Hi. Working.
All right. Good morning. Why don't we get started? It's 9:45. I don't want to take up too much of the time because we have people that know a lot more that are going to follow me that I know you're going to be interested in listening to.
But I do want to thank you all for making your way to Nashville. This is a great event, this customer expo that we have every year here. And to give you a sense and before I start, let me say, if you didn't pick up your tag outside, bear in mind that at the end of this, we're going to do a tour of our show floor and there'll be a colored dot on your tag that's going to dictate who you're supposed to travel with from an RVP standpoint for the company. So if you went and got your registration downstairs instead of outside, make sure that you check that tag as well to know which group you're going to be going to the show floor with at the end of the day. And we'll do that at 2:30.
But we will break at 2:15 for lunch and a break and then we'll continue to show beyond that. Bathroom, so you know, are behind this wall and around the corner, and that should be the logistics. And so other than that, I'd like to talk a little bit about the show. This is a show that we have every year. We haven't always had it in this venue, but we have we've been hosting this since 2004 in some form or another.
2,004 is about 1,000 people came to this show. It's gotten bigger since then. Today, it's about 6,300 people that are here over the course of 3 days, about 250 vendors, about 4,500 customers and about 1800 Fastenal employees will move through this facility over the next 3 days. And it's a working environment. It's intended to bring our customers, our vendors and employees together to network, to learn and just to figure out how we can continue to help each other and be better partners.
And so the parts that you're going to see, you're going to see the show floor. As I said, we will tour that later today. You'll see, as I said, 2 50 vendors across 9 product categories. There's also 19 Fastenal booze down there talking about a lot of different things, whether it be product, EVs, manufacturing, quality control. Certainly, we'll bring you down to kind of see what's down there and have conversations.
Manufacturing, by the way, their presence here in this room today is the bolt that's in that box that announces our Analyst Day. One of the things that we can do is we can make the product ourselves and that Bolt is an example. What you won't see is all the training rooms, right? All the sessions that we're hosting with our clients that are behind closed doors, these are focused sessions. They're hosted by product specialists and others that are really trying to get together with smaller groups to impart what we do, how we do it, how we can help, how we can improve our customers' operations.
And at the end of the day, what we look at this event and as Jean Dubois, who is our sort of chief cat herder around this event every year, as she indicated, this is a growth driver for us. This is something that we do and something that contributes to getting our culture and capabilities out there to the field to help us grow. And so it's a flagship event. It's great to have you here. Hopefully over the course of the day, you'll get a sense, particularly on the show floor, of the kind of energy that is around this company, both among the employees as well as the customers.
So again, thank you for coming. Now in the last few days or a few weeks, I've been asked many times, why are you doing this? What's the message? Honestly, I'm not sure that there's
a major message here. I'm looking to avoid a major drop
the mic moment, frankly. And in that 3 years, we And in that 3 years, we've really moved down the path of a lot of our initiatives and we've learned a lot about our initiatives and our company. And since it's been 3 years since you've had an opportunity to be at one of these events, it means it's also been 3 years that you haven't really had access to various leaders in our company that can provide you with more depth of information about what it is that we do. And so this felt at this event at this point to be a good time just to invite you in, give you access to some of those leaders. I'll go through that list in a moment.
But even if we don't have any major new initiatives or anything like that to disclose because we think we're so early with the on-site initiative and even vending that we have a lot of runway there. That is a new initiative as far as we're concerned given the opportunity still in front of us. I think there are a few things that I want to be able to convey. One of those things forward looking statement, make sure to read that. One of those things is basically this pinwheel.
One of the things I want to convey is the value of the integrated business model that we have assembled for our company and for our customers. And I think that that is represented by this pinwheel. The pinwheel has 3 pieces to it. In the middle, it says grow through customer service. That is our motto.
As much as we talk about how things change over time, a few things have never changed for Fastenal. One of those is that we try to get closer to our customer and we provide autonomy and we can make the best decisions for the customers. Growth through customer service is how culturally we have lived our lives for the 51 years of that we've been in existence and how we continue to live our lives. Nothing's changed with that. The inner gray ring is our 9 product categories.
Those 9 product categories make up 95% of our revenue. I know we have fastener in our name and we sell a lot of fasteners, a third of our business, but we're broad line. We do a great job distributing safety, metal cutting and a handful of other lines as well and we'll continue to expand that. So that middle ring is really intended to do that, but it's really the outer ring that is important. The outer ring is how we go to market.
In fact, the top half of it, really from digital solutions to bin stock, that is how we face the customer in many respects. But every bit as important as that half is the lower half and digital solutions has a role in both. But digital solutions to quality engineering is the machine behind the machine. It's what makes the front half as potent as it is. And this is how we go to market.
And the way we try to differentiate ourselves at the end of the day is we don't just have a transactional business model. We try to create a tailored solution for our customers so that the customer needs and customer needs differ not just for specific customers but within a customer's operations. Every plant is managed by a purchasing manager that may have very different interest in how they run their business than a similar plant in the same company. We want to be able to tailor a solution to our customers' needs and this is how we do it. And I want to emphasize that the slices on here, it's not necessarily comprehensive.
These are things that we do, but more importantly, these are things that we do well. I think if you look at some of these slices, on-site, as you'll learn, we can do we can execute that model at a level of revenue spend that very few others can do. We have a bigger opportunity. Vending, nobody has scaled vending the way we've been able to scale vending. The branches, 2,300 plus of them, again, I think that's as extensive a network as exists in the industry.
These aren't just things we do. These are things that we do really well that really differentiate. And at the end of the day, hopefully, you will understand that I get a lot of questions about, well, how is Fastenal going to compete with X? How is Fastenal going to compete with Y? Hopefully, at the end of the day, you might ask some others, well, how are you going to compete with Fastenal?
How is X going to compete with Fastenal? How is Y going to compete with Fastenal? Because I think it's a relevant question because I don't think a lot of people have this type of business model that we've been able to put together and execute. So that's one of the things I hope we get out of this. The second thing I hope we get to bring out of this is simply to bring into the conversation a bit about the long game.
I know that we have calls every quarter. We discuss the on sites every quarter, etcetera. And there's a lot of discussion about what's changed in our business. And on sites obviously are a new growth driver for us, but having a growth driver is not new. And one of the things that I'm hoping to be able to convey today is that the path for Onsites and the path for our other growth drivers, we think that they're going to travel a path that frankly we've traveled a number of times before.
And so this chart is meant to show a couple of things. This is a 30 year chart. I know 30 years is not it's a long time to sort of think about a business. But I think this chart shows a few things. The first thing it shows, if you look at the boxes to your right, our gross margin has been going down for a long time.
As we introduce national accounts, as we introduce non fastener products, it pushes our margin down. It always has. So this dynamic we have today where our growth drivers are pulling our gross margin down, That's not new in the history of Fastenal. It's something that we have navigated for at least 30 years. The other thing it shows you and by the way, the dots just so you know, I took the recessions out.
It kind of messes up the I think the line of sight. I think it's more relevant here. But what the yellow line up top shows is we've also been leveraging our SG and A over that period of time. And that's an SG and A to revenue number. So the extent that gross margins come down, our leverage has historically gone up.
And that's just that's how our model has worked for a long time. We think it will continue to work. But other thing I thought was interesting about this is being a 20% plus operating margin company, that's relatively new. We didn't really cross 20% on a sustainable basis until 2011. Prior to that, we averaged 17% more typically.
What changed? You can see that it happened around the point that our branches got to about $85,000 a month per branch. That was also about the period of time where we our growth rate came down to below 10% in terms of our branch growth. Now I don't know if there's anything particularly magical about those particular numbers, and I don't bring them up to suggest that there is. But I think the broader point is, in the past, we have gotten to a point with our growth drivers where we're better at them, where they've achieved a certain degree to scale and our investment needs have begun to stabilize.
And when I think about where we are with our current growth drivers, we're in the early stage of developing them. And we firmly believe that that path is going to play out in this scenario as well. And so as I said, I hope to bring a little bit of a longer game perspective to this because I think that logic continues. And I think that Onsites ultimately are going to continue to grow in profitability and efficiency. And but today, we're investing in these things.
They're driving market share gains. And we remain as encouraged about the prospects for growth and profitability today as we ever have. And hopefully that can bring something to the conversation as well. Now in terms of the schedule, as I said, this is about access. Obviously, I speak to many of you very frequently.
This is about giving you access to other leaders within the company. And so this is what we're going to do today. When I get done here in a few minutes, I'm going to introduce Walter Tate, who is the Head of our Logistics and Distribution business. And the reason that we wanted to have him come in here is because for us logistics is more than simply moving product from A to B. That's everybody's logistics.
The way that we do our logistics with our captive fleet, the way we do our distribution centers, they really are a source of market share for us. They enable us to do what we do and gain over time. So we're going to start with Walter. From there, we'll move over to our vending, bin stock and On-site. Obviously, these are our very visible growth initiatives, and we'll have Chris Van Dallen and Jeff Hicks here to speak about those.
We'll move over to National Accounts. Bill Drajkowski, who heads up National Accounts, will be here. And he's really here to talk about National Accounts is more than just securing business. Our national accounts business has a tremendous array of capabilities that I've asked Bill to dig into a little bit more deeply because our national accounts is growing very quickly and there's a reason for that and I think he'll get into that. We'll have our break as I said and then when we come back from break and we'll have box lunches for everybody to bring to their table.
We'll have a gentleman from Bombardier to come in. Bombardier is a long relationship and a global one for us. They work with a lot of products, and I'd love to have him come in and be introduced to give a quick little discussion and then open up questions to him. And he can speak as well about this relationship with anybody. And then we'll have John Soderbergh come in to talk about our information technology.
Again, that's about productivity for our customers as well as ourselves. And I think he can provide some insight into that. Then Dan will come in and he and I will take 30 minutes of Q and A. And by that time, we will have had a number of our RVPs come in. And as I said, there's a color on your tag and we'll assign 5 or 6 of you to each of those RVPs and we'll take you down to the show floor for an hour and a half.
And so that's how I see the day playing out. Now as I said, the first speaker is going to be Walter Tate. Walter, a typical story in the sense that he joined us either in or directly out of college, I forget which, but he's been with Fastenal for about 17 years now. He started in the branches, but moved fairly quickly into marketing roles. And then I think it was in 2,008 he got asked to move into distribution and do some work in distribution.
Tough year, as he said, to join to jump into distribution. Didn't make a lot of friends during the 2,009 downturn. But since then, he's continued to work and hone his skills. And today, he's our Vice President of Operations, managing our distribution centers. And Walter is going to come up here to speak about our transportation and our distribution business.
Thank you, sir. Good morning, everyone. I'm better at building distribution centers and presentations, so bear with me a little bit here, all right? As Holden said, I've been with the company, it'll be 18 years in November, and it's the only job I've had since college. I'm the one that came straight out.
A little overview. Distribution and supply chain. We have just over $1,000,000,000 worth of inventory between our DCs and our stores. We passed that mark a couple of quarters ago. Last year, we processed almost 37,000,000 lines, PIKs, whatever you want to call them, in our DCs.
We have a little over 650 semis, and we put on 47,000,000 miles just with the big trucks last year. We do import quite a bit of product where we can globally source product. We process about 6,700 containers. And we move more than £800,000,000 of product. About £760,000,000 of that was actually moved on our trucks that we own.
A little bit about and I'm going to focus on North America because that's really where the majority of our sales come from and our distribution is today. We run 3 types of distribution centers in Fastenal land. All of our DCs work as primary what we call primary hubs, meaning they have a set of stores within their geography that they do milk runs to on a daily basis, and we stock the A and the B moving parts at those DCs. Those DCs normally stock 20,000 to 25,000 SKUs that make up about 80% to 85%, depending on the region, of the transactional needs within that geographic area. Once we get done stocking those up, we actually have 4 what we call secondary distribution centers.
They're right across the center of the U. S. From High Point, North Carolina all the way to Modesto, California. That's where we take our business units up and down the East Coast, for example. You notice we have one in Scranton, Pennsylvania.
We have a D. C. In Atlanta. And we have one in High Point, North Carolina. And they all have one thing in common.
They have a great coastline. And up and down that coastline, we look at the parts that sell with a on a regular basis, but not they're not As, they're not Bs, they're those C moving parts. We don't know this month if they're going to sell in Pennsylvania, next month if they're going to sell in Florida. We know we don't have enough consistency to put them in all three, but we need to have them locally. Those are basically a day or 2 away depending on where you're located.
Those distribution centers normally stock 40,000 to 50,000 SKUs depending on which one they are. Then when we roll on up and we look at the entire company everywhere we service from Puerto Rico to Europe to Guam to all over the U. S, we stock all of those SKUs that have that we call Ds and Es that have predictable usage but no predictable usage of bilocation. These are the things that are going to fix a customer's needs. They're hard to get.
They're problem solving parts. And we put those in Indianapolis. And Indianapolis docks about 130,000 SKUs to support the entire company. Running that hub and spoke network, all of our DCs, for example, Atlanta connects with High Point, North Carolina 6x a week. So we're able to move that product on our trucks very quickly to our customers.
Looking at 10 year, I didn't have 30 years worth of history like Holden did, so I just went back 10 years. Looking at the 10 year, about 10 years ago, we actually sat down in early 2008. We put 2,007 on there because it gives us a baseline of where we started. Every year before that was higher. We looked at our transportation and distribution cost.
What is it as a percentage of revenue? What is a percentage of sales? And we were spending almost 4.5% between those 2. We were very negative on our freight. And I'm just going to say we were maybe a little sloppy on our distribution or maybe not as good as we could have been.
And we looked at the things that we needed to do
to make things better. So we
did 2 things. We started a plan in late 2008, perfect timing to go how can we automate our distribution centers? What do we need to do to our DCs to help leverage them? And we look at things like we're a less than case picking company. We're not picking cases and cases and pallets and pallets of product.
We have a large consolidation of multiple packages, so we needed to reduce material handling costs within our DCs. We also needed to allow for flexibility within our systems as our customer needs change.
And another thing that we need
to do is extend the life of our campuses. So we went down the path of what's called goods to person systems or automated systems, dark warehouses, depending on whatever depending on what white paper you read. One of the things that we realized really quickly was we were able to optimize our storage needs, meaning a campus that may be sitting on 20 acres that we thought was going to be over full in 2014 or 2015, now we could extend the life of that campus to 2025, 2030, 2,035 by going up and not out. The big key to this is the most important thing in a distribution center is a high concentration of skilled people who know the work. Moving a distribution center is very disruptive.
So these allowed us to get longer lives out of our DCs. We mobilize the inventory, not the people. 60% of the time in a distribution center when you're on the pick, pack, ship function is spent walking to the next task. So we embarked on a journey to bring that task to the picker. I always equate it to if you can go into a grocery store and magically drop a list in and everything comes to you versus having to walk through the entire grocery store, how much time would you save?
That's basically what we did with our goods to person systems. And it was a 10 year plan to get it done. And then we needed to reduce our touches. In our traditional distribution centers before automation from a time apart came in the door to the time apart was loaded on a truck, we touched it 10 times. When we turn a hub to automation, we automatically we drop it to 6.
So we had a 40% reduction. So what did we do? We went after the biggest bang for our buck. We started by automating our largest distribution center because that's where the biggest gain was. We couldn't do 10 at a time.
We did 10 at a time, we wouldn't get any product out the door. We'd break the system. So we did about 1 a year, and we're going to finish up actually next year with that first phase of automation. And that's why you see the dramatic line. Along with that, about the same time, we scratched our heads and said, hey, we got all these trucks running up and down the road and they're not free.
So what we need to do is we need to charge for that freight. And we started doing things like putting it in our branches pay programs, making it aware that there is a big cost to it because it's actually easier for our stores to charge a customer if it comes in a brown truck. When it comes on your truck, it's actually harder. So we made the awareness of what that was. If we'd stayed on the trend line that we had going into 2,007, we would be losing over $100,000,000 in freight.
That year, we lost $20,000,000 We were negative 20. Dollars We were actually able to leverage that over the next few years and breakeven on it. And I'll talk about some of the things we did to get there. Now everybody will notice that it's kind of ticking back up. We're making some investments in growth initiatives as a company that are making it more challenging to charge freight.
The 2 biggest growth drivers you're going to hear about today are vending and on sites. It's really hard to tack freight onto a bend. And on sites were already there. That business is extremely sticky, but it is more freight sensitive. So our opportunity to charge is kind of dwindling a little bit.
But we're going to talk about some things we're going to do to reverse that later on as well. One of the big keys to our structural advantage though is our trucking system, And this is one of the things that we're very proud of. Now I'm not going to tell you how I got to the $230,000,000 but before freight credits, before charges, before things that we recouped some call stone from our stores, we spent about $132,000,000 on our freight network. That's our trucks running up and down the road. At a minimum, we would have spent well over $200,000,000 if we'd use an outside carrier.
But there are some other problems that would have come from that. We would have lost control. One of the things that we like is we like to be able to control things. It's Fastenal customers buying from Fastenal stores, getting product from Fastenal DCs, delivered on Fastenal trucks, which allows us to have something that our competition doesn't have and that's speed. Everything that's ordered today that's needed that our stores say their customers need tomorrow, they're going to have tomorrow for the most part.
Yes, we do use outside carriers. I cannot get from Indianapolis to California in a semi overnight. So we use UPS planes. And that's okay. That's a small percentage of what we do.
95% of what we do though moves on our trucks. We deliver to our stores on average 4.3 times a week. Over 50% of our stores get a truck 5 days a week. That means they order product up until 6 tonight. 68% of the time 68% of those stores, it's going to be at their store before they get to work at 7 a.
M. In the morning because it's our trucks delivering to our stores. We run our routes in the middle of the night. Our average delivery time is 4:50 a. M.
Almost 70% of the stores have never even seen their truck driver. I tell our stores, our goal in distribution is for it to be Christmas every day. When you go to bed, there's nothing under the tree. And when you open the door, you got pallets and pallets of goodies. That's our goal every day.
If we can't get there by 7 a. M, we try to get there before 9. 86% of our stores are delivered before 10 a. M. We want to have the product there.
And we have a lot of product. What's the first goal is to have it at the store or at the point of use. Secondly, we have it backed up at our primary DCs, then we go to our secondary hubs. And for the hard to get solution based parts, we go to Indianapolis, which is our master DC. I'm going to go out of order here because I didn't actually make this slide, but we're going to continue to build upon our structural advantage.
We have plans over the next 12 to 18 months to open up 2 distribution centers. Nobody should look at that and go, we're just adding money. We're at the point at a couple of our DCs where we either have to add square footage and add distribution in areas that are growing further away from the customer or we can get closer to the customer by going into Florida. So when I look at Florida specifically, I'm going to cut almost 400 miles of transit off of that product that's going into Florida. What's that going to do?
Take a lot more stores and pull it into that before 7 a. M. Category. My first thing, yes, I got to get the product right, yes, it's got to be delivered on time, is to get there before 7 am. So I'm going to pull about another 160 stores that are in that after 7 am category into that before 7 am category.
Then I'm going to go to Mississippi and I'm going to build a distribution center. I'm going to pull about another 105 stores out of that after 7 a. M. Into that before 7 a. M.
My other choice would be to add on to my distribution centers in Atlanta and Dallas to do the same thing, but it cost me the same to build in Mississippi as it does in add on in Dallas. Now I can provide a higher level of service to the customers. I talked a little bit about logistics, about the ability to charge back. The ability to charge customers for freight is getting more difficult in today's times. So we have to do things with our trucks to help offset the cost.
So I'd say we run milk runs. We go out and we deliver our stores in the middle of the night. One of the things we do more of today than we've ever done is we do vendor will calls. If I have a vendor that's at the end of a stop run that's going to prepay freight, which a lot of companies do, they're going to pay $500 to get it to my distribution center. I'll back my empty truck in there at the end of the route.
