Changing to Meet the Needs of an Evolving Market

ECMD's CEO looks at consolidation at the dealer level and how it has led the firm to a restructure of its manufacturing and distribution operations
June 15, 2001

In 1982, ECMD was started as East Coast Millwork Distributors, Inc. Based in North Wilkesboro, NC, it was not a typical two-step distributor, but focused on wood mouldings. Since that time, the company has expanded to become not only a full-line millwork distributor, but also a Window & Door Top 100 manufacturer, producing Arndt & Hermann Windows.

Recently, ECMD completed a restructuring process that created five separate companies, each with separate focuses designed to enhance supply chain efficiencies. As the company approaches its 20 year anniversary, Window & Door thought it would be useful to gather the insights of Allen Dyer, chief executive officer. As both a manufacturer and distributor, his company has seen tremendous changes in the industry since it was started, and he offers his thoughts on those changes and what ECMD is doing now to adapt.

The needs of its customers were once fairly similar, but consolidation at
the dealer level has changed all that. In response, explains ECMD's Allen Dyer,
the company has restructured in order to "unbundle" its products and services.

In talking about ECMD's success, and ability to adapt to change, Dyer stresses the company's culture and its ability to attract team players. "We succeed together, and occasionally we fail together, but we have a natural tendency toward working together. We have grown to about 850 employees today, but you could say we really don't have a large number of individual 'superstars.' Somehow, we seem to be able to focus passionate, dedicated individuals on common goals to create an extraordinary effort. I like to explain this phenomenon by saying, 'Ego is not a dirty word when it's expressed in the context of a team effort.'"

Window & Door: ECMD recently completed a restructuring process. Can you explain why this change was initiated?
Allen Dyer: Our old model had manufacturing and distribution rolled up in the same organization and authority structure. That was acceptable when the downstream customers were largely in the same category, but in today's environment, that's no longer the case. When the needs of the customers are similar, it is suitable to bundle one comprehensive offering that includes both products and services. In that scenario, you price a product and it is assumed that any amenities needed by the customer are included. As long as all your customers require the same basic services, it works just fine.

Unbundling Products and Services
But consolidation at the dealer level changed all that. The home centers dominate the retail building materials business, and now the pro chains are consolidating the professional segment. While these two groups require two entirely different added-value formulas, independent dealers may need a mix of both. Our new structure takes a big step toward unbundling our product and service offering, and lets our customers choose to pay for only the parts of that menu they really need. The strategic advantage is for our company to be able to do this without losing the efficiencies of shared overhead.

WD: Can you describe the different operations, what they do, and the customer bases served by each?
AD: A&H Windows, EastCoast Mouldings, and Crown Heritage Stairs are our three manufacturing companies, and the two distribution companies are Premier Lock Systems and ECMD Distribution. A&H Windows manufactures products primarily for mid- and upper-market and new residential construction, and its downstream customers are one-step and two-step distributors, including the pro chains. EastCoast Mouldings manufactures and imports stock pattern hardwood and softwood mouldings. The customer base is distributors and pro chains. Crown Heritage Stairs manufactures and imports stock stair components. Crown Heritage targets distributors, pro chains, and stair builders. Premier Lock Systems is a full-service, two-step distributor selling to dealers and installed-sales wholesalers. ECMD Distribution is a service provider to both dealers and manufacturers. Its list of services is long and flexible. For independent dealers, ECMD Distribution stocks wide assortments of its standard product categories and provides JIT deliveries of quantities, both small and large. The menu for home centers adds services like vendor-managed inventory, in-store merchandising design, and bin maintenance. For manufacturers who maintain their relationships directly with the dealers, but do not have in-house logistics and store service infrastructures, ECMD Distribution provides warehousing and deliveries, bar-coding, merchandising design, retail representation, and store service. A sister company, ECMD Advertising, even provides marketing and graphics services, from print media to website design, for both customers and suppliers.

Wood window units produced in the North Carolina plant
include authentic divided lite models.

