Innovation Audit
Strategic Management
Executive Summary
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When something breaks, bursts, or drips, you can call Interline Brands, a national distributor of repair and maintenance products.
Interline Brands is in the business of distributing products to the commercial sector for the use of building, maintaining, and cleaning buildings. These buildings consist of apartment, condo, and townhouse dwellings as well as providing cleaning products for high rises, hospitals and schools.
Interlines innovation strategy mainly focuses around continual development of private label products, service and support of those products and the continued acquisition of smaller competitors customer databases.
Strategy: Positions, Paths, Processes
Wilmar was founded in 1978 as a hardware store in New Jersey, eventually transforming into an MRO distributor focused on the multi-family housing market. After going public in 1996, Wilmar built a national distribution network by acquiring 14 competitors over a three-year period. In 1999, Wilmar expanded into the institutional facilities maintenance market through the acquisition of Sexauer. In May 2000, an investor group led by Wilmar management took the company private, and in September 2000, Wilmar merged with Barnett. Each company generated close to 0 million in sales, but Barnett focused on plumbing, HVAC and electrical contractors, locksmiths, and retail hardware stores.
Interline has many growth opportunities, including the expansion of Barnett Pro Centers, increased telephone and field salesforce, national accounts, foreign sourcing, private-label products, vendor managed inventory (VMI), and sales of larger equipment items. Macroeconomic drivers that may influence the business include apartment housing vacancy rates, aggregate construction spending, new residential construction (only about 10% of total sales), existing-home sales, employment, interest rates, and consumer confidence.
By introducing new product lines, Interline also provides customers with additional opportunities for cost savings and one-stop shopping. Interline has introduced products such as water heaters, floor coverings, and custom-cut mini-blinds in recent years. The recent acquisition of the SunStar line significantly expanded the lighting and electrical product offerings and introduced Interline to new suppliers of competitively priced items. Future areas of greatest emphasis are likely to be electrical and HVAC. Emphasizing higher-growth and higher-margin private-label/import products.
Linkages: Learning form Markets and Alliances
Within the institutional facilities market, Interline continued to experience positive momentum as national accounts and supply chain management continue to facilitate customer penetration. On March 31, Home Depot completed the acquisition of Hughes Supply. Given that both Home Depot and Hughes Supply competed in the facilities MRO space, we believe some business could accrue to Interline as customers seek a more diverse supplier base.
The acquisition of American Sanitary (July 2006) creates an attractive opportunity for Interline to use its integrated logistics infrastructure to improve operations, expand the AmSan brand, and provide a better value proposition for its combined customer base. AmSan increases Interlines market definition by approximately 75% and provides a large opportunity for Interline to penetrate AmSans 50,000 customers MRO spend. We expect this transaction to be highly synergistic, creating significant cross-selling opportunities, generating costs savings, and providing IBI with increased purchasing power. We believe the acquisition of AmSan extends Interlines growth cycle, and we will continue to monitor any integration risk.
Implementation Processes: Internal Processes and Corporate Ventures
Several of the more material secular drivers consist of customers consolidating suppliers and outsourcing of procurement and inventory management; consolidation among apartment property owners/management firms; cost-reduction efforts among managed care providers; and manufacturers/suppliers favoring third-party distribution over captive distribution.
Interline further competes with buying groups formed by smaller distributors, Internet-based procurement service companies, and auction businesses and trade exchanges. Interline’s objective is to become the leading supplier of MRO products to its multiple end-markets. The company plans to drive above-industry-average sales growth, margins, and return on invested capital by leveraging its integrated information technology and operating platform and investing in multiple growth initiatives.
Innovation Organization Structure
Interline’s knowledgeable, service-oriented personnel, armed with a broad and deep product offering, competitive pricing, credit availability, accurate billing, and reliable delivery, collectively
1) facilitate lower customer total procurement costs and inventory investment;
2) maximize customer time available for revenue producing installation activities; and 3) enhance customer profit margins with private-label products and supply chain services.
The company’s unique, targeted, multibrands approach is further believed to drive more effective marketing, better customer penetration, and superior sales growth across numerous customer segments and price points. The multichannel marketing program (direct marketing, telesales, field sales, branches, e-commerce, etc.) facilitates better customer penetration, customization of service offering, and a differentiated offering and pricing strategy by brand.
Value-added supply chain services (10% of sales). Interline has introduced a full suite of supply chain management services to facility maintenance customers. The company plans to expand this program to professional contractors and specialty distributor customers. Supply chain management services include parts bin management, bar coding supply rooms, automated inventory replenishment with proprietary IT, inventory optimization, product standardization, lower procurement transaction costs, outsourcing inventory management, just-in-time delivery, and electronic transaction processing. Interline’s revenues from customers who shifted from traditional supply methods to supply chain management programs increased 30.4% from .1 million in the nine months ended September 2003 to .6 million in the nine months ended September 2004.
Interline continues to supplement organic growth with strategic acquisitions. Its strategic acquisition program is focused on attractive businesses that can be leveraged on Interline’s operating platform. Its objectives are as follows
· Preserve and maintain liquidity and capital structure
· Financial criteria:
o Strong sales growth opportunities, supported by solid market growth
o Ability to achieve returns on capital in excess of Interline’s WACC in 2-3 years
o Clear path to operating synergies of 1x (purchase price multiple) in year 1 and an additional 1x upon full integration in year 2
· Integration strategy:
o Obtain strategic operating synergies in year 1; fully integrated in year 2
o Centralized finance, marketing, logistics and management functions
Key Growth Drivers
Conclusion
Innovation at Interline is about servicing the customer better. We do not sell a unique product nor have a research and development department. We do not manufacture or design our own prodcts to differentiate us from the competition.
Where we see room to innovate is in the service we offer and the supply chain we have to obtain and deliver quality products to our customers quickly, efficiently and at a great price.
Works Cited
“Open Source” One Stop Report for Interline Brands February 19, 2007.
http://library.corporate-ir.net/library/18/180/180929/items/220294/RWBaird11.2006.pdf
Credit:ivythesis.typepad.com
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