You pay me $500 to bring it back versus paying an outside carrier or maybe I'll cut you a deal and charge you $4.95 You load it on our truck because it's already coming back to the DC anyhow. Now I just offset the cost of fuel for that route. Now I just actually made that route from a net loss to a breakeven. I'll give you an example of some of the things that we see. We got to take care of our stores first.
We got to take care of the Fastenal stores deliveries and customers. But we bring a load of tires back from a customer in Tennessee to Indianapolis twice a week. Full load, where they're going is 2 miles from RDC. We're actively chasing those. We're looking for those customers who have freight at the end of our routes where we can just pull in, spend an hour loading up 30 pallets, put it on that truck and pay for that entire route.
We also do we also look at our customers and go, if we're already on-site, if we already have a large vending presence, if we have a great relationship, you're moving a lot of freight as well. What can we do because we're coming to deliver to your on-site? Do you have anything we can haul back? Are you paying $200 a pallet to move this and it's going to Atlanta? Well, I'll move it to Atlanta for $195 or $150 All I got to get is 6 pallets at $150 and I can pay for that truck every day.
What I can't do is I can't run that truck out of route and affects Fastenal service. So it's select. I'm not trying to compete in the 3PL business. I'm trying to leverage the 650 semis I have on the road to make sure that they don't run empty ever. And that's a combination of different freight initiatives.
CVO, which we're calling corporate vendor only, is really about strengthening our partnership with strategic suppliers. It's about having inventory both at their location, accessible and reserved for Fastenal, more inventory in Fastenal warehouses so our stores can have it next day and some shared investment with those vendors going, if I'm going to stock an extra 4,000 or 5000 SKUs, help me help you get it into RDC because the easiest way for them to grow their sales, at least through Fastenal is to have it in my DCs. So we're working with a select group of vendors to make sure we're deeper and wider on their parts so we can improve service by sharing the investment a little bit. And the last thing I'm going to hit on is lifts, and I'm going to talk about this for probably 5 or 10 minutes. Local inventory fulfillment terminals.
We all we love acronyms at Fastenal. Maybe that way when people are eavesdropping on our phone calls, they don't know what it is. Let's go back a little bit. Years ago, when the first load of vending machines was dropped off at one of my DCs, I looked at it and I said, I've gone to work for the wrong company. What the heck are we doing?
We're going to sell candy out of blue machines? I didn't understand the vision. My job was to build warehouses. Those vending machines sat there for a long time. We didn't install very many.
In fact, the first set of vending machines, I believe, I remember being dropped off was in 2,000 and 7. We didn't get a lot of traction until 2010 on vending. So we had a few vending machines. You fast forward and we got 10,000 vending machines. Well, we got 2,500 stores.
So that's not very many vending machines per store, 4, maybe 5, 6, maybe one's got 10. Fast forward to today, and I believe we have 75 ish 1000 vending machines, and Jeff will talk about it later, we have a goal of 150,000 vending machines in the very near future, 100 and Don't write that number down. Jeff will give you the actual number later, but it's a lot. When we started with vending, we just have people who went out and put them in. Then as we grew more, we created these things called build centers because we didn't need 2,500 branches trying to figure out how to configure and get vending machines ready.
So we put what we coined the machine behind the machine, the people who do all the prep work, get it ready, get it set up, get an Internet connection, which amazingly enough is hard to get to some customers. They do all of that work. Now as we approach 100,000, what can we do to make vending better? Well, what we're going to do is we're going to go in and we're going to create some of these what we're calling lifts, local inventory fulfillment terminals. And I'm just going to use an example.
In the Denver market, we have 12 stores and approximately 600 vending machines being serviced by the 12 different stores. We believe in the right markets with the right number of machines, we can apply some things we know from a distribution level and make the service of that vending much, much better. So for instance, our stores get about $25 per square foot of inventory. Our traditional DCs, because we think like a warehouse, not like a sales force, get about $105 per square foot. That's in a non automated.
We believe in those markets we can reduce our occupancy costs because we're going to take all that vending inventory and put it in a little warehouse, we're calling a lift. So we believe there's some occupancy cost gains there. Our stores process orders
or I
should say it this way, our distribution centers with the techniques and things that we know, we process orders 6 times faster than our stores. So if a store has got to process an order, they go in and they can grab about 20 items per hour. At RDCs on this type of product, we do about 100 and really about 130 an hour. Distribution center labor is less expensive than sales labor. That's just simple.
Fully burdened rate for me to have somebody go do it is probably easily $10 an hour less than taking a highly compensated salesperson and making them do it. So you add all these factors together, you got more dollars per square foot, which means lower occupancy. You have a higher pick rate. You have a lower burden rate on the person actually doing the work. You have better service to the machines because now you don't have somebody who has sales time and replenishment time.
You have somebody who's just in the mindset of replenishing. So our machines stay fuller all the time. And that's not to say that our salespeople are doing anything wrong, but sometimes they're put in hard situations like my best customer needs an emergency delivery and my vending machine is out and it's 3:30 in the afternoon, which do I do today? And the other thing that I'm not capturing in here is what kind of sales revenue does that person generate if they're not restocking the vending machine? We figure I figure it takes about 30 minutes all in to restock a vending machine.
Not the physical there, but you know what? When we're restocking a vending machine in a 1,000,000 square foot plant and there's 20 of them, I'm not making these sales calls. And I don't know what the sales benefit is going to be, but I know all the operating expense we can bring down and we can do it efficiently in these markets. It's not going to work everywhere. If we have one store with 100 vending machines, that's all they got, we may be able to apply some of these, we may not.
But we believe there's somewhere between a bunch of markets and a bunch of markets without throwing out a number because I didn't ask Holden if I could throw out that number or not. So we believe there's a lot of markets we can do this, and we believe we can do this for about 70%, 75% of our machines. And this will allow us to support the growth up to 100, 125,000, 150,000 machines. But wait, there's more. Along with the vending process, since we're going in and we have these operations, we're going to support a little program we call Metro Express that we're working with our dotcomgroup on.
And what we're going to do is we're going to invest some dollars in additional inventory. Our average store has a little over 10,000 SKUs in it. With this vending inventory, we're going to go in and add 10000 to 15,000 SKUs in these markets like Denver. Breadth, not a lot of depth. I'm not talking huge inventory dollars, but I'm talking about things that should be selling in that market where I'm 9 hours from my largest distribution from my next closest distribution center where I can add 10000, 15000 SKUs.
And in that market, I can legitimately say I have 25,000 SKUs available for same day service. We're going to allow our customers to see them by a dotcom through filters. We're going to allow our stores to see them in their POS. It will be a click of a button. We're going to allow them to pick up at the service counter, both our stores and the customer.
And we're going to provide delivery service. I call it Domino's Pizza because you never know how many you're going to sell that day or how many you got to go out. But we believe this is going to help us in those markets that we're going after to have more inventory available for same day.
And that's it. That's all
we got in distribution. 22 minutes. I was told to go about 20. What do we do now? This is Q and A portion now?
Q and A.
Q and A.
Thank you. Walter, how many
of those lifts are currently in operation and what's sort of the opportunity? You mentioned Denver as an opportunity. How many lifts could be in Denver? And how many cities could have lifts that would help alleviate some of the burden?
We have one beta test going right now. And when I say beta, I mean very rudimentary beta. Our goal is to have 5 up and running this year. We have the road map laid out. We have the markets picked.
I will say that I can easily see this in 50 markets, more than, but probably less than 100. And the reason I say that is I don't know when I go into Chicago, which is one of my target markets. I may need 3 based on size of metro area, traffic patterns and things of that nature, but I know there's going to be one there for sure. So from the low hanging fruit, 50 plus. I think you have to wait for the mic.
Yes. Thank
you. The concept of back hauling either 3rd party goods or vendor goods is not new. What happened? Did that lose momentum a number of years ago and you're reenergizing it?
Or what happened?
It really hasn't lost any momentum. What it's we do several $1,000,000 a quarter in backhauling, and we continue to do this. We're putting more when you put effort into something, you do better at it. As we're seeing the propensity to charge freight go down, we're actually putting we've known there's more opportunity. We know there's more opportunity in there.
Now we're putting energy behind it to really drive that as an offset. We feel we can double or triple it with very little effort on the trucks that we have. I'm not going to say that we got complacent, but we had several good years. We have vending initiatives going on. We have on-site initiatives going on.
Where we put our capital and where we decide to spend our energy is what's going to be the best revenue. We're seeing a need to put more energy back into it and reenergize the program. We're doing more today than we've ever done. We also feel, though, that our relationship with the on-site customers now that a lot of them are 2 3 years into maturity and we're resigning some of these on-site, that's where a lot of the opportunity is because of the relationship that we have with those customers.
Yes.
Hey, Walter. Thanks for the presentation. I had a couple of questions. One, there's been a lot of talk about rising freight costs. You talk a little bit about, add a little color there and how much of the pressure you're seeing is kind of labor and fuel related versus kind of these internal factors that you talked about, the business mix shifting?
Sure. Well, every time fuel goes up a nickel, it costs me $250,000 a week. That's about what it costs. So you can't really control fuel prices. One of the things that we've had as a competitive advantage for a long time is we're able to run lower.
We don't have to, 1, mark up our freight to ourselves. So it's at cost. So when we use an outside carrier, of course, they have to make a profit. We don't have to do that. The freight pressures are really coming from the fact that people don't believe as much as they used to that they need to pay freight.
There's freight in everything. You go to the grocery store, if your bill used to be $100 a week, now it's $102,000,000 it's because freight. The food didn't get really any more expensive, but the cost of moving it there. Freight is a constant battle, 85% to 90%, depending on what white paper you read, moves on a semi. Semis are more expensive to do emissions today than they were 10 years ago.
Trailers are more expensive than they were 10 years ago. Drivers are more expensive than they were 10 years ago. What we have to continue to do is move more on our trucks when it makes sense because we run at a lower rate. We can leverage our that network. But at the end of the day, we have to do everything we can from charging freight where we can, getting backhauls where we can and do everything we can to leverage the assets that we have.
I look at as an opportunity to offset freight cost. Doesn't mean that it's one to one relationship. I can't run that out of the way and affect service to Fastenal stores.
And then just a quick follow-up on the Metro Express. You talked about adding inventory. It sounds like doubling the number of SKUs almost there. How many stores is that do you think applicable to and over what period of time?
So
I guess what do you mean by how many stores?
Are you planning to add sorry, are you planning to add another 10,000 or 15,000 SKUs at all 2,500 stores?
No, no, no. That's actually the whole point of that Metro Express area is to have more. So when I talk about Denver, let's just use Denver because that's a market that I've been working on. I'm going to have one building that's going to have a mini warehouse in it in conjunction with one store that's there on the front, but those 15,000 SKUs I'm added are for 12 stores. So I can't afford to add 15,000 SKUs to 12 stores in the Denver market because I can't get a return on it.
What I can't afford to do is add 15,000 SKUs that all 12 of those stores have easy access for same day service and provide them a hotshot delivery service to get it. So I'm doing concentric circles. I think I can provide 15,000 within about a 30, 40 mile radius depending on the town and the traffic pattern. So it's to give our stores more opportunity with less inventory investment because we couldn't do it at 2,500 stores.
Got it. And is that a national rollout kind of every 30 square miles?
Where it makes sense. I mean, real simple, put pens and maps with cities over 500,000 and then start working your way down. The biggest gain is going to be on the efficiencies for the vending to be able to support that program. This is just nice that it works with it, and it's good for us to go to market with. It's good for our stores and it's good for our customers.
Thanks.
Yes, just a follow-up on freight. So in the last quarter, there was a 20 basis point hit to gross margin at a company level because of freight. Was that largely because of vending and on-site and it's harder to charge freight? Or was it equally that the sales guys weren't passing along?
Well, it's hard to charge freight period. Nobody likes to see freight. I don't our propensity to charge freight especially two times we have a propensity to charge less freight, when sales are really good and when sales are really bad. That's pretty much all the time. When sales are really good and sales are really good right now, top line revenue is what our stores are going to chase.
And I'm going to chase top line revenue all day long. And some of our growth drivers do make it harder for our stores. That 20 basis points, I believe we can gain at least half of that back probably within the next 6 months to a year. And I believe we can gain all of that back, maybe not through direct freight charges to the customer, but through other initiatives to use those resources, those semis and trucks that we have on the road to turn them into more of a profit center more than they are today. I think we can gain that back within the next 12 to 18 months.
So I think that 20 points goes away. Yes, sir?
Just to help quantify, you said double or triple was the sort of opportunity on the backhaul, I think, from your current base. Could you maybe like frame it in terms of if you're running just make 1,000 routes a night, what percent are you currently backhauling? And what is the opportunity? Is it go from, say, 10% to 30%? I have no sense of that.
And just whole dollar opportunity, like what does it look like in terms of?
I think the opportunity is big as we want to make it, to be quite honest with you. Just for an example without getting into any actual dollars because I don't know where the top end is on it to be quite honest with you. 3PL as a macro level is a multibillion dollar industry. But I'll give you an example. We challenged just our distribution center managers who are responsible for our fleet at the local level to go out and increase their backhauls, offset some of the pain that we were feeling from the lower freight charges.
And in our Atlanta distribution center, in a 12 month period, they quadrupled what they were doing. Now I'm not going to lie to anybody and say we didn't incentivize them to do it. That's why they went and did it. But at the end of the day, when I talked to Greg, who's a distribution center manager down there, he's doing he's gone he's tripled what he's doing, and he's put very little effort into it. This is just putting some emphasis on it.
And according to our guys who are out there driving this revenue, LIBOR 3PL grew somewhere around 60% in Q1 year over year. Understand that in Q2 really Q3 last year after our hub manager meeting, which we have a biyearly meeting, and we said, Guys, we saw this trend coming. We need to go do something about it. And by the way, here's a little carrot and here's a big stick and we don't get it done. In 6 months, they've increased it by 60% year over year.
And there's no doubt they can we can repeat that at least another 5, 10 times. I'm not worried about that at all. So in basically 2 quarters, we've grown it by 60%, and we're doing multimillion a quarter.
Walter, can you touch on just automation? How much room you have in terms of automation in the DCs? Can you get back to the 1.5% operations as a percent of sales where you sort of is your peak number? Just any color there, thanks.
Yes. Sure. The 1.5% is a combination of the DCs and the logistics. That's always that's a combined number. Do you want me to shoot straight?
Yes. I mean there's 2 factors with it. 1, the automation does a couple of things. 1, it takes things where it makes us more efficient. It's less touches.
It offsets some places, in fact, where people don't where you can't get people to do the work. The return is really good on the automation. And then where we can drive that number down is on the freight side. Automation will get you so far. And we're I'm not saying we don't have more opportunity.
There's a ton of opportunity still with more automation to become more efficient. We sliced a lot of the low hanging fruit all from the material handling standpoint. And from the pick, pack, ship standpoint, we still have a lot of opportunity to continue to improve. And when I started putting automation in, in 2,008, I mean today automation is fast forward we've been 10 years, Automation has fast forwarded 20 years in the last 10. The thing that I'm excited about when it comes to automation and leveraging operating expenses is actually robots are starting to get things like do things that require dexterity.
Now I still think they're about and I can talk about automation for 2 hours if you guys want to. But I still think there's a little bit left to go. But with where automation is today, I'm looking at things that I thought never could be automated before and have very short ROIs. But the great thing about automation is it runs 20 fourseven without a break. It never calls in sick.
It just repeats. As long as it's repeatable, it does it over and over again. So I don't know, I don't have a hard number, but there's definitely we reduced well over 100 basis points in just inside the DCs over the last 10 years, about 120, give or take. Can we get another 120? I don't know.
Can we get another 50 as automation continues to improve? Probably. And automation helps offset the one thing that we all hate, which is wages continue to go up. Labor becomes a more expensive part. And we've never displaced anybody because of automation because when you're in an environment where it's under 4% unemployment, you have more job openings than you have applications in a lot of cases.
So we're going to continue to automate and leverage. Where we can drive that down maybe to under the 1.5 year original is through our 3PL, through our moving of other people's product and leveraging that. That could actually turn into a revenue stream for us, I believe.
Hi. I kind of wanted to piggyback off of Hamzah's question. I thought I heard you mention that this phase is kind of coming to a close and you kind of do a 1 year kind of thing, which suggests to me that some of the upgrades in your automation that occurred maybe a decade ago are not what they could be today. So I guess what I'm wondering is, is there planning under a next phase of automation? I think you started to allude to that at the end of your last response.
And what would that entail? Is that still around where you're going to do 1 a year? Maybe what are some of the more specifics to kind of get you to that 1.5% in this line is obviously bending up, which obviously the people in this room are not thrilled with. So when do you get that to bend down and how do you get it to bend back down?
Well, remember again that line is fully loaded with both our freight and our internal operating expense. We still continue to go down. We're at the lowest percentage inside the four walls of the DCs that we've ever been at this point right now. We continue to look at automation. When I say 10 years ago, technology has changed.
The technology which we choose to use for things like dark warehouses and some material handling functions really haven't changed all that much. Putting containers in a dark warehouse and taking all that handling and lifting out of it, that technology hasn't changed a whole lot. Yes, there's cameras on it now and it's a little more robust or whatever. But the technology that will come out in the future is where you can do things that once required only a human to do with dexterity, which we look at how fast we'll roll it out, that's Holden's call. He's a CFO.
But it's where we can get a return on those things. Industrial Automation usually runs about a it's not like computers, right? It usually runs about a 15 year cycle, maybe even longer. So I don't know if I'm actually answering your question. I think our best way to leverage is through our logistics where we have the, what I call, deck feet available to create a revenue stream for Fastenal.
As far as automation goes, we'll continue to automate where it makes sense. We'll continue to invest our money where we can get a return on that automation. And we're constantly looking at it. I mean every time you go to a MODEX or a PROMAT or you meet with your vendors, there's another widget that will do another thing and the fingers, right? In my world, as soon as I get to fingers, I can't automate fast enough.
Right now, robotics is coming to the point where they're having some level of dexterity. You got to remember, if you don't have dexterity, you can't reach into a box of nuts and bolts and take 50 out or 100 out or 1,000 out, which is about 32 percent of our business. But when I look at things like concrete anchors and things that have standard packaging and are really grab and goes, we have an opportunity to automate a lot of that. And our goods to person systems actually play well into that because now we actually have a place to deliver to a robot or a picker, as you would say. So the other places that we look at it is in a lot of our import side.
We have not automated our import distribution yet, and I plan on automating our import distribution, which is those 6,700 containers, I feel that probably 40% or 50% of them easily we can handle with very little human interaction.
But that's not that hasn't been
my lowest hanging fruit till I finish automating all of the DCs that do the pick pack ship. And you guys got a lot of questions.
Question for you on the lift. Is it right to think that as you implement that, it would result in a situation where you may have multiple employees on a given customer site handling vending, handling bin stock and then handling basically everything else? And if so, how should we think about the cost of visiting that customer side as maybe an offset for some of the labor advantages that you gain?
So can you see Should you see multiple employees on the site at the same time? Absolutely. The key with it is, is have your salesperson there doing the sales and have your operations person there doing the operations. They're really 2 different functions. To have 2 people on-site, we're going to do very specific, dynamically routed, highly efficient replenishment of the vending machine.
We're going to take that salesperson and say, you go sell. For him to be there at a customer for 2 hours replenishing vending machines and 15 or 20 minutes talking to the customer, when I need him to create $400 an hour in revenue to hit his sales goals, but I just took 2.5 hours away from him, but he still had that customer contact time, I'm better off to have a guy who's just responsible for that machine. He'll go do it. They'll get to know it's Fastenal employees and Fastenal blue shirts that follow Fastenal's code of conduct and ethics and standards and all that kind of stuff. They're all on the team.