WD: Can you tell us more about your company's window and door activities?
AD: A&H manufactures three series of windows. Our Woodview includes a very traditional wood window and a sister version with composite frame parts. The DesignView is a high-end vinyl product, featuring full 4 9/16-inch jambs. Our Cladview is a clad window that also is available in our Clad Plus version,which has a very authentic wood-look vinyl sash. We do not manufacture vinyl extrusions, but the components are exclusive to our windows. We produce all our insulating glass panels using TruSeal Technologies' Swiggle Seal system. Custom and radius windows in both wood and vinyl are a core competency. A&H Windows' operations are characterized by a made-to-order focus. We converted our made-to-stock operation to a made-to-order factory about three years ago. Anyone who has undertaken a similar project will respect the effort and time it takes to adjust not only every plant operation, but also the culture or mentality of the entire organization. We are pleased with what we have achieved during the past year in the service levels on a made-to-order basis. Almost any window-standard or custom-is out the door in less than 10 days. As an acid test of made-to-order capabilities, A&H's inventory of finished windows at any one time is limited to those being loaded on the trucks at the dock, and actual on-the-plant floor velocity is such that we have minimal work-in-progress inventory. A&H sells primarily to two-step distributors and larger pro dealers who have the volume to make direct-from-the-factory shipments efficient. It should be no surprise that A&H's biggest customer is ECMD Distribution, giving A&H a viable channel to independent dealers. We have had mixed results with the dealer focus, and it will likely evolve to include window showrooms and specialists who like to add more value than does the traditional dealer.

WD: Does ECMD distribute other companies' window and/or door lines?
AD: ECMD Distribution does distribute Therma-Tru entry and patio doors. The entry door business continues to be a viable product for two-step distribution, in spite of the consolidation on the pro side. Our customer base is a mix of the one-step pro chains and independent dealers. While the customer groups do overlap with A&H Windows' customers sold through ECMD Distribution, the two are not sold or marketed together.

A Shifting Customer Base
WD: You restructured in response to changes in your customer base. How did some of these changes affect your company specifically?
AD: While the home centers dominate the retail side of the business, ECMD Distribution has grown with them as they took market share. So that change has been less unsettling than the more hurried consolidation of the pro segment. ECMD Distribution has a tradition of strong relationships with independent dealers, so the recent consolidation binge has been traumatic. We haven't stopped to count, but the number of long-standing relationships that ended as independents sold out has been staggering. The fact that our company has continued to grow through this period is remarkable, and validates our business strategy of developing added value models specific to the customer. In many cases, the large pro chains really don't need full-service distribution as their primary source for some products. Yes, they do need support on the special order side, and quick fill-ins of stock products, but their primary source for stock items is typically a manufacturer, not a distributor. This is directly related to our recent restructuring, and why we generally include the pro chains and one-step distributors as target customers of our manufacturing customers. Still, ECMD Distribution is counting on the independent dealer as a key customer category, and expects the better operators to remain viable, especially in smaller markets. The more pertinent quesiton is whether these independents will be building material dealers or simply lumberyards. We believe the key to independents remaining strong in millwork is for them to add more value at their level, primarily by selling the product to their builder customers on an installed basis.

WD: What has been the greatest change you have seen in the industry?
AD: Most of the millwork supply chains that were in place in '82 no longer exist. When you are in the business of supply chain engineering and management, that change is as big as it gets. And, not only have the old supply chains been dismantled, many of the companies that were part of those chains have disappeared. The broad channels of distribution have even changed. You could say the original East Coast Millwork Distributors no longer exists because we have undergone such dramatic change over the years. We have adapted to new technologies and concepts to address the rampant pace of change throughout the building materials industry. Consider the major impact of just one supply chain change over the last decade. We have seen the millwork industry's preferred resource move from the domestic woods of the Western U.S. to the plantations of the Southern Hemisphere. That totally disrupted some very resilient supply chain dynamics that had been stable for decades. Many of the hundreds of companies that performed the functions of harvesting the Western woods, producing the lumber, remanufacturing the lumber into millwork, and distributing it to local and regional markets in the U.S. are gone today. But as traumatic as these changes were for some, they created opportunities for others, including ECMD. Our team gets excited when we get a glimmer of a new concept that can introduce efficiencies into the supply chain, and consequently, we tend to rush toward change rather than away from it. That makes today's business landscape fit us like a glove.

WD: How was your company able to capitalize on these types of changes while others struggled?
AD: The team concept is directly related to our flexibility, in that it is a lot easier to change when you're doing it as a group, instead of having to go it alone. Besides, if you're not flexible in our industry, you don't last long. Our people recognize that. As a matter of fact, we have worked hard to evangelize that message to our suppliers and customers over the last decade-sometimes with success and sometimes with negative responses. Remember, one of the first segments of the millwork industry to undergo wrenching consolidation was the wood moulding business. In the Southeast, where our distribution companies operate today, there were literally scores of moulding suppliers in 1982. Today, you can count the viable ones on your fingers.

Glass cutters at the A&H window plant.

