technical problems, and with local technical inventory," Piraino asserts.

Currently, supplyFORCE targets five industrial segments  pulp and paper, petrochemicals, automotive, mining and metals, and the food industries  which the company says adds up to about a $120 billion slice of the half-trillion-dollar MRO marketplace in the United States. In all, the company's network includes 300 local distributors representing more than 4,000 locations nationwide and with combined annual revenues of about $18 billion.

The company, which announced agricultural giant Archer Daniels Midland as a customer in October, can take orders from its clients out of e-procurement, enterprise resource planning (ERP) and computerized maintenance management (CMMS) systems, or customers can place spot orders on the supplyFORCE e-marketplace. supplyFORCE then routes the orders to the appropriate local distributor for fulfillment. The distributors, in turn, can integrate with supplyFORCE via electronic data interchange (EDI) or XML, gaining access to national account contracts.

supplyFORCE takes a percentage of each transaction for the large commodities it offers, although the company also has a mark-up-driven sourcing business focusing on products that do not require local technical capability, such as instrumentation, fasteners and hydraulics  core commodities that their original network provided.

At present Piraino says his company, with some 60 employees, has about 30 accounts, and the three-year-old startup's challenge remains much the same as it was in the heydays of the Internet bubble: making a dime of its offering, or as Peraino puts it, "monetizing this value creation that we have."

The CEO says the down economy has slowed the MRO business on the one hand, with supplyFORCE's customer base purchasing 15 to 20 percent less MRO goods now than they were in 1999. On the other hand, the recent emphasis on cost reduction has helped push the company's larger customers to drive more volume through supplyFORCE, according to Piraino.

Despite the economy's woes and the continued downturn in the tech market, supplyFORCE's CEO remains optimistic about his company's chances for making it. "We are creating value for end use customers," he asserts, "and it's a matter of packaging and positioning it."