The customer will get to know both of them and that's fine. And the guy at the vending machine can very much take an order if a guy walks up from the maintenance department or anywhere else and goes, can you give me this? They'll have full access, but it will be a quick they're not going to be in meetings with engineering. They're not going to be in meetings with procurement department. They're not going to be in the total cost of ownership savings documentation that happens quarterly.
So we should be able to, 1, cost of service will go down, occupancy to service will go down, so the operating expense and sales time will increase. I don't know what that sales time will turn into in top line revenue, but I have to ask if we can magically snap our fingers and give all of that sales time back to those people, what would our quarter have looked like? What does our future look like? And I also know that we need to get better, more efficient by applying best practices that we know where we can in the field. I think it's a net win all the way around.
CVO, does that apply to where you share the cost to carry inventory? Does that apply only to DCs or does it also apply to on-site?
Right now, we're only targeting distribution centers at the moment. I cannot speak to any thing with the on sites personally.
And how significant is it as a portion of your total inventory? How much of your total inventory is covered by CVO?
Honestly, I could not answer that question because I don't know.
Thank you. Yes. It's wow, that's hot. Thanks. It's a relatively new initiative that's developing.
So we've done a few customers and we'll do more down the road, but it's still relatively early. So I think discussions about what percentage of inventory has been affected is probably a little
early. Walter, thanks for the presentation. I just wanted to see if you can maybe provide some color on when you think about the growth drivers on On-site and vending through the years, you think about your truck capacity both on the inbound side and outbound side. Are there any significant investments you need to make here going forward to evolve with those growth drivers going forward? And then as it relates to driver pay, what are you seeing there?
And have you guys actually invested in drivers the last couple of years, meaning bringing pay up? Or is that something you still that's still ahead of you going forward here? Thanks.
So, 2 things. I believe that we're allowed, I'm allowed. We can add all the trucks that we want to add as long as we can justify paying for them. We don't have any restrictions. We want to deliver to our stores.
We know the cost to our stores and our customers if we don't have our own fleet. We know that the cost goes up. We also know that the delivery times get worse. We have some freighted stores where it doesn't make sense. We look at this in certain markets and go, well, would it make sense?
Well, the average of the stores that we have to go outside of our own fleet, the average delivery time is 12:15 p. M. Versus a. M. And so we continue to invest.
We're fine where we are with our driver pay. We look at the national statistics all the time. We actually pay pretty well. We always have. We've always tried to be within the 80 percentile, meaning we're paying within the top 20% of companies that are surveyed out there.
We pay our drivers very, very well and always have as compared to fair market value. We've added we had probably I may get this number wrong. We've probably added 45 truck drivers in the last year. Every time we add 1, we're taking what we call loads off the board, meaning we've identified enough to justify buying that truck and that driver. We have enough miles to move our own product to take what we are paying.
We do use some outside carriers, right? I mean if I got to move a truckload of water to somewhere one way and deadhead back, I'm going to send an outside carrier. So we move about £100,000,000 a year on an outside carrier. But as long as we have justification to put to turn those wheels on the road, we're going to add. We're going to continue to add.
I think we'll probably increase our trucking headcount by and our assets probably 7% or 8% this year, and we'll probably create 7% or 8% next year. If we have an opportunity to do better for Fastenal at the same or less cost, we're going to go do that. Put a hook in it? Thanks, everybody.
Thank you, Walter. All right. So next we're going to move into
these two
gentlemen. So I'll introduce them both really quickly. So what's going to happen is Chris Van Dallen is going to step up to give a quick little sort of overview of what we're trying to achieve with some of these growth drivers. And Chris, he's been with Fastenal for about 14 years. Like so many others, he came to this company through the branches.
But because of the success that he had with Onsites, he assumed the role of VP of Solutions for Onsites in 2014. And he's obviously been heavily involved in that period heavily involved in the growth of that business. He's going to be followed by Jeff Hicks, who is our VP of Fastall Solutions on the vending side. And Jeff also, he joined out of college. He's been with the company about 23 years, worked in branches most of that time.
I think a couple of years ago, we tapped him to head the government services. And then about this year, we tapped him to head the vending side of things. And so Chris will give a quick presentation, he'll give way to Jeff and then Chris will be back to talk about the on sites. Should take about 25 minutes and we'll get into Q and A. But we're going to hold the questions until after they both have completed their presentations.
All right.
Chuck, can you guys hear me?
Thanks, Holden. My name is Chris Van Dahlen. Thank you very much for being here. Really, I want to introduce you all today on our approach to our solutions platform. So Fastenal and our evolution as a company has really stuck on one model.
That is the idea that we will bring inventory and programs and assets and resources close to our customers. And so the way we're moving forward today and the method in which we're moving forward today is very much centered around that core model that we've established over 50 years. So we've come to the realization that our customers have to invest in their business in order to produce whatever they produce, okay? That investment is under constant constraint, Okay. They have some investment in inventory.
They've got some overhead in labor and acquisition costs related to the products that they need to drive their business. Their quest to improve their capacity really hinges on a few things. Part of those part of that is internal change management. Organizations that we encounter on a regular basis struggle to manage organizational change, change in direction. They often and supply chain professionals often misidentify the problems within their business, okay.
They result in things like pricing bids and those pricing bids are typically based on challenges that they've experienced in rising costs of product or supply chain disruption. And those misidentification of the problems have them go through a process of changing suppliers, potentially lowering costs, but the outcomes are typically not as desired as they want. They put a lot of risk into their business through this change. At Fastenal, we've done some similar things. We've invested in operating costs and inventory and the infrastructure that Walter spoke to earlier.
And it's that investment that we've made that gives us the capacity to serve the marketplace. That infrastructure is, we believe, world class. The approach that we have to the market is world class. And so when we go to sell a solution based program, our approach is very much from the position of removing working capital, improving operating costs for our customers, okay? We want to take that burden on.
We feel we can take it on because we're strategically positioned and we're strategically adapted to improve that business for our customer, Okay. They really operate in a world where their quest is to improve their capacity. The reduction in those operating costs and the savings that go along with it really improves their capacity to produce. So our solutions portfolio, the things that Jeff is going to talk about with vending and bin stock and our on-site program really hone in on freeing up working capital and really freeing up labor and resources for our customers to go and produce more. That's got by far a bigger impact to the customers' revenue potential and bottom line of their business than saving $0.10 on a pair of safety glasses or $0.10 on earplugs or whatever commodity is built into the products that these solutions support.
3 or 4 years ago, about 3 years ago, I went out to Seattle with our marketing team, had the experience of doing a case study. So we go out, we shoot some video on a customer's facility of our solutions. We have On-site deployed there. We have a vending program. We've got bin stock in kitting, really a pretty robust program.
Interesting, you interview the Director of Supply Chain and we're finishing up the day and the CEO comes into the room and pokes his head and said, hey, I'd really like the chance to talk and explain the value of your program. And obviously, we're going to take the opportunity to hear from the CEO. The interesting part that he projected throughout that interview is that in their business, they're not competing. Their manufacturing operations are not what they're competing against their competition with. They're competing, their supply chains are competing because his feelings were that the supply chain efficiency really led into product innovation, the quality of the product and ultimately the supply chain partnerships they had improved the customers' experience in doing business with them.
And really that's the principle that as we move forward with our on-site programs, our vending programs is that we want to influence our customers' end users' experience in doing business with those organizations. So I'll turn it over to Jeff and he can talk about vending.
Thank you, Chris.
Mike, good.
Welcome to the EXFO, everyone. My name is Jeff Hicks, Vice President of Fast Solutions. My core responsibility from solutions perspective is around our bin stock and our vending program. So I'm going to give you a little bit of insight as to why that's a successful point for us. The core function that the store performs every day is servicing the bin stock and the vending program.
If you go into a store a branch location, that's the number one thing they look at, is how do I build that strategic relationship, the cost associated with the program, how do I impact the product acquisition cost, how do I help a customer address their labor, how do I help a customer reduce their inventory level? We're driving towards getting that customer out of the transactional relationship and transitioning that to that strategical relationship. Our business thrives when we can make that transition. It's very important for us that when we achieve that, we start to see efficiencies within our system. We see efficiencies in our cost structure and we see efficiencies in terms of our ability to drive dollars through our revenue models.
So when you look at our vending and our bibstock programs today, a number that we really haven't talked a whole lot about in the past is when you look at our bid stock customers, we service about 50,000 customers on a monthly basis with some formalized bin stocking program outside of vending. And we touch those customers about a quarter 1000000 times a month. There is a tremendous amount of face to face contact that takes place that allows those strategic relationships to build, that allows us to get the increase in efficiencies that we need, which I'll talk about as through the program. We have over 70,000 vending machines that this year will generate roughly $900,000,000 in revenue. It is a program that is, as I'll talk about, still in its innovation stage.
It still has a tremendous runway in terms of opportunity. When we look at our top 10 markets that we serve, our best customers per se from an industry perspective and we look at what's the potential. When you look at the items that they
use on a
regular basis, their normal consumption, What of that is a good fit for vending? $22,000,000,000 worth of opportunity exists in that area for us. So the branch profitability improves as we transition from that transactional to strategic relationship. Why is that? When you look at the transactional aspect of it, it's a very inefficient quoting process.
There's a strong focus on price and availability. You pick up the phone, you go see a customer, you have a visit and it's all about what's your price, how soon can I get it? It's a very dictatorial relationship, one way communication. The inventory model is very reactionary. I don't know, you don't have a relationship.
I don't know what brands you like. I don't know how quickly you stock you replenish that inventory. Do you buy 3 months? Do you buy 3 days' worth of inventory? The communication isn't very strong.
Understanding the customer's goals. We don't understand why are you placing these? What's your purchasing habits? Why? What are you trying to drive?
Are you trying to get inventory? Are you trying to get your prices down? Are you trying to reduce your acquisition costs? Are you trying to address labor within your business? What's your goal within your supply chain today?
That conversation is not taking place. This is a very expensive sales process for us and it's demoralizing for sales force. You talk about the salesperson that goes out and say, hey, you got to get 1 or 2 for every 1 or 2 yeses, you got to hear 8 or 9, 10 no's, right? That's that lifestyle when you live in that world of the transactional relationship. Securing the bin stock as well as the vending business, that drives that efficiency.
As we move down that train, we bring savings to the customers. It typically starts really small and it grows as we move down to that relationship. A bin stock for us might start out as something as small as $3,000 to $10,000 a year in business. Hey, I'm going to give you this little corner. I'm going to trust you with this corner right here.
Whatever is in that corner, you own that. Prove to me that you can manage that inventory. Prove to me that you can drive savings to me. Prove to me that you can make smart decisions and I can trust you. And that's where that relationship starts to grow from that transactional to the strategic relationship.
That strategic partnership, it now moves from price and lead time to how can I help you impact your total cost of ownership? When I go and make a sales call on that customer now, it's about new product opportunities, not about price. So, hey, have you thought about using this to save you money? We start to have conversations around the supply chain as opposed to being dictated to. Sales increase, why?
Because as my sales start to increase, what the best thing that happens is it creates that synergy because my customer contact time goes up. The more sales I get, the more interactions I have around the supply chain, the more time I spend with that customer. The more time I spend with that customer, the more opportunities I have to get the next new sale. So customer contact becomes a big part of it. The business grows because we start to transfer those expenses that Chris talked about from the customer to our side.
When you look at customer and that instant gratification, everybody wants everything today, right? Things aren't fast enough. Everybody wants something faster. I don't want that same day delivery. You get it.
As you move towards the stocking program, if we do a good job servicing your inventory, if we meet the expectations of the program we put in place, you always have what you want. It's always there. You're taking unplanned expenses, you've turned them now into a planned environment without having to add expense to your business. As we put a vending device into the location, we move product closer to the point of use. It's now what typically can be a quasi planned environment to now it's a very well controlled established environment.
Our competition is moving away from that instant gratification ability. They're moving away from our customers in many of our marketplaces. Fastenal continues to get closer and closer through our branch locations and even more importantly through our on-site programs, through our vending programs. We're actually injecting ourselves farther and farther into the customer base where we see a lot of our competition retracting. And it's our ability to continue with that increase in contact time by being closer to customers that more and more solutions come into play, whether it be industrial services, whether it be different products, whether it be different inventory management solutions.
We drive more opportunity to the customer to receive that instant gratification. Fast flow managed inventory is really what we call a bin stock program. And those bin stock programs work everywhere. They work in MRO, they work in OEM, they work in construction. It's the most efficient way for us to drive a supply chain.
That's why the stores spend the majority of their time focused on how do I start to build that relationship with the customer. The customer sees a reduction in inventory. They see reductions in labor. They see reductions in their freight costs associated with those products as they do vendor consolidation. Their process improvements improve.
Walk and wait times reduced within their facilities because we take product closer to point of use. Traceability improves because we provide reporting now on things that they didn't have reporting on in the past. Their lead time improves because I understand what your goals are. I understand what you like, what you don't like, what your patterns are. So I can improve your lead time because I can stock products locally.
Our costs go down. In a transactional environment, it's very expensive. I play catch. Just waiting for that phone to ring or I'm standing in front of me going, I wonder what they want today. I wonder if they'll buy this today.
Are they going to buy 1 or are they going to buy 100? That changes. We're now talking about what their expectations are in developing these stocking programs. So I now have scanning capabilities. The handwriting of an order versus scanning an order can reduce as much as 90% of the operational expense of performing that function.
When I can get into an environment like this here, where I can go in and I can scan an order and I can control the order quantities, I reduce a tremendous amount of cost as opposed to standing there with somebody
and go, so what do
you need today? Why I need this? Okay. I write down a description. I now have part numbers.
I'm deciding what those package quantities are, which makes my picking and packing more efficient. If I have that in a package of 25, the customer tells me they want it 30. Well, now we've got to negotiate whether you want 25 or 30. 30 costs me more to pack, 25 more efficient. Does it really matter?
In many cases, it doesn't. Quote to order success improves. It's a quality relationship, so we're talking through things. It's not a dictatorial relationship. I don't have to catch that order and just cross my fingers and hope they call me back with it.
Right product, stock locally and shared inventory. Because I know what they like, I can now tailor that local inventory in the branch to match what the customers' needs are as opposed to guessing what I should stock on the shelf. When I go talk to the next customer about an opportunity to grow into an area, I start by selling them the items that are on my shelf in my marketplace instead of going to the next customer and hoping they pick something that I have in my store. Instant gratification becomes more of a reality. The data collection improves.
I now got all those little bitty consumables now. I know how much you use. I know how often you want it. I know when your spikes happen throughout the year. I can be smarter.
I can help you identify problems that are going to occur in your business. My deliveries become more efficient. I'm not dropping off one order. I'm dropping off 13 orders for various people within a facility. And I have less pressure for that immediate delivery.
When it's a transactional relationship, I'm playing catch. I'm playing catch in this environment. I need this. So when do you need it? Yesterday.
In that strategic environment, I know that you have preventative maintenance coming up. We're working through and we're helping you prepare and stage that product long hand. That's a lot less expensive for us to develop that. So the strategic relationship is crucial for us and this vendor managed inventory is nothing new. It's a decades old concept.
We've been doing this forever. But it continues to grow. As our number one function performed by these stores, we continue to add new Fastenal Managed Inventory Programs, whether it be adding existing, pogs to locations, planograms, so the customer can see their inventory in dotcom and where it is in their plant, we continue to add these at a pace that's faster than what our organization's growth is today, the double digit faster. Those 250 interactions every month, that's where it allows our local sales force to maximize their efficiencies and it provides a very positive work environment for Redfin. Vending, we have the most robust vending program out there from an industrial sales standpoint.
We have more experience in this industry than anything else than anyone else with over 70,000 devices deployed. Vending takes that bin stock model and it just turns it up another notch from an efficiency perspective. It develops that relationship stronger. Why? Because now from a customer perspective, they have deeper look into their inventory.
They get flooded with information. Now they know who took that individual item. How often do they take that item? What are the habits of their employees? They understand that they're about to have an item go low.
They saw that they see a spike in their usage. They see tremendous amount of inventory. They have the ability to establish controls now. So whether they want to restrict something, whether they want to create alerts in their system, so they know if somebody went over a budget, they have now gained a tremendous amount of eyesight to their business to make better decisions with. Fastenal's operational efficiencies improved, too.
With the bin stocking program, I got to go look to see if you need it. With the vending program, I don't have to look. It's in the computer. The computer tells me it's time to place an order. That's one less trip that I have to make to go see that customer that's an operational visit versus a sales visit.
I also have visibility now to their abnormal usage. Production goes up. We added another shift. We started to work some overtime. That's not always clearly communicated.
In a bin stock program, it's a phone call. Hey, we're running out of this. I need it today. No problem. I have it on my shelf.
Let me get it to you. We don't have to deal with that in vending. I see the spike. I see the usage ramp up
on an item and I go, oh, wait
a minute. Let me drop a phone call and find out what's going on with this customer. And it gives us the ability to get in front of that. So this doesn't happen. This growth of these machines does not happen without that team behind the machine.
We used to we talked about that machine behind the machine. Probably a better terminology for it is the team behind the machine. We need our people to perform a service function that takes place in order for this to be successful. So what's that team behind the machine do? They create access to local people and products, our regional sales specialists in the field, our regional build centers, our state of the art distribution model that Walter talked about, 20 fourseven customer support, training programs.
These are all functions performed by the Fastenal team. And I hired out to 3rd parties, they're performed by Fastenal. And because of that, we're close to the entire operation and we have the ability to react and help the customer from a customer service perspective. So what does this team provide that makes this successful? We match the machine to the solution.
One size doesn't fit all. Everybody just doesn't take the Fast 5,000 machine in the picture and go, well, hey, that works for every situation. No, it doesn't. You need an expert to talk through the pros and cons. This machine will do this, but it won't do that.
Your goals are this, but you want to do that. And we figure out what's the right mix of devices. Flexible service agreements, nobody wants the same agreement. We're constantly having to work with our agreement department on tweaking it to make it work for that customer's environment. Machine configuration, we have over 70,000 devices.
Not one looks like the other one typically. Everybody wants it to be different. And you know what happens when we put it on-site? Oh, that's what I put in it? Well, can I move this from here to there?
Can we take this out? Can we put this in? The machine constantly is being refigured. Our team does that. We don't have to rely on a third party to come, well, let me call a customer service rep and see if we can get somebody out here to service that for you.
We take care of that ourselves. Customize, report them, matching the reporting to match what the initiatives of that organization is, what are their goals. Software support and training. We have a team that's available 20 fourseven, fasten all employees, educated on the devices that can help the customer as well as employees through any concerns or questions that they have. We also offer training as well.
Fastenal employees do the training on-site. We also offer training off-site from a WebEx perspective to where we can dial in. Hey, you can't get everybody in the room together? That's okay. We'll do 3 or 4 trainings for you via WebEx, so we can get all the different shifts and get everybody educated on the program.
Machine repair and maintenance, okay? It's a technical device with mechanical moving parts. There's going to be issues. There's going to be things that need to be changed, updated, preventative maintenance. Our own employees in the field have the ability to address that.
They take care of that from a store perspective as well as from a regional build centers perspective. Delivery and install, it's all fast and we do all that. That team behind the machine takes care of that. And at the machine level, we take care of all the restocks and the optimizations. We make sure that that machine is filled on time when it's supposed to be filled.
And we make sure that we're optimizing those programs to make sure that that device is not a one time hit. It's an opportunity for that organization to evolve their supply chain over time and optimize that device as they move forward. So without that team, we cannot deliver on that last mile of savings. And really when we look at our competition in the field, a lot of their struggle from a vending perspective is on that aspect of it. Is the team in place to take care of that transaction?