Adding Value in the Supply Chain
WD: You talk about added value models for different types of customers. Can you elaborate more on that philosophy?
AD: In the past, we would just say: "We must add more value than we add cost." But today, it goes further. We really try to logically tailor the added value to fit the needs of the different customers we serve, while combining the physical product volume into a single channel that can realize significant operating efficiencies. That way, we actually create value without adding any cost. Fundamentally, it's pretty simple. We just look for ways to get a better value to the fellow at the end of the supply chain-the consumer or end user. We pride ourselves on working outside the boundaries of our own company to make an entire supply chain more efficient. If we simply work toward getting a better value in the hands of the consumer or end-user, the entire supply chain benefits. We have some great success stories here. Our supply chain leadership has helped our supplier partners be successful, while our customers also benefited because of our ability to focus the whole supply chain on the end user. An example of one methodology for achieving supply chain efficiency is to make the comparison of a chain and a pipeline. If we work to make a supply chain look more like a supply pipeline, generally, the results are positive. A chain has distinct links, each one separate yet attached to its interdependent partners on either side, painting the mental picture of a common burden being handed off from one link to another. On the other hand, a pipeline is one continuous conduit, with no stopping points and no handoffs, giving a clearer mental picture of how it can move product more efficiently. And a chain is more suitable for bearing static burdens, namely inventory, than the pipeline, which by its very nature can only contain and direct, not hold, the flow of its burden. This explains why the word partner is used in most supply chain discussions, because all the players in a given supply chain must truly work together in order to create efficiency. There is, in fact, a direct relationship between the level of collaboration among the supply chain partners and the efficiency of a supply chain. This is not a natural tendency for most companies, and it is one of the hardest selling jobs we do. Some never accept it as a truism, but if they concentrate on their own agenda or on enriching their own company at the expense of their supply chain partners or the end user, ultimately they fail. To a large extent, the relative success of our company is dependent upon our ability to demonstrate this concept.

WD: How do you partner with the various types of customers in the market? How is your role different with the different types of companies? Do you also attempt to partner with builders and contractors?
AD: Right up front, let me point out that none of our companies sell directly to builders and contractors. We believe the builder is best served by local suppliers who can best recognize and address his specific individual needs. That means our 'partnership' with the builder or contractor is mostly on an indirect basis, through a distributor or dealer in traditional ways like product training and promotion. Remember, in the housing industry, there are few, if any, examples of a totally vertical supply chain within one organization. That means multiple organizations must work together in order to create an effective supply chain, and consequently, that's what makes the 'partner' mentality among supply chain members a necessity.

Unique Roles
Each ECMD company's role in its supply chain is different. Really, the necessary activities within a supply chain are pretty much defined. The real question is not what needs to be done, but where in the chain can it be more efficiently performed. And the challenge comes when those activities need to move from one supply chain member to another.
One example is that the home centers have moved numerous functions that were performed by their own company back upstream in their supply chains to be performed by their real suppliers. In this case, our ECMD Distribution company also has taken on the role of a retail service group and advertising company. This is how the operating expenses at the home centers can go down while that of their suppliers goes up. The functions didn't go away, they just moved.
Going the other direction, the consolidators on the pro side have taken into their organizations some of the functions that used to be performed by distributors. This is where our EastCoast Mouldings company, being a manufacturer, sheds the costs associated with being a distributor, but does not provide services like quick turnaround of small orders. In both cases, it is likely that the new paradigms will prove to be more efficient supply chains long term, and therefore better for our company, our customers, our vendors, and most importantly, for the end user or consumer at the business end of the supply chains. That's what we hope will turn out to be the magic of our new structure-an enhanced ability to focus our full efforts more specifically on the customer.
We think there is one thing, though, that is common to all supply chain successes. If competition within a supply chain is well managed, we have a better chance of building a very competitive supply chain overall. But, if the partners in the supply chain focus on competing with each other, instead of competing supply chains, their odds at success are hampered.
Someone has to encourage the supply chain to keep its focus on the end user. We must enhance the value by making our services and products work better for the end user, and to do that, we must lower costs at the end of the supply chain instead of within the supply chain. An example of this concept is factory-primered mouldings. They cost the dealer more than raw wood, but the cost of job-site priming almost certainly exceeds that differential, so it ends up lowering the cost at the end of the supply chain. As obvious as this change is, some more traditional companies still have not adjusted their supply chains to accommodate it.

