Upside Down

Feb. 1, 2000
More than ever before in American business, the buzzword is "customer-driven." It's end-users who determine the shape of distribution, the style and substance

More than ever before in American business, the buzzword is "customer-driven." It's end-users who determine the shape of distribution, the style and substance of service, the features of the products themselves, and the manner in which they should be delivered to the job site. They decide whether they want to rent, buy used or new equipment, or do a rent-to-purchase option. And they call the shots when it comes to the method and schedule of payment.

Within the micro-economy of the rental industry, the term "customer driven" also defines the at-times uneasy relationship between manufacturer and rental company. After several years during which consolidation and the influx of a new breed of sophisticated competitor turned rental companies upside down, manufacturers now find themselves in the unfamiliar position of being the ones in turmoil.

Although the economy continues strong and business is good, manufacturers are facing unprecedented demands for service and price concessions from national rental chains. And, not wanting to be left out of the buying picture, smaller rental companies are joining hardware co-ops, the American Rental Association's Member Buying Alliance and informal locally based buying groups, seeking price discounts comparable to those enjoyed by the larger players. As former Hertz Equipment Rental Corp. CEO and current industry consultant Dan Kaplan says: "This is not a good time to be a manufacturer."

Some manufacturers that are diversified in many markets and whose rental constituency primarily consists of smaller, one-location rental firms are still prospering, confident that a large enough well of independents to meet their needs still remains. However, many rental industry suppliers have seen dozens of customers acquired by consolidators in recent years, and have a compelling need to replace that volume. Because national rental chains buy in large numbers, manufacturers have naturally looked to those companies to make up for that loss.

National rental companies, however, tend to do business with a select group of preferred vendors. Obviously, not all manufacturers can be part of this elite group, leading many to seek other markets or to become part of an increased pace of manufacturer consolidation. And for those able to seriously compete for the business of national rental companies, they are finding a series of expectations far beyond pricing discounts, making it necessary for them to re-structure and re-examine the way they do business.

"National accounts basically are saying, 'Make it easy for us to do business with you,'" says Dave Christifulli, vice president of sales for Wacker Corp., Menomonee Falls, Wis. "They're looking for the best value. They want suppliers to take as many costs out as possible - including back-door costs and back-office costs. They want product support and business support."

Christifulli says price concessions are only a small part of the picture. "They have big checklists," he says. "They want to know how quickly you can get them parts, deliver the finished goods, and get them the service when they need it. What kind of training can you provide their people; can you do it at your own facilities, at their facilities? How can you make it more convenient; can they pay electronically? They're trying to eliminate vendors, so the companies that offer the best support and delivery and a broad line of products are likely to get the opportunities."

These requisites will naturally lead to more manufacturer consolidation. "Big companies want to deal with big companies," says Ken Rothmel of Alto U.S., Chesterfield, Mo. "They want to deal with one vendor instead of five or 10 and maximize discounts on many items instead of dealing with 10 different contracts. Big rental companies want to do business with fewer manufacturers for the same reasons corporations want to do business with fewer rental companies."

Just as rental customers are seeking the one-stop shop, larger rental companies are increasingly attracted to one-stop-shop type manufacturers. Of course, no one manufacturer can supply all lines of products, but those that can supply a broad range will certainly have major market advantages in the coming years. And manufacturers that specialize in only a few products - while they may be of outstanding quality - may find themselves squeezed by those suppliers that can fill an abundance of job site needs and offer package deals.

"The ripple effect of consolidation, which began in 1997, is really starting to take effect in 2000," says Kaplan. "When everybody first saw consolidation occurring, they saw it affecting dealers, but they didn't see how it would affect manufacturers." That effect means the loss of many customers. And for those able to land the big national contracts, that means producing more variety, high quality and the challenge of remaining profitable.

The enormousness of the task is driving many manufacturers to either add lines to their existing product mix or to seek merger opportunities. Diversification of product lines can also protect manufacturers that suddenly find themselves shut out by national accounts on a particular product line. For example, Westport, Conn.-based Terex Corp. recently shut down a scissorlift manufacturing facilitybecause it had lost so much national-accounts business to more established scissorlift lines.

However, Terex, which owns a number of lines, was prepared. "We diversified ourselves considerably, so we have flexibility," Terex CEO Ron DeFeo says. "We were prepared for it, and it had only a minimum negative effect. But for a smaller company, the loss of a couple of million dollars can be the difference between success and failure. The only way to compete is to consolidate and lower costs."

Cut the costs Cost cutting is a frequent theme among manufacturers these days. As they provide more services and lower prices, margins are naturally shrinking. DeFeo says companies need to examine and re-define their entire operations.

"We have to understand the customers' needs, design an approach that's compatible with their needs and then eliminate anything else that gets in the way," he says. "Many manufacturers try to design a package that's comfortable for themselves and then sell it to the rental company without eliminating excess costs. Ten years ago, for example, many manufacturers had hunting lodges and took rental customer on trips. These were perks owner-operators of rental companies wouldn't provide for themselves, so they loved it. But the executives making buying decisions for [big consolidators] don't find those things important.

"There are wastes in field organizations, sales and dealer channels. What about company cars that are of a higher class than needed? Consider all those costs and see if they are really providing value." As more and more manufacturers concentrate on larger accounts, they are likely to cut costs such as trade show participation as well.