After you sold the device and sold everybody on all the bells and whistles, who's going to take care of it from a continued perspective? Fastenal has that team built. A lot of our competition struggles with that ability. Because of that success, quarter 1 of 2018 was our number one quarter for signings on machines. So we continue to gain momentum on signing our devices in the field.
So our programs come a long way in the past 10 years in building a tremendous amount of momentum. If you look at our business 6 years ago, about 5% of company revenue ran through these devices. In 2018, we'll approach almost 20% of our revenue moving through that device. So we're continuing to grow the amount of acceptance into the supply chain of more and more devices as we engrain ourselves into that strategic partnership. When you look at the revenue, it's not I talked about the strategic partnership and how it continues to grow, right?
When we put a vending customer on let's say we drop a couple of machines into a location and it generates $50,000 of new revenue for us. It's not just $50,000 in new revenue that we gain with that customer. We typically see about 2x, 2.5x growth throughout the overall account because they appreciated what we do for them over here and because we save the money over here, they're going, well, what can you do over here? Well, that's not a really good fix for vending, but I can come up with a better inventory management solution for you. Why don't we stock it this way?
Why don't we reduce your inventory? Why don't we change it from pallet quantity to case coin? And we work with them on maybe a BIM stock program for something else. And so we'll see that customer that we had $50,000 in revenue. 12 months later that same customer actually grew not by $50,000 but by $100,000 to $125,000 in revenue because the one solution led to the next one, which led to the next one, which led to the next one over the course of that year.
So it reinforces that aspect of the strategic solution. When you look at the marketplace, we talked about it being a $22,000,000,000 opportunity. We're in the beginning of this. Some people may be going old fast and all, you're the leader, you have 70,000 devices, you're dried up, it's all done. No, we're still at the end of this.
If you beginning of this, if you look at the industry in terms of what we feel we're at, our market penetration into that $22,000,000,000 marketplace, we've got about 4% of it. And we're the leader at 4%. So there's a tremendous runway to go. And the best part about that is most of those customers, they're just dabbling in it today. They're just dabbling with the new technology.
They haven't truly embraced vending as an opportunity to reduce cost within their supply chain. They're still experimenting with it. Let's just try it over here. Let's just try it over here. Let's just try it with this category.
Let's not do it in all these others. So there's a tremendous opportunity for us to continue to grow this over the years. The struggle that I see for our competition when it comes to vending is, are they able to keep up with the investment to service the supply chain as opposed to shipping to the supply chain? How much money are they how much are they investing on? How quickly can I ship to the customer versus how important is servicing the customer?
As you've seen in that pinwheel that was brought up by Holden, it's about servicing the customer. That's where our operating margins really improve as an organization. That's where the sales process becomes easier and the synergy creates and we see more and more revenue that comes from that. So with that, I'm going to kick it back to Chris.
Thanks, Jeff. It's exciting.
All right.
It is I had the opportunity a long time ago to get involved with large customer bars and vending. We were just getting going with it. And I'll tell you that experience Walter talked about, I'm not sure I worked for the right company. It took me about 15 minutes of program like this can create and show a manufacturer, give them visibility into things they never had visibility to. Really impressive stuff and it's to the point where this has become a staple in some capacity in some of our business today and we're well positioned to support it.
So moving on to On-site. We've been doing this a long time as well. 25 plus years, we've been operating business units within our customers' facilities with quite a bit of success. The depth of the penetration within those customers, obviously leads to business opportunities, leads to close knit relationships. And over that 25 years of Fastenal, we've really built out our infrastructure as an organization.
The energy we started putting into the program a few years back has really turned this into a growth driver for our company. So today at 20% of our organization's revenue, it's moving 40% of our growth dollars. We're not including the transfer from the branch or the cannibalization of some of the business in that number. It's true organic growth. Of our organic growth as an organization, 40% of it is coming through this business model.
The scale of our programs is also something of interest. And going back and looking at the history, our ability to execute and run small businesses profitably has been a cornerstone of Fastenal. It's why we're able to set up branches in a lot of towns our competition will never touch. And we're seeing that kind of perpetuate throughout the on-site world as well. So today, we operate profitable businesses anywhere from $600,000 a year to $30,000,000 plus.
In fact, if you go back a few years, we had some customers that were almost double that, near $60,000,000 a year. So there's tremendous scalability and there's not a program out there, a customer scope of work today that would scare me into the point where we wouldn't be able to deploy the resources and build a program around their business because at first they haven't been able to see what our teams in the field are capable to do and what our organization footprint and depth of resources can provide a customer. As we move through the last three and a half years or so, 3 years since the last time we had an than our traditional than our traditional business model. We've improved upon that over the last few years and we're not quite to the 50% number yet. Not all of our business units are there, but the scale that we're building into the program and the leverage of the existing infrastructure is really moving the business that direction.
I have full confidence based on looking at the next 3, 4, 5, 10 years as we continue to build some scale into the On-site program that we can and continue to approach that 50% number and perhaps even do better. The whole premise of Fastenal and going back to the slide Holden started off today with is, we've been able to continue to leverage our OpEx and we are going to continue to do so with our on-site model. We certainly have business units today and mature business units that are much better even than 50% operating expense in comparison to our normal business. So as you guys know, we've consolidated some branch footprint over the last 3, 4 years at a little more accelerated rate than we have in the past. And that's noted here on this slide.
The idea that we're pulling back from the market would be a little bit of fake news. The idea is we've never been further penetrated into the market than we are today. And I can stand here and tell you that tomorrow, we're going to be a little further than we are right now, because we have people out there implementing on-site programs. So the 678 on sites we finished Q1 with, We've turned some on since then. We're turning 1 on today or 2 or 3, but we've built a pipeline of another 100 and change that we're implementing right now.
And that penetration into the market just continues to build upon the idea that we are going to put inventory and programs and resources and assets closer to our customers. We're going to do it by putting their needs and their goals and objectives as a customer in front of all of us so that we're working towards a common goal. So the investments we make upfront in building this business alongside our customer don't go to waste because we screw up and make a there's a miscommunication about what the objective is or we don't really understand where they're taking their business. We need to understand where our customers are going in order to build an effective program. Back in 2015, we talked about the potential and through Holden and some people in the market, there's question on whether or not we got all the low hanging fruit within our business.
Have you guys exhausted all your on-site opportunities in your current customer network? There's no doubt it's easier to sell a program like this to an organization that understands deeply what we bring to the table. I'm not going to back off the fact that there's still 15,000 plus locations out there that are on-site potential based on some very conservative profiling. And if you apply that conservative profiling to our current contract customers, okay, people that work under the team Bill manages and he'll be up here in a little bit. If you look under that group, there's 5,600 sites that have potential to have an on-site program.
Those are sites that are in our sales people book a business today. They're actively pursuing them. We're understanding and baselining their business and working to sell them programs. We get a good look every month into the pipeline of things that are coming in. It's never been stronger.
I have a lot of confidence. We have a lot of confidence as an organization that we are going to continue to add a significant number of Onsites to our business in the coming years and continue to drive a percentage of revenue. So when we look at why Fastenal and I'm going to start with the things that Walter talked about and Jeff alluded to as well as the infrastructure of our organization is always going to be the core as to why we're there. Those jump off points are incrementally inexpensive for us to go move into a customer's facility. Our trucks are going to those markets.
Our employees are in those markets and therefore we can be profitable at a lower revenue level than a lot of our competition. We continue to build scale into this business and that's an exciting part now that we're annualized at $1,000,000,000 in revenue. We're keeping pace with our goals. We're adding revenue at the clip that we would like and we're prepared and continuing to be prepared by adding resources in the field to support it. So this is going to continue to be a push and from our regional vice presidents on down, we're focused.
There's a focus with our national accounts group. There's a focus by our district managers. There's a focus in all of our business that developing on-site customers in every market is a way to grow the business faster. And they've adopted that. The participation is much wider and deeper than it has been in the past.
And that's the reason we're seeing the acceleration in new customers added to this program quarter to quarter, month to month. The last piece is, we've learned a lot as an organization about what matters to our customers, about what supply chain uses our business, how partnerships contribute to their success and we'll touch on that a little bit more in a bit. But we built education around those concepts and training for employees that lead these sites. We're winning a lot more often, so we're learning what gets us there end to end in the organization. We don't need an RVP or a Vice President to go in and land an on-site deal.
We've got even general managers with branches developing their customer relationships to the point where they're like, I think we can do this. We're ready to move this. So they take this step with this customer. And that's just Fastenal101. How today we've got our outside salespeople and even support people selling vending machines and solutions into our customers.
We continue to get better and deeper with our sales and expertise as an organization that includes our on-site business. So as we've moved the needle in terms of number of on-site customers, you'll notice that our annual revenue per site is taking a hit. And I get asked often actually on am I concerned that we're not targeting the right opportunities? I have concern that we're not going to be able to build the scale in the business because the numbers speak for themselves, we are on a downward trajectory. Well, the reality of the situation is that if you look at the speed at which we're adding these locations, there's a maturity profile, which we'll talk about in a little bit.
But I don't get concerned, I get really excited because today we've got just about 700 dedicated customer relationships with the business leader in place and the team that are 100% their success as an Fast Flow employee is 100% contingent on their ability to go out and take wallet from that wallet share from that customer to show them value to continue to get deeper into their business, sell wider, sell higher and show that we have a place within their 4 walls. So this is opportunity for us. And the teams that we've built out, business development teams and consultant teams to go into these existing on-site locations and understand what drives their business continuing to stay ahead of what the customer needs, we're going to continue to put some serious energy into growing these relationships because they're now established. As we continue to add new on-site locations at the speed we are today, we might see that trend line continue to tick down for some quarters. It could be if it's $350,000,000 to $400,000,000 a year, we could be mid-twenty 20 before we really start to see that average size ramp up.
But the reality is that business matures as we grow the business, we put some scale into it. The operating profit starts to emerge, old pathway to profit, adage is that we are running away from some of those expenses as the business continues to grow. So I get asked on occasion, people will ask our consultants about why do I need partnerships? Why do I need suppliers in my business that can support my supply chain activities? We've talked a lot about a lot of things today relative to costs and labor and rising freight costs and the ever changing cost of capital and things that challenge organizations to grow or produce at the rate they need to.
In manufacturing, their customers aren't getting any less demanding. That's for sure. There's kind of this friction in every single direction. So when you boil it down to the core principles of supply chain management, right, we get as Fastenal and even our customers sometimes get hung up on the efficiency piece. Now that's an element and it's really important that we operate business with efficiency and a lean mindset.
But the idea is that our engagement with our customers needs to be extremely relevant to what they do. Okay. It has to hone in on their business specifically and we're learning a lot about what drives specific customers and industries, and how we can be relevant to their particular supply chain. There needs to be an effectiveness to what we do as well. And so we talked about total cost ownership savings and what drives those things for our customers.
But at the end of the day, we're the most effective when we've really impacted their ability to produce, when we've impacted their customers' experience. And then the sustainability factor is always ever creeping into what we do. Green initiatives and environmental concerns and social responsibility of organizations and how that trickles down the supply chain. We've got a global reach at this point with our sourcing. We have to have that responsibility in front of us.
The idea is that Fastenal in our competency as an organization, the resources we have provide a tremendous agility into our customer supply chain that they can't typically achieve on their own. And we're pretty darn creative. We come up with some pretty unique ways to take cost out of our customers' business to move them forward faster and the value that we're providing through those two concepts in combination with just the good principles of supply chain management are separating us. And we feel a strong need to continue to develop down that pathway and educate our customers about these practices on the way. So this is the fun stuff you guys all want to understand when we get when we start making money.
And this is a slide that I wanted, along with Holden, to kind of go over what does this look like, okay? And what when do we start to make some cash? When do we start to leverage our business away from some of the expenses? And so talking really quick through the first part of this in the implementation phase, we signed a business and that implementation phase and the standard implementation has a 30, 60, 90 plan. In those 1st 30 days, we're doing plant tours.
We're finalizing our space needs. We're investing a little time and energy from a personnel standpoint. We're determining what the KPIs are going to be for that business. And we're building a project team and the future operational team for that particular on-site. So the investments upfront are personnel and some time of existing teams within our business.
30 to 60 days, we're physically setting up the site. So we've outlaid some capital equipment, cage and office and computer systems. We're spending energy in sourcing, crib crawls, product identification and understanding the systems integration points. Where are we going to start talking? What does reporting look like?
What data do we need to glean out of our relationship? 60 to 90 days, what everybody is really excited about, we turn on some revenue. It's pretty fun. And then we set up SOPs, the communication cadence with the customer, how often we talk, what we talk about, so that we continue to keep that up out in front of us. And we really hone in on training, making sure that our team is set up to go to trainings and continue to educate themselves on how to execute that particular business.
The revenue ramp, now this is a little bit different customer to customer. It kind of depends on what inventory they need to sell through or burn through before we really start selling them the entire depth. But the 1st 18 months is typically there's a nice ramp to our revenue. We see it substantially outpace the company, substantially outpaced even a lot of our other solution based customers. And it's typically we're out of the red, somewhere north of $25,000 a month in revenue or about $300,000 a year give or take.
And that's obviously contingent on the scope of work and the investment that we need to make in people and resources. As we approach north of $50,000 to $75,000 a month or somewhere between $600,000 $800,000 a year, $900,000 a year is where we really start to see the leverage of those three main expenses in our business take hold. Starting with labor, we really get to the point where we've got an advantage on the amount of product we can move with the labor dollar. That's about $75,000 a year or excuse me, a month when we start to see that. The occupancy and transportation, occupancy specifically runs about 80% better than our organization as a whole.
Labor is about half in relation to cost of goods sold. So those are some things that we really emerge as opportunities to continue to leverage and trade operating margin within the business. At about 18 months, maybe sometime before 24 months, if we don't make the necessary changes in the business, if we don't get in front of these things, we typically will see that business flat line. And so we become a little bit, I'll say, contingent on what the customer's business is doing. We've implemented a plan to review, plan and reinvest in the business.
So outside resources coming in to build a business plan for our site leads, understanding what resources internally and externally they need to bring into the business. And the idea is that reenergizes our operation, making sure we're investing in the right ways and continuing to do so, so that we don't run into a flat line of revenue. We've got tremendous runway in mature and immature business related to On-site. We have to continue to be aggressive in pursuing that revenue. And at sometime in the future, we don't know the envelope on what are operating margins we can create and how much that customer wants really possible.
And over the last 3 years, we're still seeing the market opportunity somewhere north of $25,000,000,000 I'm not stuck on that number too hard because we continue to see opportunity in government agencies like higher education or school districts, petrochem and refineries, aerospace, markets that were not deeply penetrated yet as an organization. Onsites become a driver into those particular markets and that number is very large and easily north of $25,000,000,000 given what we've seen. We're signing at a rapid rate in comparison to where we were. As you can see, we've near 20% of sales. And I don't know what the end number is for a number of on-site customers.
I know it's not 700 and I know it's not 1,000 and it's somewhere way north of that. We're going to continue to pursue this as a business model and we're going to continue to put a lot of energy into making it a very profitable and growth driving piece of our business.
Thank you. Why don't we jump into questions, Jeff?
I have two questions for you. The first one is on the On-site, if you're incenting your people in the factory to gain share of wallet, why is revenue per location declining a good thing?
If you look at our business today, we've implemented
on the
last six quarters, we've implemented about 270 sites just shy of that. Given that the time it takes to ramp the revenue, we've just got a larger percentage of our business, we'll call it immature and it has not matured to the place where it could be. So we do make investments in energy and people and resources, but we do operate with some constraint at the end of the day. We could throw a ton of labor at something and probably move it faster, but we do operate in a world where we don't have unlimited capacity to do that. So we try to right size that investment and keep it on a trajectory so we can continue to grow.
But it will continue to decline as we add more sites faster.
You understand I was asking revenue per site?
Yes.
And the revenue per site because the majority of our not the majority, but 270 of our sites being less than 6 or less than 5 quarters old, less than a year and a half, that there takes some time to mature and grow that business to the point where it's going to outpace the average site. Chris, do
you believe there's any reason to believe that line continues to go down or as some of these sites we're adding now begin to age, you believe that that line will begin to arc up again at some point in the not too distant future?
That line will begin to arc up in the future once we get past the idea. If we continue we had 350 this year and we add another 400 next year, 350 next year. That's still a lot of the more immature business. So yes, at some point in time in the future, that line does begin to arc up as an average.
Thank you. My other question, can you tell us where you stand today? How big is your VMI business? And Holden, if I can loop you into this, is that a gross margin plus or minus business for you?
We don't really talk about what the total number of sales dollars involved with it. It's a gross margin plus for us on the BMI. It definitely drives that business. It's when you look at that customer base, you look at the fact that there's over 50,000 customers that are using that. You can put that into various buckets.
It's a huge range from customers that are spending $10,000 a year with us, where we just have a little corner of their business to customers that we're doing $100,000 $200,000 a year with. So that VMI number in terms of the profitability range, obviously, the larger the customer, typically the constraints on the gross margin comes into play. But the majority of our customers, it is a driver in our business and that's why we're so excited about seeing the next new one come on because they're typically that smaller program that runs at much higher margins.
I think part of the question also, Jeff, just to add a little color they're heavily fasteners, which tends to be our best margin product, but they're also heavily OEM fasteners, which tends to be low within the spectrum of fasteners. It also tends to be a lot of national accounts or is it better mixed?
It's a good mix. There's a tremendous amount of local business there.
So net net, do you think that our business on bin stocks is higher gross margin or lower gross margin given the mix of national accounts and OEM fast is higher?
Hi. I got here a little late. So sorry, I got a couple of questions though. The first one is on these initiatives. How do you manage kind of the channel conflict?
Because the company that's typically has been more decentralized in terms of the branch managers, that these are kind of by definition more centralized in terms of a focus for driving growth. And you need to have buy in. And in a lot of situations, if you're doing these rapid deployments, you're putting branches out of business because the inherent profitability of those branches will probably be impacted. And you can optimize your network, right, from an operating margin perspective. But how do you get the buy in from the rank and file for these initiatives going forward?
And then I have a follow-up around working capital.
Yes. So from the beginning, this entire initiative has been to support our 3 major stakeholders as an organization. It's number 1, it's our employees and the opportunity it's going to present number 2, it's for our customers and number 3, it's for our shareholders in terms of the value it can present. There is certainly conflict in some areas about the idea that I'm a branch manager and I own my market, okay? The reality is that within the constraint of a branch environment, 200 customers, 300 customers that they service, they can't focus enough on a large opportunity to do everything that we've talked about today and provide value for that customer.
If they decided to do that, they would sacrifice the market, okay? They can't have it both ways based on the requirements of our largest customers. So we saw them on that aspect. The idea that if we pull this out of your business, the organization is going to have a faster runway to growth. I would argue that we are not necessarily putting our branches out of business.
There's not one of these customers that's bigger than the market that they were that the branch represents. The other thing is that we have a bonus incentive program for our general managers when they spin off an on-site. So there's royalty payments off the gross profitability of that site and bonuses that we pay them on revenue potential in a staged approach. So they've got incentive from a compensation standpoint to maybe offset some of the negative revenue in their branch. But they do get a transfer sales offset as well, which resets their baselines.
And we do pay a premium for our employees on the growth of their business. So they've got the opportunity to take that large business out, put that energy back in to growing their market. It's a 2 fronted approach for us. It's not just about the one customer. So how do we build a profile around every market we service to grow as fast as we possibly can?