WD: How do you anticipate the restructuring will enhance supply chain efficiencies moving forward?
AD: Now that the cloud of dust on the horizon seems to have settled somewhat, it has become easier for us to assess the competitive landscape and begin to take bolder steps toward introducing future supply chain models. We have been quietly undergoing a restructuring of our own company to do just that, developing five separate added value models appropriate for the wide diversity of our products and customer base. Our goal is to remove the last bit of efficiency bias toward one added value model or the other, while leveraging common administrative and operating functions across five added value models. The last piece of this plan has been putting into place a very deep implementation of enterprise resource planning (ERP) software. I am aware of no other company in our industry that has tackled such an integrated, detailed approach to all their internal processes. It is a necessity in order to preserve efficiencies of scale and utilization of common overhead functions, while freeing each company from carrying the burden of another's added value offering.

WD: How do you see the new ERP system will enhance your capabilities?
AD: We certainly have confidence that the new infrastructure will add value for our customers, primarily in the form of better, more dependable service. We were running a deceptively complicated business model on relatively simple software. The result was a limited capacity for dealing effectively with details, as well as a limited capacity to cope with growth. And by choosing non-industry-specific software, we avoided any built-in bias toward tradition. It will be interesting to see if we can reap a benefit from verticality-that is running both manufacturing businesses and distribution businesses on a common ERP system. This is an anomaly in an industry where the typical manufacturing enterprise operates separately from its downstream distribution. In effect, we're forcing a measure of partnership between our own distribution and manufacturing companies, and according to our theory regarding the benefits of reducing competition within a supply chain, this should turn out to be a significant benefit in lower cost and better service. If that's the case, and we think it will be, our other distributors also will reap the benefit of this efficiency.

WD: You've obviously invested significantly in new computer and information systems technology. What role do you see for the Internet at ECMD?
AD: The Internet can be a most efficient method of communication. In that respect, our companies certainly hope to participate in the Internet revolution. However, we have avoided knee-jerk development of, or participation in, new business models based on the Internet. Heretofore, our primary use of the Internet has been E-mail, itself a wonderful efficiency tool. And we worked with a major home center as a development partner for EDI transactions over the Internet, significantly reducing costs for both supply chain partners. But so far, our companies' Internet personalities are relatively basic, taking the form of general corporate and product information. Generally, we're moving very deliberately as far as our Internet strategy. For the near future, we hope to concentrate on using the Internet primarily as a tool to help our supply chain partners, first to specify our products, then as a transaction medium. But, we still have plenty to do refining our work with moving atoms. Moving the bits is an easy part. As far as the Internet changing our business, it has, it is, and it will, but we regard the Internet as more of a still-developing business tool than as a total re-write of how our company adds value. Whatever the eventuality, we feel a continuing focus on building our logistics expertise will be valuable. The physical activities are still our primary focus.

WD: What do you see as the biggest hurdle in the coming years?
AD: I worry that entire supply chains will take their eye off the goal of providing legitimate value to the end user. Without me pointing them out, you probably can name some examples where this has occurred. When the definition of value is degraded to simply mean 'cheap,' it can create a vacuum and quickly produce an alternate supply chain, potentially one in which we are not an established participant. We are somewhat dependent upon our channel partners to understand this and to act responsibly in the way they hand off legitimate value to their downstream partner. This is especially risky at the end of the channel, with the newly consolidated market clout of home centers and pro chains. It is so easy to let the quest for lower costs cause us to forget the requirement for better value. Today's consumer is more discriminating as far as the quality of the products and services they buy, and will quickly abandon a supply chain if he thinks it is insulting him by pushing products that are cheap, but not of good value. The industry is already littered with the remains of individual companies who ignored this, and eventually it could threaten entire channels. It is shortsighted, for instance, for a tract builder to take the attitude that all he needs is a door or a window that will last one year, and then he's "home-free." That leads to a "price-only" buy decision, which in turn drives a desparate supply chain to keep taking cost out of the product itself, eventually compromising it to the point it may no longer perform its intended function very well.

WD: As a company that talks about value, do you fear that the price-only mentality is gaining in the marketplace?
AD: We believe the marketplace is becoming more attuned to the value concept as opposed to the more simplistic price-only perspective. There may be several reasons for this, including a more affluent customer who really desires more amenities than most price-only sales pitches can deliver. And both builders and dealers are becoming more sophisticated businesses, making real strategic business decisions instead of just taking a transaction-focused approach that simply tries to take cost out of the product without regard to the value delivered to the end user. And, maybe we're really seeing the manifestation of the "better educated consumer" that marketers have referred to for some time.

WD: What makes you most optimistic about ECMD's success going forward?
AD: Regardless of the equipment, the technology, and the investment it takes to do our business, the key is still our people. We have a unique culture that gives as much authority to employees as they can responsibly handle, and then work as a team to succeed or to fail together. This team mentality is real at ECMD. It's not just marketing fluff. In fact, it may be one of the keys to getting an entire supply chain to work together. The team spirit is contagious.