Manufacturers have also taken costs out of the manufacturing process itself. A just-in-time approach has helped many manufacturers reduce storage and warehouse expenses. However, consolidation has pushed many manufacturers to a "build-to-forecast" approach rather than "build-to-order."

"We have to have product available to cope with unanticipated demands," says Dan Sandonato, vice president of marketing for McConnellsburg, Pa.-based JLG Industries. "Rental companies can generate forecasts by a bottoms-up approach and we work closely to understand their business and what their requirements are. We balance that with our study of the market and merge the two together."

Ditch Witch CEO David Woods agrees and says the sophistication of the larger companies makes long-term forecasting far more scientific, thus enabling manufacturers to reduce costs by being more aware of what demand for product will be.

However, even the most careful forecasting has its limitations, thus creating challenges for even the most forward-thinking suppliers. "Our customers often can't forecast their needs to us, so it's hard for us to do that for manufacturers," says Pete Post, president of Houston-based Prime Equipment. "But we're pretty upfront about our needs. Our suppliers know what we need and where it goes. We like to see vendor-managed inventory."

What do chains want? Wayland Hicks, vice chairman and chief operating officer for Greenwich, Conn.-based United Rentals, the industry's largest company, sums up what his company looks for in suppliers.

"The first thing we look for is the quality of the supplier itself," Hicks says. "We want the best products we can get our hands on because our customers demand that and deserve that. The quality of the equipment and its reliability - how easy is it for us to service the product, how frequently does it require service, is it a piece that constantly demands repair? And how does it hold up for resale?"

Hicks says he frequently asks United's mechanics about what equipment they prefer and why. "They might mention ease of service and what they like to work on," he says, "But they also talk about relationships with the supplier itself. When they call up for product support, can they reach the people they need to talk to, do they spend a long time on hold? If they leave messages, do they get called back quickly? Can they get parts lists easily, do they get quick service on parts when they request them?"

Brand recognition is important, says Hicks, but to a lesser degree now because of the industry's ability to put common controls on equipment. If a customer requests a particular popular brand - such as Bobcat - and the rental company can't offer that brand, it might offer a different brand with the same controls, making it easier for the end-user and the workers who operate the machine. "As the industry makes equipment easier for the operator to use, it's easier to substitute one piece for another," Hicks says.

In fact, Hicks says, the standardization of products is becoming increasingly important for rental companies. "I want to standardize a wider array of products," he says. "We want common drivetrains and common engines across product lines." The commonality gives the large rental company another area of leverage. By saying to an engine manufacturer, for example, that it can request that manufacturer's engines on a wide range of machines, the large rental firm can seek better price advantages from that engine supplier.

Hicks adds that the resale of the equipment is a major concern. "We have an internal database that tracks the residual value of equipment," Hicks says. Large rental companies such as United seek greater freedom on the selling of used equipment as well. They seek transferable warranties to facilitate turning over equipment quickly and being able to offer used equipment still under warranty to the buyer.

United also seeks the removal of restrictions on resale. "We don't want to get into sale of new equipment as a focus for our business," says Hicks. "But if a rental customer does want to buy it, I want the freedom to sell it from Day One, rather than have them go down the street to the dealer and discover that they can also rent from that dealer."

Think electronically At the same time manufacturers are cutting costs, they are finding themselves forced to invest large sums of money in their companies' futures by preparing for the growing role of electronic commerce. Most manufacturers now feel that every service - short of actually turning wrenches - they provide their customers, they'll be able to do electronically, including billing, trading bids and quotes, providing parts and warranty information, and training. Manufacturers are even looking at helping their customers with marketing by tapping into various databases and other types of electronic information that can help them penetrate markets.

"Not only is e-commerce a powerful tool for communication, but manufacturers can help themselves and their customers drive costs out of business," says JLG's Sandonato.

"In the future, deals will be done on the computer, and owners manuals, schematics, parts breakdowns and price lists will be available on the Internet," adds Alto's Rothmel. "If somebody needs a materials safety data sheet on a chemical, they can go right to a Web site and print it off immediately with all the specs."

A recent survey conducted by the Construction Industry Manufacturers' Association indicated that the average manufacturer plans to spend close to $200,000 on e-commerce preparation this year, and many manufacturers say their expenditures will run well into the millions.

The landscape will change dramatically for manufacturers in the years ahead, and companies that are not doing in-depth strategic planning are selling themselves - and their customers - short.

"You need a three-to-five-year crystal ball," says Wacker's Christifulli. "Where do you want to be, what do you need to get there, who do you have to take you there, and how do you train your people to get you where you need to go?"

For those companies that are doing this kind of planning, and for those that have the capacity to satisfy the needs of the industry's major players - notwithstanding the fact that many thousands of small independents still make up a significant market - the future might not be as daunting. But those that lack this capacity may be second-tier players unless they can partner with others to survive.

To find out more about vocational education and training programs in equipment maintenance, contact the following organizations:

* Equipment and Engine Training Council: 512/442-1788

* Associated Equipment Distributors Foundation: 630/574-0650

* Vocational Industrial Clubs of America: 703/777-8810

* American Rental Association: 309/764-2475

* Rental Industry Association: 530/666-4337