I want to
ask more about working capital than perhaps operating margin because I think that will be a well trampled ground in terms of how people feel about the negative gross margin mix and association with these growth initiatives and when you're going to get the leverage off OpEx. But I'll table that for somebody smarter than I am. What I would like to comment on or ask your question on is on working capital turns, particularly inventory turns for on-site and for vending, and kind of contrast that and give us flavor around that versus the overall company average, presumably much higher. And then talk about the opportunity perhaps. When could we see an inflection in overall company turns just because the nature of the business has fundamentally changed, 5 or 10 years when you fundamentally become a different turning company?
I'll take the first part on inventory related on-site business. So I don't know exactly, Holden, what's our branch business run at today In the 90s, I think?
Yes.
90 days of inventory on hand?
And maybe you can speak to just sort of how the on sites run and I can answer sort of the question about declines.
Yes. So our on sites are we're obviously bringing in inventory specific for that customer and there's a mix of standard and non standard inventory that goes within that structure. 2, 4, maybe 6 weeks of inventory on hand that allows us to 2, 4, maybe 6 weeks of inventory on hand. That allows us to invest in the inventory that's dedicated to the customer. So if we have to go offshore and procure 6 months worth of inventory on a particular item to build up the supply chain for a customer, we can afford to do that.
Our days of inventory in our on-site business run about 80 and change today. And that's down substantially from where it was when we started the program. In addition to that, our on-site employees have asset based metric within their pay program. So their incentive not only to grow the revenue and operating profit of the business, but do it responsibly with the company's funds and making sure they're getting a return on those assets. And inventory on
hand, Rob, at the end of the Q1 is actually down about 5 days. And I think for the year, last year was down about 7. So part of that is just good management and then focus on that in the organization. But part of it also, I think, is the beginning of this beginning to have an impact because as you said, the days on hand of inventory are absolutely lower in our on-site as a group than they are in the branches.
The growth in the vending program helps that as well. So I'll walk it back from the customer upstream or back downstream.
So when
we look at it from a standpoint of customers, they're taking inventory that they either have as unplanned expense today and they're moving it to a planned expense. We'll turn inventory in a vending machine typically about 26 times a year. Most people on low dollar consumables like that or high moving items, they struggle with those particular items.
Either they
have a lot of stock outs or they load up on it because they had stock outs and so now they change their apps. So we're helping them with that. That then helps the stores, because now from us as I have more strategic relationships, I now can start to sell customer A on customer B and build volume, right. So I can get instead of 10 different gloves in the marketplace and now it's a stock 6, because I was able to convince 4 of my customers to move one of the other gloves. So now I have less inventory they indicate on hand to support that in their overall vending program.
Then you move farther downstream to the lift concept as we are able to move lifts into the equation. Now I can take vending inventory that's spread across 10, 12, 14 stores in the marketplace and I can consolidate that. So instead of having that same glove in 14 store locations to support 40 different vending programs, I can consolidate that into 1 and make better use. I'm getting refilled every day out of our distribution center. So it just allows us to totally refine that marketplace.
So as we get more vending into the play and as lifts start to come into play as well, that inventory model becomes more and more efficient on a vending perspective.
Thank you. A couple of questions here. Your pace of legacy public branch closures to the opening of the on-site has been running a little bit more than 2 to 3. So for every 3 on sites you open, you've been closing 2 legacy branches. Do you it's not always apples to apples and related, I
have
I'll follow-up after that as well. Yes. I can tell you this. From our strategy related to On-site deployment and push, there's actually no correlation or intentional correlation to how many branches we're deciding to consolidate within the market. That's entirely about rightsizing our footprint and our operating expenses within every market.
And I can let Holden if you've got anything else to add to that. Yes. Not a lot
to add.
They're independent decisions. Yes. It was to make a point of how our
Go ahead. To make the point that we've never been further penetrated into the marketplace than we are today with operations and dedicated resources. I mean, our strategy is to continue to push that direction. We're not pulling back. Okay.
There's a couple of things on this onion we can peel back then. So at your current pace of closings and openings, you'd have roughly fifty-fifty mix of public branches and on-site branches, let's say, in 2021 or so. Is that how we should think about what the mix of stores would look like at that point? I would say that, that's not unfair. We're going to aggressively pursue adding on-site locations at the close of $350,000,000 to $400,000,000 a year until something tells us that we don't have the capacity to do that and I don't see that happen in
the future. Yes. I'm not sure that there's anything magical about fifty-fifty. I'm not sure that we're going to continue to close branches at the same pace that we've closed the last couple of years. I think the idea that we will have fewer branches and more on sites 5 years from now than we do today is probably right.
But is that fifty-fifty? Probably not. Probably not. But I think directionally, you're going to see this go for a couple more years.
And the final question, if I may. The math would suggest based on the turns of an on-site versus the turn of a legacy branch that we could get somewhere in the company wide 3, 3.5 turns area as opposed to 2 turns now once we get 4, 5 years out. Is that right? Or is there something structural that would prevent you from getting turns to that degree? Thanks.
You could certainly make a math case in that regard. But frankly, the as you saw from the lift, for instance, I mean, we're interested in continuing to move more product close to where the customer can actually use it. And so to the extent that we get better with inventory, to the extent that we get better with our turns, we may take some of those benefits and put more better inventory into the field to continue to enhance our service. So, we see getting better at this business as an opportunity to continue to invest in providing resources to our customers.
I'll add one minor thing to that. As we learn more about our customers' business, we learn more about the products they need to run them. And so the breadth of what we service today in the inventory in our distribution network, I would have to say, will continue to improve or get larger as we move forward.
So a couple of questions back on On-site and really on the same theme here. For a mature On-site, what is the return on invested capital?
I'm not sure that we've ever publicly made that statement that we're of what they are our return on invested capital is in a mature on-site business. But I'll make a couple of statements around that. As our business and we talked about in 2014 matures and we kind of had that average size of $1,800,000 a year, We glean operating profit very similar to the company today. And in fact, if you look at last year, that mature business actually pulled the organization. It didn't pull it down.
And the return on the assets we have within that business also pulled the company. So it's certainly a number that we think can inflate our operating margins and a return on investment
moving forward. Okay. And I think what
you said at a mature on-site is similar to 20% operating profit similar to the company. Is that fair?
Yes, that's fair.
What's the average operating profit margin of all the vending machines, I'm sorry, the on-site in this immature stage. Is that a number you have?
It's a number I have. We've never publicly said it.
I think we've talked about the entire group of our on-site say run around 18%, 19%. Yes. Right. That's all of them. That will include those mature ones, which have a higher number as well as the immature ones that have a lower number than that.
And I'll add one piece of color. If you took so much of our businesses in that investment and pre really ramp up stage, if you take the business that today isn't really giving us a return, some of that really immature low level business and you pull those sites out, we see about 125 basis point increase to operating margins within that business. Just that's the drain on that the expenses and investment in those businesses. So as we start to leverage that business and those relationships, I'm excited for what it can provide for our organization.
You sort of got to the punch line of where I would go with that, but let me ask one more. So Holden said that 20% operating margin for On-site isn't actually the end goal. Do you think you can do better? So where do you think that can go? And could we be talking about an optimization program for all the Onsites, much like we did with vending, where you can improve the margins there?
I think it's an interesting way to think about it. I would make one statement regarding the optimization effort is ongoing. These are business units that are living and breathing, not a machine sitting there that may or may not be producing the revenue it needs to. So our evaluation of our operations and the needs of the customer is ongoing in an informal capacity and has now a program and a review and re planning and reinvestment effort from a corporate capacity and oversight capacity. So that the answer is yes, but it's more ongoing rather an overall effort.
Long term, we're going to make decisions about adding incremental profitability to our business through this model. And some of the things that we do may not be at 20% operating margin, but some may be a lot more. And so the program as a whole, I think it's reasonable to think about it being in that capacity if we can build the scale up towards $2,000,000 a site within the program over the next number of years. We're going to have to move on
to the next speaker. Chris and Jeff, thank you very much. And Dan and I, we'll be here at the end of this to have some further conversation on it. Next speaker is going to be Bill Jaskowski. Bill also started with us in 1995, joined our Madison, Wisconsin branch and moved through the branch structure before becoming a Regional Vice President of our Upper Midwest in 2013.
He moved to National Accounts in 2014. And in 2016, he assumed the role of EVP of National Accounts. And again, today he's going to sort of come up here to talk about all of the various businesses that he tends to drive within the organization.
All right. Thanks, Roland.
12.20.
Good morning, everyone. It's still morning, right? So we have still a little bit of time left. First, I'm Bill Drazkowski, the Executive Vice President of our National Account Sales teams. Thanks for your time today and thanks for coming to Nashville to see a little bit more about what we do and how we're doing it.
We're going to switch gears a little bit because I thought it'd be a really good place to start, kind of telling you a little bit about how to kind of scope up national accounts for a little bit. I know that often on the earnings calls and things like that you see some stats on national accounts. I thought it'd be really good to take a moment to really talk about the context of it, what we do and what we really offer to our customers and what and why customers buy this and why it's bringing them value, okay. So just to kind of scope it out, it's we have about 200 sales reps that manage over 1,000 corporate customers or contracts, throughout the world. Within these contract customers, these customers have over 40,000 individual site locations that we're servicing, managing and bringing different value propositions to.
And we do that in 23 different countries around the world today. And today, this group of customers represents about 50% of our company revenue. And that's been a growing piece over the last few years if you paid attention to what the numbers have said, when we release different stats on what we do. And to really scope out what our vision is and what our purpose is in the organization and it's really simple. Our vision is to drive revenue and earnings growth by creating strategic partnerships with multisite customers.
And so that's what our target is. And so we look for customers that have more than one location. They meet a certain spend criteria. We know there are customers that we can grow with and customers that really seek out a partnership with their suppliers versus just a transactional type relationship. And so when we're talking with customers, we really work to position ourselves as a strategic supply chain partner.
You heard Chris, you heard Jeff talk about that a little bit today. And really once we've established that, if you're a customer that has a site where you might have 5 sites, you might have 10, you might have 50, you might have 100, but it's really to scale the service model effectively and profitably amongst the enterprise, not just for us, but for the customer as well. And when we do that, we don't just propose a canned solution every time. We go, we analyze the customer's business and we propose and implement what we consider to be the best solution for the customer. It's not whatever is always best for Fastenal.
I know that that might be a little different than you've heard. But when we get it right at the customer sites and we put the right model in place, we can scale and make that profitable very easily and very quickly. But the model has to work, ask people what works best within their organizational walls. And listening to our customers over the years, that's one of the reasons that you've seen vending on-site and some of the programs take off so well for us. We work really hard to execute at all levels, what the customer vision is.
So when we're meeting in the boardroom with the customer and that corporate leadership and us are deciding on what's important, what are our goals, what are our objectives, it's really up to us to get within our national account team and just as importantly within the branch and the on-site teams to really communicate what the objective of our agreement is, what are our goals, what's important to that customer, so that our local branches, local on sites, local districts and regions have the best opportunity to serve that customer really well to make sure that we as a group achieve a goal. And really, I think the thing that we're doing really well right now is establishing a very good cadence of innovation with our customers, right? That might mean and some people term that continuous improvement. You might think of 6 Sigma. There's a lot of ways to talk about it, but we really think about bringing technology right to the customer.
And that takes a variety of ways. I know John Soderbergh is going to be talking to you about some of those things later. But technology to us is beyond a website. It's executing platforms right at the customer location, whether that's a vending model, an on-site model, an integrated model. A lot of ways we can bring technology right to the shop floor that's bringing customers a lot of value today.
And really one of the most important things for our customers, they want a consistent pricing model amongst their whole enterprise. So when you're talking you have 5, 10, 20, 30 locations around the United States or Canada or Mexico around the world, we're able to create a price model that's consistent, one they can depend on, one they believe in, one that gives them confidence that when they go to when they do a transaction with Fastenal on an agreed upon group of parts, they know that price is going to be the same wherever they purchase it from us. That has a lot of value in the market and it's very important to our customers today. It gives them a level of transparency, a level of confidence and a level of appreciation that really makes them want to give us more of their wallet share because it's a program that works for them, right? And that's a way they can control their expenses and control their spend.
So one of the things we do and I know it came up a little bit on the on-site that I heard some of the leverage talks. So we really align resources to to support our customers, right? And a resource isn't just putting a vending machine and leaving and saying we'll see you later, right? It really comes down to aligning what resources make sense and really supporting the business beyond the product. And so we've invested in a lot of different things.
We talked a little bit about our business sales specialists. Those are the folks that are just running the business, right? They're on the ground and they're getting the customers. They're getting the contracts signed and they're getting the contracts rolled out. But when we get a little bit deeper, I think you've seen a lot of growth over the year of our safety program.
One of the big reasons for that, our vending platform is a very good platform to dispense safety products. Another reason is we have safety specialists all over the world, right? 63 of those specialists are actually certified QSSP safety experts. So they bring value beyond the pair of gloves or the glasses or the protective equipment. They can bring value by offering them other alternatives, other substitutions.
They can tell them about the latest laws and things of what's going on with OSHA. So it's value beyond the product that they're looking for. We also have metalworking specialists that are at the spindle with the customer to recommend different things like, hey, if you try this product, change up your speed, change your feed, this may work better for you. This may make you more productive, right? We may be able to support a different type of product with them better.
By bringing a specialist to them to help recommend solutions for their business so they don't have to. We talked about the international, national account team. When you're with Bassil and you're a national account customer, wherever we're operating in the world and if you have a facility there, we can mirror a program for you internationally as well. So we have specialists overseas internationally that help us roll out and execute those programs. And one of our probably one of the biggest separators for us is our implementation and lean solutions team.
That's the team that is going to the customers and recommending the right solution. They're going through with their customer. They're getting to know the customer's business. They're knowing their supply chain, getting to know their accounts receivable, their finance teams, getting to know all aspects of the business, listening to their goals and then recommending what solution may work best for them, right? And if you're a national account customer, that solution might look different in different factories because so many of these manufacturers and customers may have different cultures from location to location to location.
So even if we don't scale the same solution, we're going to go to our customers with a solution, the one that works best for them. In this team, we have currently 48 Lean 6 Sigma black belts that are educated at Villanova in that practice that are going and recommending these programs as well as our 76 internally trained what we call our blue belt program. And over the years they've talked a lot about employee development within Fastenal. That's one of the ways that we develop our lean team. We take them through our own internal program first.
E commerce specialists, that's a big deal. So many customers today are looking for integrated solutions. A big piece of integrated solutions is making sure when you integrate and you go shoulder to shoulder with that customer that all of your metrics are the same, meaning your data is the same, your data is exchanging properly. So suddenly you don't sell the customer $1,000 worth of products and you have $1,000 worth of past dues because something doesn't match. Having those specialists train our customers, train ourselves, train our local teams on how to do it, how to roll it out and what's important so those transactions are seamless.
That's a very important part of the execution part of electronic invoicing. Talk about industrial services. There's more to products than products. Sometimes there's a service required with it. We have a great spectrum of services that we offer customers.
It's not a huge part of our sales, but it's a big part of making business stickier with the customer. And finally, in our fasteners, so we talked about fasteners a little bit today, but we have 21 Degreed Sales Engineers that are out in the field and are mobile that are working at customers' facilities with their engineering teams and what kind of products might make more sense for them. They'll look at form, fit and function and recommend maybe lower cost alternatives, maybe more productive alternatives, maybe future alternatives. What's the latest in the faster industry? Where is that world going?
What are the new regulations? What are the new specs? How can we help update your prints? Doing those things also makes that business stickier for us. There's 21 on the sales side of the business.
But overall as a company as an organization, we have a manufacturing division. So we probably have about 80 engineers in house, because we don't only just distribute fasteners, we make them as well. And that's a powerful competitive advantage for us that is noticed in the marketplace, because when you make it faster, you also have a lot of in house ability. You know that product line better than anybody else we sell against. Couple examples and we put both on the same slide and I think Holden did that because he wants trip me up because I made Holden talk to a lot of customers this week.
So we put this in the same slide. So look at this left to right. So $3,000,000 reduction in on hand inventory. What does that mean? It's a big bold statement there.
What that means simply is we have a customer. We'll give you a customer example. That started off, they have about 40 this customer is a large heavy manufacturing customer, 40 locations around the country, some big, some small, right? Some have some union environments, some don't. So very diverse manufacturing customer.
And so with out of these 40 sites, we were able to make 8 of those actual on-site locations, right? What's one of the big advantages of being on-site? It means that we can take the inventory utilized by the customer and shrink that tremendously, right? If we have a customer account today and don't think we had to add $3,000,000 as a company to get them that $3,000,000 savings in working capital, If we're serving a customer and we already own the inventory, whether I have it in a branch or an on-site, I need that inventory to be able to supply that customer. What our programs do is it allows us to take that inventory legitimately and work the customer's inventory down and we'll be able to when we're able to supply them in a just in time sort of environment, right?
Doing that plant to plant to plant in a very disciplined way allows us to shrink their working capital. In this case, it was a $3,000,000 savings through the on-site program. Now with that said, this particular customer also we've utilized and rolled out the vending solution in the rest of their plant. And some of the on sites do have vending as well, but some of those smaller sites, some of the ones where on-site may not have made sense or some we might have processed met them. We just haven't moved on it yet because of a certain environment there, doesn't mean the solution stops there.
It means we also have our vending program in place, which also helps them reduce their working capital, right? So that's just a good example of the diversity of what our team does and the diversity within the customer and our ability to custom make a program for these corporate customers, these contract customers. And I guarantee at every one of those sites, you see our engineers, you see our lean team, you see our safety specialists, you see our metal working specialists working to get more wallet share and also get them to purchase more of our own more of our products. And when I say more of our products, I'm talking about more of some of the products and the brands that we may prefer them to get, right? But they may also save some money for the customer as well.
So it's a mutually shared goal.
I'm going
to go over the right side, the right slide here. The safety one, 33% consumption reduction. You heard Jeff talk a lot very passionately about his vending program, right? And he should because this program simply works for customers. We've seen results time and time and time again.
This particular customer here,
they came to us with
a problem. They needed to reduce their safety spend. It was out of control, right? And with that, it didn't mean we just looked and said, okay, we're going to put Vending in and we're going to reduce your consumption. We took a 2 pronged approach, a really good team approach.
We looked at it and we implemented industrial vending in their locations, which immediately got us to 33% reduction in consumption. But it didn't start there. What does that mean? We also utilize our safety specialists to do what we call the glove assessment right away. And they're using what was called a cut one resistant type glove.
So they're going through these gloves very, very quickly. It wasn't strong enough basically, for the use of the application that they were using. So what we did is we recommended they switch to our safety specialists, those QSSP certified safety specialists, simply recommended, hey, switch to this cut floor glove, and you'll have to buy a lot less. It might be more expensive, but the workers won't need as many. Instead of needing 10 a week, I might need 2 a week.
Again, what does that do? Reduces consumption, price is off the table. We solve the problem. So when you combine those two things, you could see where we had a very good impact on that customer over $100,000 in savings on just that product group, right? And so you can really see why with examples like that, our safety program and our safety sales have grown so much over the last few years, because not only do you have that great availability of a very diverse group of products in that product category, you have a very knowledgeable team selling it and you have a great solution in vending.
You put those together and it makes us very difficult to beat in a safety environment, okay? So identifying opportunity. We talked a little bit earlier about the 1,000 plus contract customers we have today, right? And one of the things we wanted to touch on was what does what kind of runway do we have? Is that all we're going to get?
Is the 1,000 customers, is that our market cap? Is that our max? Can we get 2,000? Can we get customers we have? What industry type they were?
What type of customer they were and we just looked at what our typical national account customer base looked like by industry SIC code. And we also added the fact, do these customers then have more than one location? So we determined we have about 20,000 prospect customers today in North America that look just like the 1,000 plus we have under contract today, right? So as Holden and Dan like to remind me probably every day, we have a lot of runway in front of us and an incredible opportunity to make a significant contribution to the organization by capturing more of these customers, right? Does it mean everyone is a fit and makes sense?
Of course, it doesn't. But we have a large group of customers that look a lot like the ones we have today. And if we successfully implemented programs at these customers, it would just make sense to us that we can make an impact on many more of those prospects that we have out there today. So, and one of the biggest competitive advantages that our corporate customers are asking for us today is, don't just support me in the United States, right? I need your help in Canada, Mexico, Europe, China.
We're with customers this week and when you're on the floor walk around and you're actually going to hear from 1 today. They want to support them, around the globe. So because what they're really looking for is transparency and true account management and supply chain management at the highest level wherever they do business. And so as our international footprint continues to grow, quite naturally, this group of customers is going to really help us drive there as well. We have sites all over the world and countries we're not in today where customers are asking us to help them, right?
So it's up to just decide which ones are the next ones that make the most sense to invest in, okay? So as far as opportunity, our team works very hard to be very strategic in where we are going to attack each segment of the market and the customers within it. And we're just starting with prospects based on customers that are a lot like the ones we have because we've been successful. We own that type of inventory and we understand that business. So that means we can be very efficient and profitable at it.
So that's what I have. And I hope my questions are easier than the ones you gave to Chris and Jeff. Just kidding. Any questions?
Hi. You indicated that you have 1,000 plus contract customers,
I think you said? Correct.
And can
you just remind us what your total customer count is today? National account customers? No, in total. In total?
All customers.
I think in the K we talked about 400,000 actives.
So think of active customers and if those actives about 40,000 sites each month are active will be national account customers. Remember those are larger typical customers.
Got you. And you said across your base here, you see that 1,000 potentially being, did you say 20,000?
We have 20,000 prospects. Okay. Don't know why.
Sorry about that. So my question is maybe a little bit more about what when you say a contract customer, is it just sort of like a basket of items, prices, certain matters, is it a conventional definition of contract or
is there maybe something a
little bit different than you with you, here than other than your competitors?
Sure. What it means is we've created a contractual agreement with them to do business on a group of products in a certain monocytes over a certain period
of time.
And one of the things that our team does is we try to get more of a wallet within it is we addend or add products to those current agreements. That's how we grow the size of the average size of that national account or contract customer. I'm kind of intermixing the terms, I apologize for that. Just trying to start thinking national think they have a contract. Sorry, Dan's got some feedback.
Sorry, I just stepped in a couple of minutes ago. I just want to there's a definitional issue there. And maybe when Holden, what was the number you said? It was 400,000. 400,000.
That's account numbers that we're tracking in our system, right. And a national account customer who is being who has 40 locations serviced by 40 different business units within Fastenal at a minimum would have 40 account numbers, 1 in each of those locations. So 1,000 contract customers, that could be 150,000 of Holden's 400,000 number. I honestly don't know what it is. But and if they have vending in each location and have multiple production lines, for example, the customer might choose in one facility to have 10 or 15 or 20 account numbers because on their financial system, on their general ledger, that's how they want to track the activity.
So there might be an account just for vending machines in this one building. So apples and oranges, a 1000 businesses a 1000 entities have relationships with us. Those 1,000 entities might have tens of subsidiaries across tens of hundreds of Fastenal locations with tens of hundreds of account numbers. They're probably reporting the number differently in all honesty. And for us to be in Bill's world, what's your cutoff typically for a net account?
That's the minimum is a $500,000 annually.
And so it's a subset of our customers. Part of the reason that we have the account numbering system we have also centers on the fact, historically, if you think of how our point of sale system was developed, we operated in somewhat of a franchise model. Even though they're all corporately owned businesses, you're in a customer of Fastenal, Eau Claire, Wisconsin historically. 20 years ago, when we started National Accounts, we started stitching those together. But we still think of it as a customer in Eau Claire, Wisconsin.
But now they might be one of Bill's contracts that touches Eau Claire and 100 other markets.
I just had one thing
I wanted to clarify on the numbers. The 20,000 prospects, is that the apples to apples with the 1,000 current national accounts or is it apples to apples with the 40,000 national account locations.
Yes. Now what we do is basically take D and B information on our contract customers today, our national account customers, And we look at ones that have we break it we just break it up, right. And we look at how many of those are in that same those same industries that we serve today. And then we look at ones that have multi site locations. And we have about 20,000 that look just like that.
That's your point is the penetration of your prospective national accounts. If you have 1,000 and you have 20,000 out there, it might be in the 5% range? Correct. And the size of the prospects, it's not as if you've gotten all the low it's not as if you've gotten all the best ones and you're going down to smaller ones.
It's through the right. It's prospecting, it's sales processing, it's learning those customers. So the runway we have is obviously wide and big.
And the
size of the prospects is comparable to the size of the existing accounts that you report?
Everything indicates when we look at when we pulled our data to get our prospects. So let's say you have a certain industry and they typically these customers have a certain headcount within it, right? And they have multi locations and they're in an industry we serve. We looked at factors like that to determine what our target group is of customers.
So it's not something that we're taking the top of the pyramid and now you're going down the pyramid? No. Correct. Okay, great.
Thanks. Thank you.
Hey, thanks. Bill, just a couple
of questions. To what extent to and to what extent might there be any change in the behavior to which customers in the categories like safety are sourcing direct? I mean, if they're saving $100,000 I mean, why not just like go to 3 ms directly and get all the goggles and other things? Is that
a dynamic? Well, the difference in what many of these current customers we have as well as that the ones we're working on, they want their inventory to be managed for them so they can work on what they're really good at. I'm really good at building railroad cars or trains or whatever medical devices, whatever product that is. Their supply chain teams want to be focused and utilize their resources towards that. And the more and more they want to turn over the management of these commodities in their mind to folks that are experts at managing that, right?
And that's where us selling those solutions is so critical to what we do.
Yes. And we have to do a distribution of value.
I mean, I was just wondering if in some of these very big categories, especially as automation has increased, whether any of the customers are doing more direct. But it sounds like that's not the case.
I don't see any different now than it was 5, 10 years ago as far as those direct things. And could
you just give us some flavor for the competitive environment? I mean, to what extent would you say and maybe also some perspective on how this has changed? Who else is in there trying to serve these big customers in this way and how has that been changed?
I think it's I'll answer
it this way. It's always been competitive. I think when you're a distributor, you always have to be ready to you have to compete, right? And I don't know if that has changed, but what has changed is the ability to get and dissect information has just gotten a lot faster. And you think of data analytics and the ability to take data and compound it and do things with it, that's gotten a lot faster and certain folks have got a lot better at it.
One of the things we're really able to do for customers is take all their information, all their data and utilize it to help them with their strategies, right? So instead of us waiting for data to run us, we're helping to run the data to come up with solutions and ideas for them. So it's really about utilizing what they're doing to get customers, give them the right ideas on how to save money, how to become more efficient, how to help their business really. And so what we've I think what's made us more competitive is just to speed people's their ability to capture and do things with information. That's been a huge shift, I think, over
the last
5 years.
Does that answer your question to some degree?
The competitive intensity is that increased competitive intensity? Is that or is it kind of
separated, made it less fewer?
I think it's been equally intense. I don't know. I think it's I think in talking to sales person running the sales, but it's always been really competitive in our space. So we have to get better at our solutions. And when we offer the better solution, then we win.
Okay. Thanks, Bill. We have about 12 minutes until 12:30 for people to use the restroom, grab a lunchbox in the back. And when we get back at 12 30, we'll hear from a customer.
Thank you. All right, everybody. We're going to get started up again. Hopefully, your lunch is good. So we'll eat and talk at the
same time, if that's all right.
Keep you on schedule. I know you want to get out to the show and see some of our customers.
Okay.
So one
of the things we wanted to do today was to give you the opportunity to speak with 1 of our customers, one of the customers we just described. And we thought it would be really it would be good to kind of give it a different tangibility and the chance to kind of some of the things we talked about with our contracts and our on sites and things like that give the opportunity to kind of put it into some kind of a perspective and get a little better understanding of what we're doing to go to market and what the impact is at a particular customer. So today we have Martin Bombardier here and I'm going to talk a little bit about our relationship and kind of how it started and how it's evolved. And so the relationship with Bombardier started quite a few years ago, but it didn't start as typically as that fancy prospecting thing I talked to you about. It was a person at a local branch on vacation with his wife driving home from vacation wanting to stop at Bombardier because he knew it would be a great account for him and his local store.
Fortunately for everybody, his wife allowed him to stop much to her chagrin, right? So if you're all in business and doing things, I'm sure you can all appreciate that, right, when you're taking those e mails and those calls and everything else. And so that's where it started. And on the back of his card, effect call me if you want to save money immediately. That's what you wrote on the back of the card.
Fortunately, the individual at that Bombardier location up in Quebec, Canada called and that's how the relationship started. So today, just to give you kind of a high level look at it, Bombardier, you heard Chris talk about on-site locations. Within that our relationship we have 4 actual on-site locations. Over 230 vending machines have been installed at their facilities in different parts of the world. We do business with them in 12 different countries.
And I talked a little bit, we got granular with some data earlier with 25,000 unique different parts SKUs that we sold to them and over 32,000,000 pieces delivered, okay? So very robust relationship. And so when you talk about when you think about companies that want you to manage their direct or their indirect spend, I
think those numbers help give
it a little bit of
a perspective when you start looking at how many SKUs and how many transactions and how those can just build up within a business. Because what companies are what a lot of customers are looking for is help me manage all that because it can be overwhelming because of the scope and the complexity of business
today. So here we have
a little timeline. And we talked a little bit about wallet share utilizing specialists in different ways to grow business over the course of time and a little bit about runway. So I mentioned back in 2007, 2008 that local branch manager stopping in and having the intuition to say, hey, I could really use this customer in my local market. They started to buy some things. We actually signed our first little local agreement with them back in 2,009.
And in October 2011 when we were first really rolling out vending, we were early, very mature in our whole vending journey. We rolled out our first vending machine in New York. And that evolution with Bombardier continued. They paid attention. So over the course of time, we did things like expanded to Brazil, new business within there.
South Africa, September 2015 our relationship really started to take off and we created a global agreement because the different solutions we were bringing to the table were bringing value in the plants we were in and they really wanted to expand and accelerate that. And over the course of the last 2 to 3 years, we started very intensely and very strategically with Bombardier identifying locations where the models and the goals they had made the most sense for us and most importantly for them.
So started
as one call and it's evolved into those 4 on sites with a lot of runway still ahead of it. I'll let Martin talk to that in just a moment. So when we've managed these contract customers, it's not sign the contract and go away, right, onto the next one. That's just the start, right? We then start that journey with the customer of what we can do together to get more sales, more share for us, but more solutions, more value, more innovation, transparency for the customers.
And we'll work together and create measurables to help them achieve their goals. And if we do that well, the runway within those customers continues. So not only do we describe the market and the prospects with the runway, within the walls of every contra customer we have today, there are similar runaways. So with that, I'm going to turn over the speaking to someone you probably want to hear from a little more than me. I'd like to introduce Martin Breveer and let him talk to you about the relationship, what we do and then we'll grab
we'll let you have it, right?
We'll let them take questions from you, right? And he asked me one thing is what should
this morning we talked to
you at breakfast. What should we talk how should I talk about it?
I said, just be honest. Tell him whatever the answer is it is. So, appreciate you coming in today. Thank you for the time and look
forward to it. Thanks Bill. Thanks for the introduction. Well thanks for the opportunity as well to talk about the relationship that we've built over the years. Like you've mentioned, it started in 2009.
For those of you who don't know of Bombardier, we do basically, well 2 different products: airplanes, business aircraft, commercial aircraft, but also trains. The division where I'm working in is mobile transport. So we do railcars for many customers in the world including North America, New York, Toronto, Chicago and many others. So like I said, it started in 2,009. And back then, what we were looking for is partner that can do like VMI service in our major North American manufacturing location.
So RFQ has been sent. They didn't know the story about the business card by the way, but interesting. And we sent our SKU to many vendors, some of Fastenal's competitor. And of course, after a commercial evaluation, major criteria were, of course, quality, agility, innovation, service, proximity, really critical and important for us to have like people basically embedded into our manufacturing operation that the planning replenishment of the bins and so on. So after this commercial evaluation, Fasnal has been selected.
So and since then, I mean, we started first with La Porteccatiere, Quebec, Saigon in Mexico and Platteville, New York. And since then, I mean, a lot of sites have been integrated. And I think we have around, I don't know how many, but a few in the world. And of course, since we have a global footprint, one of the strengths of Fastenal as well is that they were able to follow us basically when we when it was needed. So we recently implemented a few sites in Europe, so it went well.
And what we're looking to do right now is to expand the scope. So to not necessarily on the part that are in Fastenal core expertise, but parts that are not necessarily in Fastenal's core expertise. And the reason is simple is because as a car builder, basically what we want to do is to really focus on what we do best is assemble and test of railcar and sell them to our customer. So do less and less manufacturing operation and have signed and work more and more with global partners like Fastenal. So, Walt can talk a bit about what have we created in terms of environment by with the signature of the GPA, the Global Partnership Agreement that we signed together.
So basically, it's a key enabler for us because it's we're creating a win win environment. So there's criteria that were defined, really important, cost saving measures and cost saving reduction targets that were set into this agreement. So for us, there's an incentive to do more and more business with Fastenal. So I don't know if there's any question for me or Yes. There's some questions?
Yes. Should I take the microphone?
I get mine too.
Thanks. Really appreciate you being here. Thank you for that. First of all, could you talk about in your role as I guess strategic sourcing, what are you compensated based on? I mean, what are the metrics that your company judges you by?
And then second, as you look at either your competitors or other manufacturers that you know of, how similar or different is your organization in terms of this sort of arrangement and thinking about things in terms of the total supply chain as opposed to just pieces, parts buying them off the shelf?
One of the important metric for us, of course, I work in supply management. I do sign contract with many commodities. I'm working now. I should have done a bit of introduction of me, but I'm team lead in supply management for BT America, mainly responsible for everything that is that touch electrical. I used to work a lot with Fastenal in the past, but I've moved to electrical a couple of months ago.
But that being said, there's important criteria, of course, for an organization like Bombardier is the cost reduction, the cost of the bill of material, of course, that we want to reduce and of course, inventory. Inventory measure, inventory reduction, headcount reduction is also critical and important. So the more and more we can give to strategic vendors like Castanon help us basically to improve our financials at the end. So this is why partnerships like these are really important for us.
Okay. How much share of your wallet of the relevant wallet does Fastenal have? And how do you think about this issue? And how much will you let them get? What do
you mean versus the complete deal of material or?
Whatever that they could anyone could distribute for you that Maslow could distribute as well.
You're looking for example of product that they can
What percent
of your
business are you looking at?
Okay. I mean, difficult to say because, of course, the bill of materials vary from one project to the other. On some, it's limited to the nuts and bolts. On new projects, it's becoming to be more and more important. So we're adding like what we call B and C components, like small components that can be purchased off the shelf from vendors.
And we don't want to deal with that anymore. So we are trying to consolidate as much as possible to key partners and key vendors. And it became natural with Fastenal to increase and give them more and more scope because logistic is really one of their strengths, supply management as well. So this is why we've tended to give them more and more responsibility. So in terms of percentage, difficult to say.
I would say it's more the tail end product than the major system, possibly in the range of 8% of the bill of material maybe, something like that, a little less.
Martin maybe touch on approximately how many suppliers does Bombardier have and maybe what are you hoping to kind of shrink it to?
I think a VMI partner in 2009 was really important for us because on any given project, we have plus or minus 250 to 400 suppliers. With having partners like Fastenal enabled us to reduce and consolidate to key vendors like Fastenal. So we can easily eliminate over 100, 150 vendor on any project. So and for us, of course, it's less manpower, less operation, less PO, you can reduce your headcount, you can be more efficient and you transfer its responsibility to Laplace Alon.
And when you think about just to tack on a little bit, one of the not just somebody to manage materials, but what's that also helping? The labor market's tight today, right? So they don't want to put as much energy into procuring commodities like what we have. They want the labor they can get to be used to make their trains and make different vehicles and things of that nature. So and you see that common especially the entire economy has gotten being able to save them labor time it gets more and more impactful to their organizations.
There was a question about 3 ms and why big car builders and OEM do not necessarily deal directly with 3 ms of those world. First, for us, we of course, we buy a lot of product from them. But it might sound a bit silly, but it's difficult for me to understand what exactly I'm buying from 3 ms. So everything is split across many distributors and at the end I don't have full visibility. So what we try to do is to the vendors like 3 ms, we try to consolidate 2 strategic partners as well.
So we don't necessarily deal directly with those distributors as well and manufacturers.
Hi, Martin. As it relates to the 4 on sites you have with Fastenal, could you give us some insight into how did you identify those sites as being most viable for partnering with FASTINEL? And in addition, how has your sourcing changed at those locations since inception?
Well, the 4 locations that we were referring to are basically our 4 manufacturing locations, major manufacturing locations based in North America. So first the relationship started in North America. Our headquarters are based in Berlin and we have manufacturing site of course in Europe. But bottom line for us, the impact was really material inventory reduction, cost reduction, of course, on our side as well, more efficient in terms of labor. How many employee, buyer do I need to have when I'm managing 150 vendor versus 1.
So that's really critical and important. So just to give you an idea, when I started in 2 1,009, there was a team of roughly 20% that was basically involved into the procurement of the C Class components hardware. And when I joined, we signed the agreement, a couple of months after, we were like 4 or 5. So it really helped us to reduce our headcount and bill of material, of course, and inventory, which is critical.
Thanks. Just curious how exhaustive is the vetting process when you're looking at a new supplier? And what are the some
of the things that are most important to you? You mean if I would have to change the supplier for that type of score? Correct.
Yes. You're right. Once it's difficult, the implementation is painful. It's difficult to change vendor during the course of a project. It's really tough.
And what are the some
of the characteristics when you're looking at different suppliers are most important to you?
Of course, cost is really the one that TCO, okay, total cost of ownership is really the 1st criteria that we're looking at that we're looking at. Do the supplier have the capabilities to follow us as well where we want to go? So economy of scale. So I would say those are and quality, of course. And another thing that is really critical and important for us is the access to low cost countries capabilities to reduce the cost.
So that's another thing that we're looking at.
Right here. Thank you also. How frequently do you discuss pricing with your vendors, with Fastenal in particular? And how do you know that you how do you feel that you're getting quality from a pricing standpoint?
Good question. I mean, we're doing different things. And as per our process, typically what we need to do is to have quotation from different vendors. So we do benchmarks once in a while, once it's needed. And but it's a partner of choice.
So it's a question of trust as well. There's people that are really involved and try to negotiate a best agreement as much as possible, but also making sure that we're paying the right price. So people are working on the market to make sure that the price that we're paying is the right one. I mean, it's not there's no process. We're not doing that regularly, meaning that it's not scheduled, but it's something that we do often.
We take the part list and we go on the market to compare and benchmark to make sure that we have the right pricing.
Yes. Hey, a couple of questions here. Maybe actually just following up on the pricing question. I mean, in an increasingly inflationary environment.
So a
lot of talk about going back to customers and asking for price. I mean, how does that work? How does that work, for example, with you and fasteners?
In the context of the price inflation, material?
Yes. I mean, certainly with fasteners, it's obvious with steel, but just general inflation too, freight costs.
Yes. I mean, there's different things that we can do. Of course, there is in some case, there is inflation clauses in some contracts and so on. So what we tend to do for bigger components is to have a slowdown with the contract that we do sign with our customer in order to avoid the volatility of the increase of the pricing. We do have like contracts that are set from fixed for a period of time.
After that, there is adjustment. But of course, it's a work in progress. So what we try to do is to try to compensate with reduction on different materials, alternatives, different supplier or other components to offset the price increase. But it's a reality that of course we cannot avoid. It's difficult.
And could I just clarify when you said before 250 to 400 partners, I think you called them, is that really for MRO and fasteners?
Or is
that across everything? It was on
any given project that we do, let's say, New York City Subway, we have roughly 200 and I don't have the exact number, so don't quote me, but around 250 to 400 vendors for that project specifically. So we do buy, of course, components from Webtech, Knorr, the biggest suppliers in the rail, but we also do buy small valves, connectors, cables, hardware and small gizmo. Those are the ones that we want to consolidate. It's low spend. It's sometimes it's high labor intensive, meaning to follow all these vendors.
So what we want to do is to try to consolidate as much as possible the tail end spend
of those filler material. And do you or would you buy from Amazon Business?
What we want is really the proximity and the service. Would we buy online? No, I think we're doing the opposite actually. We're we want to have more and more presence of our supplier on-site to solve problems if there's any. Integration issue, try to help us to find solution.
I mean, difficult to do it over the phone. We prefer to have people dedicated on-site with technical expertise that can help us also commercially to find suppliers and all over the world. So proximity is key.
Even for MRO, like basic MRO?
MRO as well, because like I said, what we tend to do is maybe it's not the same I'm less involved in our MR also, but maybe you're right, if we're buying gloves, but there's a value added for us for a supplier to do the integration, bin replenishment and everything. We don't want to do that. We don't want
to bother with
that. So that's but when we're dealing with Amazon, you receive a box or but you still need people to do the material reception, take those box, you put them in your inventory. So having an integrated model basically help us to achieve different production target including inventory.
It sounds like you all make a lot of your decisions based on total cost of ownership. If you think back over time, has that caused different silos within your organization to have to adjust their metrics? There's obviously sourcing that often cares about unit price. There's the floor that cares about the amount of labor they're putting into material replenishment, for instance. Has that have you guys had to adjust your way of thinking internally?
Absolutely.
And I have a follow-up on
Yes, absolutely. You're right. Bill of material was when I joined, I would say, 1009, bill of material was one of the main metric that we were following. And then we realized that there's other costs that needs to be included like freight, direct labor, overhead and direct labor and so on. So yes, and inventory definitely.
So basically what we do is we have some sort of a model where we try to evaluate the and give a score basically based on the importance of criteria and do the selection after that. But definitely, we needed to adjust. The TCO was not necessarily there like 10 years ago. It was not looked at. Because of course, it's not only one department that is involved.
So in procurement, I'm responsible for the bill of material and the bill of material only. So price of unit, price per unit, not necessarily the cost of the other function. But in a competitive environment, we need to look at the whole thing. So yes, we've changed.
And are you saying that, that decision changes as you move from indirect materials like a lot of MRO products to direct materials that would go into the bill of materials on the product? And I guess my second question there is, is Fastenal at an advantage that they would be supplying to both of those categories and therefore can sell a broader basket?
But currently, we're doing business both on hardware, nuts and bolts, piece and piece components, but also MRO. MRO is not necessarily my expertise. I don't know exactly. And I think some of our my colleagues from Fastenal would probably be in better position than me to answer those questions on the MRO specifically. But yes, what we it's the same thing.
So it's either nuts and bolts or MRO. What we are looking at is the complete model MRO sorry, total cost of ownership. And definitely, there's area of growth and improvement for that. But on MRO side, Fastenal is also embedded into our manufacturing location. So they do have in some case like Saigon, a small shop where they do where the guys go and there's vending machine as well.
So the guys, the workers can go there directly and get their stuff.
You described a range of value added services that seem very important to your overall business process. But at the same time, you also mentioned that you've got a team of people who also sort of do spot checks on the pricing across your vendors. So is there a sort of a framework or a threshold in the way you think of it in terms of a point at which you feel like you've got to go back to Bill and say, look, I know you're adding all this value through these other things, but this kind of a premium, we need to find a different answer.
First, I have to say there's like cost reduction target that are set in our agreement. So there's definitely an incentive for us and Fastenal to provide material cost reduction. Is there a specific threshold? No. But what we typically do is I pick up the phone and I tell my local rep and I say, we need to do something about this because it's either that you're working with the wrong supplier or you've looked at the wrong solution or something is just wrong in the price structure, but we give the opportunity.
Is there a threshold? Not necessary. And sometime I can understand that for some of the item, it may be less competitive than others. But on the grand scheme of things, for the old basket of goods, the solution is still interesting for us commercially.
Can you speak a little bit about why you use Fastenal in some of your international locations and how their service and proximity compares relative to some of maybe the local players that you
can use? I mean, the integration of new business is always challenging of new manufacturing sites, including in Europe. I mean, the presence of TACONOL in Europe is relatively new. Did we add some bumps and ups and difficulties? Definitely.
We still have some. So implementation is really challenging, I would say. You think you're well prepared. You know everything and everything will go smooth, but it's definitely not the case. There's always hiccup.
Sorry, what was the second portion of
the question? So then why I guess, why would you use someone like a Fastenal versus some other maybe local suppliers that you can go with?
Basically because of the favorable market condition that was created by the with the signature of our global partnership agreement. So for us, it's really an incentive to do more commercially, to do more and more business with Fastenal. So there's like I said, it's a win win partnership. So the more business I gain, the more discount I get. So
this is
really my incentive. And also the fact that I mean we have a very good service here in North America. They kind of duplicated and carbon copy the same model in Europe. So having like branch located close to our manufacturing location, that proximity is key. Having the right resources is key also.
And the way we're structured, it's really interesting because we have like a key account manager basically, which govern all the manufacturing sites all across the world on both ends, both on the end and fast on all ends. So they see basically everything. So and after that, the sites are involved into the micro details of sourcing the parts, new because there's always like as in daily new parts to be sourced and everything. But on the strategic level, these guys have very good vision globally and put together the plan for the way forward.
When you install like vending machines
frontline employees happy about that? Or do you have to kind of force it through as like
a cost cutting measure? It really depends. In some cases, it's more difficult than others and in other sites because of the collective bargaining agreement and so on. We have difficulties to put machines. So of course, some sites are very reluctant to that.
But generally speaking, no, I think the feedback is good. But they're mainly used for us for MRO. So not necessarily on the hardware side, but more on safety equipment and so on. There's no pushback. Of course, there's always people that are reluctant to change.
But no, it's not too bad.
So obviously, you've increased Fastenal has increased their presence with your organization over time. And it seems like you want to give them more scope, maybe even beyond what is can be sold through your POS. I don't know,
maybe this question for Fastenal
as well. Just how do
you manage kind of increased scope that is maybe something that didn't run through the POS and getting a good margin for that when you have to source it from outside your inventory?
Sure. I think when it we see that often when customers come to us where they want us to supply them a component or a product that we don't necessarily distribute today. That happens every day. And really what we do is we work with each customer, each situation and create a business case for it, business case that works for us and may work for the customer, right? And it really depends on what the scope and what the goal and what they're trying to accomplish and what that savings could be by.
If they want to move products that aren't core to us, it probably means we've got a very strong process in play that's bringing them a lot of value. And this comes down to as we go through the math with back and forth with the customer and the case by case basis, we'll find a scenario in a way that may make sense and may not. But those are individually we work through together, but I'd say that's probably an everyday occurrence in our world. And that just becomes individual business decisions we make with the customer daily one at a time. But the frequency that gets more and more is you get a better process dialed in with the customer and you're bringing value.
And then they want more products to follow that value. Someone before asked the indirect versus OEM versus MRO. If we're at a facility and we have an on-site or we have a vendor managed material program and it's working really well and we're achieving our metrics, whomever has the indirect in that facility, we have a very strong opportunity or advantage to gain that business because we understand so well all the intricacies of the process that go behind that customer for curing their product. And so we have an ability and just a firsthand knowledge of what a solution could look like. And as we create the value prop for moving the indirect to us, because we have the direct materials, we've got a great knowledge of that customer and what their financial position of that transaction is.
And so it's not going to say easy. That's the wrong way to describe it. But it's definitely an advantage for us if we have a presence to add another scope of products to that and vice versa. If we have an indirect relationship, odds are we're probably working on the direct components as well. Does that help answer a little bit somewhat?
I don't
know if you had
anything to add Martin, but
Just along those lines for Martin maybe, there are 1 or 2 large electrical distributors. Clearly, they do a lot of work with Bombardier on aero and transport. And how do you think about them trying to source industrial supply? So merging your electrical distributor, if you will, having sourcing industrial supply as well, which is what Fastenal does? Thanks.
Sorry, can you repeat the question? Sorry.
So there's a large electrical distributor, let's just say WESCO.
They do
a lot of business with Bombardier. They want to source the same product that Fastenal does for you. How do you think about that piece? Do you separate electrical versus industrial?
But typically what we do is we look at the total TCO, total cost of ownership and the whole model. So do I want to have more supply right now into the mix? Not necessarily. What we would tend to do is to see if we can either secure agreements and pricing and basically try to see with Fastenal or any other partner if those term conditions can be shared with the partner that has been selected. So, I don't know if it answered the question, but, I mean
I guess that's it.
All right. Thank you, Martin. We appreciate it. Thank you so much. Thank you.
Thank you.
All right. Moving on to our last formal speaker of the afternoon, John Soderberg is going to come in here to talk a little bit about information technology. John, another typical story in Fastenal in the sense that he started, I believe, part time in college, in the branch system and became full time when he got done with college and he's been here for about 24 years. And he also was able to work through the branch system to take a role as a Regional Vice President up in Seattle for us. And a couple of years ago, we began looking for somebody who could provide good leadership into our information technology teams.
And John is someone who would sort of had an affinity for that when working in the field and had fantastic leadership capabilities and we brought him in I believe in 2016 to be the Executive Vice President of the IT Group. With that, I'll turn it to John. Thanks.
Hear me okay? Appreciate it, Holden. As you said, my name is John Soderbergh. I've been with Fastenal for 24 years. In the last 2 years, I've been in IT.
I think an advantage for me being in IT is that I'm a consumer of the system. So I've been in the sales side, I've worked in branches, I worked very close with our customers, actually worked to help develop a lot of our systems through the years. But now I'm in a role that I can influence what we do from a technology standpoint. Came into the role, got a great team, and really what the things that I started out working on initially was really aligning, business priority with IT priority. So making sure that we're properly aligned in the areas of the business and we're working on the right things that are going to have the proper return on our investment.
So working with Holden, Dan and Terry, if it's
I have to
make sure that when I'm going to go spend money that we're going to get the right return in the right place. And so that's something that I do quite a bit with the team. Okay, here it is. So when you look at Fastenal, we've got just over 3,000 locations. I'm sure you've heard a lot of this information today.
From an IT standpoint, it's if there's 33, 3,400 physical locations out there, we're managing products for those locations or hardware, etcetera. We've got over 100,000 connected devices and could be anything from iPads to vending machines or scale systems, whatever it may be out there in the field. We are a development house, Fastenal. So we operate development facilities, predominantly Winona, Minnesota is where the majority of our employees are. We've got employees within IP within our Westchester facility within Ohio, Shanghai.
We have a team and we have a large development team within Bangalore, India. And so very talented team. Today, when you look at some of the complexity in what we manage and it was hard for me not to jump in on those customer questions earlier, but there's just over 16,000,000 SKUs. And so when you think about MRO products, OEM products, facilities maintenance, construction related products, there's a lot of SKUs and it's growing every month, okay? So we manage a lot of the content around that.
We manage 2,800,000 customer accounts. That's not individual customers, it's account numbers. And those are created by the store, whether it's a branch location or it's an on-site location. And I think something important to note is that we develop approximately 80% of our own applications. So we are a development house.
That really gives us a competitive advantage. We're not consuming necessarily third party systems. We're waiting on them for changes or updates, etcetera. We work very close with our customers. As you know, we're a decentralized environment.
So we need to be able to provide information closest to the customer and provide flexibility too. So we take I look at personally for me, a lot of the relationships I have in the field or with customers, we take that input into our development process. We're constantly open for that feedback and we are constantly enhancing our systems. And as I mentioned, approximately 80% of them are developed within house. When you look at some of the things that we're focused on and e commerce comes up a lot, our team's done a really nice job on our website over the last 2 years.
We've replaced our platforms. We've developed a site for Canada. We've enhanced the U. S. Site.
We've implemented a new search technology. And you look at I look at e commerce and it's really it really does boil down to us for transactional versus strategic. I've had a number of meetings with large customers in the last few days. And our customers are not transacting. Our large accounts contract customers are not transacting so much on our website as they are in an integrated environment.
So it's more about the value add that we have within our website to be more strategic than just the transaction. Most of the revenue is flowing through that strategic integrated environment. And so we have replaced, added a lot of features, functionality. Fast360, I'll jump into a little deeper here in coming slides. But what Fast 360 does is it really it illuminates the floor plan, the customers' supply chain, so they can see what we're doing within their business.
They can run their own reporting. There's a lot of customer management tools within it. And that's important, especially in an integrated environment because the customer wants access to information. So we've spent a lot of time investing in our e commerce or we brought it back we brought it up to speed, but we've really focused a lot of our new investments within our digital strategy, With about 74% of our employees being customer facing, they're in front of customers every day. We capture a lot of information.
We're in front of the customer. We see a lot of things. And so for my team, what we focus on is how do we make that process easier, more efficient? How do we drive more productivity there for the customer as well as for our employees, okay? So we do focus on our mobility strategy, developing apps.
We've launched a web based POS system over the last 12 months so that when our employees are out in front of customers, they can answer questions on the account. They can do quotes. They can interact with supply chain. They can get quite a bit of information there in the handheld. So we're going to continue building on those themes.
I can answer questions on that later. But it's really the person closest to the customer being well armed with information and being able to solve problems, okay? So a lot of the digital strategy is just beyond e commerce. It's really more of a mobile strategy. When I look at our development focus today and you've heard a lot of different speakers from Fastenal and as Holden reminds me, we really provide the ice that everybody skates on, right, within IT.
So Walter spoke about logistics. We for us, it's we have a warehouse management system, an order management system and a truck management system. And so that really helps us illuminate the supply chain so our employees can see where products are at, our customers can see where those products are at and how do we do it more efficiently. I think he may have discussed the Lyft project with you, moving that closer to customers. That's challenged us in a lot of different ways on how we handle or will handle 3PL type opportunities in the future.
But we really stepped back from our existing systems and really looked at what do we need to be able to do over the next 12 months, 3 years, 5 years and beyond to really leverage that logistics because it's such a strong component of what we do and what we offer our customers. Inventory solutions, I'll spend a little more time on this, but really this is going to be not just the vending topic, but it's how we manage products. And there's a lot of different things we're doing beyond vending to do that as well as things that we'll be introducing. Again, I'll spend more time on that. Data exchange, you've heard from customers today, you'll be on the show floor.
We capture a lot of information. So for our customers, it's about how we provide them with that information and they make decisions based on it. If you're dealing with multiple suppliers, it's really hard to consolidate information. The industry is complex in nature by the number of SKUs that are out there and you want consistency. Within a lot of customers, they're not even on the same ERP system in some cases.
So they really look to supply chain, who can drive more efficiencies within our supply chain, drive more visibility within that? How do you capture information? Is it consistent? If you look at like a POS system, one of you had mentioned, we can provide the same POS system throughout the world and it may be 24, 25 different versions, but the sources of truth are the same. And so we can consolidate that, we can give good reporting.
And so integrating that data with the customer systems is a key component of driving whatever behavior they're trying to achieve through cost savings or efficiency gains, whatever it may be. Supply chain analytics, I would say analytics in general, but supply chain is really about we understand the industries that we sell to, sell through. We understand who our customers are and what they're doing. And then when you look at the products, how they procure and how we service that, we want to move products closest to either the customer site, the point of use or to a neighboring distribution facility so that we can have the product before the customer needs it. We know if they're in this industry or this area has these types of prospects or whatever it may be, it helps Walter and his team better class products, it helps our product team better decide what to source, what to spend time on.
And So really we spent more time on analytics and giving providing that information to our logistics teams, our product teams, our sales teams, etcetera. And I think when you I look at supply chain analytics along with inventory solutions, because if we're evaluating the means by which we distribute the product at the customer site, Maybe it makes a lot of sense for this product to be vended, maybe it doesn't. When is it most cost effective and what is the best means to manage that product for the customer? So when we're having these meetings, quarterly meetings or QBRs with customers, it really is about bringing that data forward, showing them what's moving. And I also would kind of correlate it to planned and unplanned spend.
So it's the more they can move into planned and obviously a bill of material is going to be the most predictable spend that they have based on their forecasting. But we want to be able to do that with their MRO product as well. And when you look across the whole enterprise and you pull one supplier in that can help them put that puzzle together, we're well positioned to do that. And we can give deeper levels of visibility because many times we're bringing it right to point of use and it's being managed through different means. Mobility, I mentioned, we spent a lot of time and I'd say this is an area that we've lagged in.
I think historically we struggled with it a bit. We've really come on strong in the last year, year and a half in this area. And we're going to keep investing here to build out our mobile platform. It's been focused predominantly on our employees today and driving that productivity efficiency. And some of the projects we're working on right now are equally focused with providing an external mobile capability for the customer because some want the ability to manage it on their own.
They can do a lot of that through the website, but I think it needs to be also presented in a mobile form and that's some of the demand we're supporting. Industrial services, I'm not sure if that topic has come up, but I think about a lot of the things our department does and it's really around products, it's around solutions, it's around services, it's around logistics and then it's around reporting. So services are that if we're able to support 13 different service types associated with the products we sell, I'd say today we don't do a great job of presenting that in a digital form. We do it, we execute on it, we do a nice job. But if it's a small percent of our revenue, I think about the percent of revenue that it represents and maybe the opportunity it represents.
And I'm not going to tell you it's huge, but if you're a customer and you can't get those services with the products, the percent of pain is greater than the percent of the service offered. And so being able to really tie that whole solution in for a customer from product solution to services to moving to reporting is really what our customers that's the demand our customers are putting on us to provide them with. If I look at Fastenal today in a facility, this is really things that we're executing on today that our customers are consuming. And so if I start with bin stock, it's about as traditional as we get. And what I'll show you is that we've kind of digitized this process so that a bin stock is going to be a fixed number of locations and parts in it.
So think about part and location association, and we can track that at multiple levels. Companies want that because they want to know from a GL standpoint where these products are going to. In a bin, I can tell you that it's here. It's got a min max associated with it. And I can tell you the last time I delivered it.
It's not smart. It doesn't know how many what the quantity on hand is, but it gives you visibility to what might be out there. What we've done is that through Fastenal 360 is we've taken that logic, that concept and said, you know what, when your employees are online and you're searching for a part, we'll show you that part. Before you buy it, hey, it's over here in Building 3 in this area. We also use the customers' naming convention for their location.
So when they're on fastwell.com, they're seeing familiar labeling associated with the local plant, okay? We do the same thing with vending any location so they can search within familiar attributes. When you go down to scale, it's like the other extreme. Not only can I tell you where it is with on your floor, I can tell you how many pieces are in that scale? You've got 72 pieces.
You can see live inventory. Infrared is more of a and it's out there within a large number of beta customer sites today, but it's more about I can't tell you exactly you have 72 pieces, but I can tell you that your inventory level is either green, yellow or red. And that suffices and it's a lot more cost effective than scales. If I set down to RFID, it's more about I have a 2 bin system and a bin is empty and I put it over here in this tray and that triggers the reorder point. So it's a good visibility for the customer.
It's also a good efficiency gain for Fastenal because I don't need to run out there and check it. It's notifying me when I need to run out there and fulfill that bin. So that's kind of the some of the standard things that we do within a lot of our OEM environments. And you can imagine a lot of those are faster driven, but they're also component driven. You step down to vending, it's kind of when the game changed is that now I'm dealing with user management.
Not only do I know who did it, I can set restrictions, I can set parameters for quantities. I've got live visibility to existing inventory levels. And so when you build off that concept, maybe it's a locker, maybe it's check-in, check out. It could be a lot of different things. But again, it's that visibility that that product is there when I need it and I can go check that on fastenal.com in Fastenal 360.
Okay. So again, e commerce and digital solution, our customers don't just want a website to transact on. Most of them do not, okay? They want to be able to go in and they want to see things that are familiar to them and they want to see their supply chain. And some are working to get that through ERP, some are utilizing it through Fastenal today.
If I step ahead, what are we working on? I'm always glad when there's not a lot of sales people in the room because they start selling it before IT can get it out, right? But maybe some of
that applies to this group too. But
everything on the left is today. Everything in the future is it's the concepts of what we're working on. So I'll give you some examples. If I can take that 360 concept and I can put it through your plant on kiosks, then your employees on the floor can find products when they need them. Maybe it's asset management driven.
So we're working with a lot of different areas right now because customers, if we're managing all these products from an asset management standpoint, whether I'm doing it through RFID or near field communication or through BLE, that mobile cart might be moving with products on it to support different lines. I want to know where that cart is. I want to know where those parts are on that cart. I want to see it now. I want to see if it moved.
I want to know if it's low. So that production floor is very dynamic and we have to be able to provide visibility to that floor. A lot of these things you probably don't associate with Fastenal today, but these are the types of things that our customers demand from us. Our customers are some of the biggest producers within the world, and so they challenge us with these topics. They also work on these topics themselves.
So we're in a unique position that some of the most innovative companies in the world are customers, and they share their challenges with us. So from an IT standpoint, it's exciting because we kind of we get a nice backseat to what types of things we're doing to innovate. In many cases, we can help them innovate faster. So we very much appreciate that relationship. And coming through sales, for me, it's been great Access Point, being able to work with customers from an IT perspective and work with them on their challenges and their goals.
I look at some of these other products, it's more about reorder points. It's about how do I get that customer to that location where that product is faster? How do I give them visibility? And then it's mobility again. How do I put that in the hand of the customer or the employee on the floor and give them visibility?
So all those capture points, the customer wants visibility to that. We provide that. Many competitors are relying on 3rd parties for delivery. They're perhaps not even going in the back door. So when you think about product is a component of what we do.
It happens to be there, but it's everything else that comes with that product. So we have to do a good job at documenting that, providing data back to the customer. And then what they do with it is really more about what they're working on for their business goals. I mentioned asset management. If I think about a job site, this stuff translate, it's not just a plant floor.
So if you're touring the floor here during the show, you're probably going to see a lot of manufacturers that you're familiar with and you're going to see a lot of things that they're offering from a technology standpoint for better visibility to assets on job sites and products on floor, service components. And I just want to remind you, those are all things that we do, but our customers are not looking for manufacturer partners to do that with unless the capital equipment is of a certain expense level, then it's an expectation. But for us, we have to be more supplier agnostic. So we work more on the components that we can service any of these products. So if you go down and look at the tool manufacturers, every one of them has a product that they're offering out there, but we're selling all those products.
We have to have the same solution to support it regardless if they use that manufacturer's product or not. So just keep that in the back of your mind as you walk the floor, you'll see some cool things. Those are many of the same things that we work on or we have in test that we have with customer sites today. But whether we're moving a vending machine on a floor, whether we're putting it in a Connex box out on a job site, whether we want to show what asset is where on a job site or if it's left the site or if a van is left and I'm leaving a tool behind. Those are the things that we work on.
Those are the things that our customers expect them to provide them with. And so if you think about the progression of what you would want to see running a facility, running a job site, those are the types of things that we're challenged with. I missed anything up there. And again, it's how you report back. They want customers want visibility to that.
Productivity, so right now we're obviously focused on not just customer productivity, how do we free more time up for our customer, but productivity within Fastenal. So Fastenal 360 has really helped us with our customers providing them more line of sight to what's happening. Bill and his team, obviously, they're connecting quarterly business reviews with customers. We're showing them products that we move. We're showing them different ways that we implement accounts.
It's kind of all the things I was showing you, they're a la carte. So they want to know what's happening throughout their plants and what happens in their plants, I'd say, principally is the same expectation. How they achieve that, they do it through many different ways. They do it for many different good reasons too. So we're the company that can capture that information, bring it to them and help them make decisions on it, but we can also act on it.
We can implement it. And I think that's a critical component. It's not just about that part and that price. It's very important, but it's also about the quality system built in behind it. And so our team really focuses on the traceability and
making sure that we're providing that visibility
through the whole supply chain. I I may have had a milk run where I'd go out to this customer, I'd go there every Tuesday. Well, now I know because the devices are telling me when I need to go out there. It's a much smarter way to manage our supply chain. It creates a lot of efficiencies.
And I'd say that we did a lot of heavy lifting probably that was unnecessary for a long period of time, just brute force going out servicing and maybe being too habitual about some of our patterns. But now we're being smarter. We have more notifications that tell us, hey, this is getting low or we really try and pair the fact that if you're going this way on these deliveries, you might want to stop by and see these machines or you might want to go over here and service these bin locations. So again, whether we're eliminating that supply chain for the customer or for the employees in the branch, it drives productivity for both parties. And that's really what we're looking for is that win win.
On that note, Holden, I think that's what I have. Are there any questions?
I guess one question that comes up is as you think about all the data you're collecting, are you giving it up at the enterprise level so that you can do better demand management at the C suite? I mean are you taking all of what the data you have and you're providing to your clients and customers, provide making them make better decisions? Does it allow you to make better decisions across the network? And could you just give some tangible examples of that and where you are? It does.
I think
demand from data grows every week. So it's really about your data governance and how you manage that, your definitions behind it and making sure that what you're looking at is exactly what you're looking at. So those are the types of things that I work on with the leadership team. But they absolutely are looking at data every day. How do we make better decisions?
What's a better way to serve? What are we seeing for trends within what may be moving where and why? And it could be industry driven. It's product category driven. It's really kind of the crossroad between the product, the customer, the industry and what we're stocking and moving within our distribution centers.
But customers, obviously, more and more, that's a demand from the customer too. I think we're uniquely positioned because we capture more data points than most companies are able to. I don't know if you want me to.
So sort of two questions on the Internet strategy. First, you have a public website, but I'm wondering do you actually go after non relationship selling? Are you paying for Google searches? Do you even want that customer?
I mean, do we want that revenue? Of course, we want the revenue. We have done some pay for search type things and we've seen success with it from time to time. So if there's certain inventories or segments and things like that, our marketing department with the product group, they do run those things from time to time. I wouldn't say we're investing a ton of money there.
I think it's more about that integrated relationship. And you hear a lot about, we integrate with a lot of marketplaces, a lot of P2P sites, punch outs, the a lot of EDI integration. That's more of our e commerce focus and it's also a much higher percent of that e commerce revenue. Right.
So then to that second point, some of your peers have a much higher percentage that goes through e com. Yes. Right. Yours is still, I think, below 10%. So I just I think I wonder, is it more efficient if you can train your customers to buy through the punch out catalog versus your more labor intensive model that you have today.
My question is, should you look a little bit more like those peers?
Well, I would say it depends what your definition of e comm is.
Take out vending. Take out vending.
Yes. If you take out vending or FMI or the way it's really moving planned spend. How are you moving your unplanned to planned and how are you reacting to your unplanned spend? So if should we be and I guess your question is, should we be going more after the rogue miscellaneous spend that's out there? I think our customers expect us to be more strategic in nature and move them away from that.
I have more customers that I go to meetings with that are talking about shrinking the offering versus expanding the access. So it's more like, hey, look, you know this is what we buy. You know our bill of materials are made up of these things, you know within the eightytwenty on our MRO product that we should be using these things, I don't want you to make it easy to go outside of that box to purchase. So the more customization we build within our catalog offering for a customer, the more strategic in nature it is about the discipline they might be trying to drive through their facilities. So they don't really want 1,000 gloves.
They might want 7. But then you look at how do you provide 7 across an enterprise with 3 50 locations. So I encounter more of that than I do, I need you to show me 3,000,000, 4000000 SKUs that I can have access to for spot buy. There's plenty of companies that can do that.
Hey, John. Yes. Just curious what if anything you're doing around pricing. I know a few years ago we had the price guidance system, but especially now as inflation is picking up, it's kind of top of mind. Anything you're working on to kind of enable the frontline guys to make better decisions?
For us, IT, it's more we display the result of the business' pricing plans. So yes, absolutely, how do we provide visibility to what's happening within the pricing environment so that the branch can react locally or Bill and his team can react locally to what we're seeing within industries. And so that is a tool those are tools that we're always working and developing on, whether it's in our POS system. I mean, a lot of those contract customers are fixed contracts, so they fall within periods of time where certain things can activate things. But there's a large percentage of our revenue that also is locally controlled and managed at the branch level.
So it's more about giving them the right tools to arm them to have that conversation with the customer. And yes, it's always it is and yes, definitely an important topic.
Nothing else for John? No, there you go. This may be a bit out
of left field, but do you have a view on self driving trucks and adoption at Fastenal? Thanks. Yes.
I mean, we you got
to think about all the trucks and semis that we have and we're the large companies that are testing those things, we do meet with, we do discuss with them. So I think I could tell you that Walter could answer that question better than I can. But it's absolutely something that he's looking at. I don't think we'll develop that in house though, just for
I hope this doesn't sound insulting or anything, but what you guys are doing today is these are awesome projects and it's value in the data and turning in information people can use to do business better. But if you think out like what is your stretch goal or what's the stretch vision? In 10 years, what does the customer relationship look like when you've added this much automation?
Do you guys have a vision for that? Yes. We talk about those things often. That's not I don't it's something we talk about all the time. It's I think you have to if you step back from Fastenal and you look at the products, we are constantly expanding our products.
Our customers are challenging us to offer more products, whether it's 3PL and other versions of 3PL that don't have names yet that they're asking us to do. It's supply chain and logistics. We move that product in house, 90% of that weights on our truck. So when they look at us or we come on-site, on-site, the team has more time to really work more strategically with the customer and you take that supply chain from wherever it may be in the world and how do you manage the sourcing, the quality, the checking before it leaves, the receiving through distribution to point of use. So those are the things that we think about and work to develop systems that best support that.
And then I think when you want to think about the second and third level of that, it's more about the customer wanting to have more ownership in that process. But we have to make it transparent. We have to make it frictionless. So it's a great question. We work on those things, discuss those things often.
And Walter, I think, he spoke earlier this morning. I mean, he's very, very in tuned individual. So he challenges us all the time.
Any other questions? Yes. Just 2 more add ons.
I guess one question that would come up is, I mean, obviously you cited very innovative customers that you have and we can we don't need to cite a particular innovative customer, but a big deployment of your vending is with that customer. The customers like them or that customer in particular, have you learned anything from how they're looking at their data, the decisions they're making? Is that helping you inform better decisions? And I have one follow-up. Yes, absolutely.
I can think of 2, 3 customers that you can go to trade shows, you can go meet with industry groups, you can but really when you get in a room with 2 or 3 trusted customers and you talk about the challenges that you face and where they come from and what you're doing from a system standpoint to combat them, they're very fruitful conversations. I would rather sit in that discussion than some of the other things that are out there. But there's absolutely a handful of customers that deal with some of the same dynamics and challenges that we do. And we've got very open relationships with them as to how we solve problems.
And then I guess as a follow-up just back to I think Ryan's point. I mean if online is out there, I mean, to be charitable, I think your online strategy, to my mind, looks a little bit like benign neglect. But there is opportunity. If there's low hanging fruit for investment, why wouldn't you just make that level of investment and grow that business more? I I guess what is the opportunity cost of maybe putting a little more marketing owned phenopics behind that if there's a pretty decent return on that?
And I
think I don't know that it would be fair to say that we haven't. I mean we've replaced our search, the platform, a lot of the functionality, a lot of it is geared towards more of that strategic relationship, but adding parts into that, optimizing our search, a lot of the content that goes behind parts is that we continue to drive and we work very closely with a lot of the suppliers that you'll meet downstairs. It's we've added we've enhanced our product information management
and our
supplier portals. And so that allows our customers to work better with us and give us the content that they've done, all the different things that you would associate with maybe the distributor, the manufacturer has done the work. It's more about getting the content, the video, the images, whatever it may be from them and then making it easy for our system to consume that. So that's a I don't want you to think we're not doing that. We're doing that all the time.
That's a daily, all day activity. Our e commerce strategy is linked to our branch network today. So our branches have full line of sight to whatever is happening within their marketplace through our website. It tends to lend itself better to more strategic relationships, but it's not that we're not getting Spot buys and companies aren't transacting on our website, they absolutely are. And we know and obviously we're shipping to them.
So we know who they are, where they are.
Okay.
All right.
John, thank you very much.
All right.
Thanks, man. All right. You all finished with our leadership a little bit early. Dan is not in here yet. He'll be in probably about 10, 15 minutes.
But I'm happy to field questions on anything that you saw here today. And as questions come up, we'll hand you the mic.
So Holden, on incremental margins, you guys have said that you can get back to call it the low 20s, right? I know Q2 it sounds like there's some irritants to that, but we heard a lot of things today on sites running in the 2018, 2019 range, clearly growing faster than total company. Freight, it's going to take maybe 6 to 12 months to kind of fully recoup that. Can you help us get comfortable with how quickly you can get the incrementals back above 20%? How reasonable that is.
Well, and one of the things hopefully that you heard today as well is that over time, right, the on sites in particular, we think that we're going to be able to leverage that business. Your question is not over time. That was obviously the thrust of Chris Van Dallen's presentation. But from our perspective, the last year, we talked a lot about the increase in incentive pay and what impact that had on our model, which is fairly typical in the 1st year of an expansion. And the expectation we talked about Mansco, obviously, having that impact.
And the expectation was always that by the time you got into Q2 of this year, you begin to anniversary some of those expenses and you will. The amount of growth that we had in incentive pay over the last four quarters has been significantly greater than I would expect to see over the next quarters. Mansco will in fact anniversary. Now about 6 months ago, if we had this conversation, I would not necessarily have anticipated sort of the challenges we have around price cost and those have sort of emerged differently. But when I think about how the Q1 played out and how I think the rest of the year played out, I think about the fact that I got 50 basis points of SG and A leverage out of occupancy and out of just general corporate expenses in the Q1.
2nd quarter, as you put it in irritant, we do have very difficult gross margin comp, but that 50 basis points in the Q1 was offset by about 20 basis points of leverage on headcount. If I get past the 2nd quarter, into the 3rd Q4, I continue to believe that we will get occupancy leverage. I continue to believe we'll get general corporate leverage provided we continue to have the growth that we have. But at that point, I think that we can begin to leverage headcount more. 1st quarter, we grew headcount.
We grew employee expense about 14%, a little more 14%. Roughly half of that was incentive pay and Ensco contribution. And I think that those impacts will begin to mitigate as you get into the second half. So I'm not going to predict the number, but if I think about the cadence of SG and A expense, I think there's reason to believe that some of the leverage pieces that we had envisioned all along, even in the second half of last year, those should begin to become more visible in the second half of next year. Question about next year?
Dan, you want to come up?
What's that?
Say that for next year or this year?
2018. Okay. Yes. Dan has come in as well.
Okay. Thank you.
Hi, everybody. Good
to see you.
My question is a little bit longer term, but along the same lines as what we've been talking about here. First of all, Holden, I thought it pretty funny that Martin provided you the mic drop moment there with the answer to the Amazon question.
That he's the riskiest of the presentations because I had no insight into what he was going to say. I was not displeased with that answer.
Well, extremely well.
So the question though is,
all that we've heard today, it seems like the common thread among all of the speakers has been this drive for value add to get close to the customer and provide more value. And it just seems like increasingly the company is getting more information, higher predictability, product closer to the customer, all these things. What I'm wondering is if we look out 10 years from now and you take these things to their logical extreme and you have much better information, you're able to leverage your labor, your freight, your inventory, all of those things very nicely. But the trade off, it seems in each one of these things we talked about was that the gross margin is lower because it tends to be bigger chunks of business or that it's going out to bid or something like that national accounts or on-site, etcetera. So what I'm wondering here is if you look at that spectrum between perfect information, being able to leverage and manage those costs in house most efficiently versus what I think it was Jeff referred to as playing catch.
When you look
at that trade off, where
do we ultimately end up? You showed the chart that showed the EBIT margins climbing over time. Are they going to be higher? Are they going to be at 20% or are they going to be at 15% I'm just trying to get a read on how you see that trade off over time?
You care if I, Simon? Be my guest. No, I'm coming in a little bit of an awkward situation when Holden City won't do an Investor Day. I said, Holden, I'll support you doing an Investor Day completely. And the reason being, over the over 3 days this week, we have just shy of 6,000 customers here.
And my number one priority this week, I love you all dearly, is them. And so the last few hours I've been in with a group of large potential customers. And so hopefully I'm not going to walk into anything that came up in one of the earlier pieces that I stepped inadvertently into a landline. So I'll try to be conscious of that and Holden will kick me if I get close to 1. When I think about what we're doing let me take a step back and I'll answer your question.
When I think about the folks that have been talking to you today. Hopefully, one thing you take away from it is the excitement that I genuinely feel in the talent pool we have in this organization and our ability to bring a different type of value to our customer. And I believe every day the mode around our business continues to widen. I don't believe it's shallow. So I'm really excited about that.
When I think about getting deeper and deeper into On-site as an example, I look at On-site and say, our regions in the upper Midwest have the deepest penetration in their business today with On-site. Both of those regions have an average branch that isn't doing 120. They have an average branch that's doing 160 to 170 to 180, somewhere in that neighborhood. So there's some pathway to profit leverage that's occurred there. So I won't discount that.
But in the case of our business in Wisconsin and Illinois, that region, over 35% of the business is On-site today and their gross margins are lower than the company. In fact, we've talked about that in the past. If you take a $100,000 branch and grow it to 150, you're going to give up a 100 basis points of gross margin, because $150,000 branch has a bunch of customers that do $20,000 $25,000 $30,000 a month. But we also in that process going from $100,000 to $150,000 we shed 400 basis points of operating expenses. So it's an incredible business.
Our days of inventory go from within the branch itself goes from like 110, 120. There's another 60 days of distribution on top of that, but 110 to 120 down to about 60 to 70 days. So your returns are incredible. Our operating margins, despite the fact that over a third of the business is on-site, our operating margins are higher in Wisconsin, Illinois than they are in the company. So I can look at that and say, here's concrete evidence that we could expect an operating margin that's meaningfully above where we are today as a company.
And so I think the strategy can yield that. When I think of our vending platform, when we started that a decade ago, I remember a lot of conversations that we had where we looked at it and said, what's gross margin of vending? At that point in time, the gross margin of vending was about 39%. And a lot of discussions about, geez, that's going to destroy your gross margin. And okay, that mix will affect our gross margin.
But you had to remember that vending was largely going into and a big piece of our vending today goes into national accounts. National accounts don't run at 50% gross margin. They run-in the low 40s. So when you looked at vending, what it was doing, it was a lower margin for two reasons. It was going into a larger account base and 2, it was safety products, which have an inherently lower gross margin than fasteners.
But what we did over time is we had discussions with a lot of our suppliers that go into the vending channel. And we said to them, hey folks, here's what we're trying to accomplish and here's what we need help on and here's how we're going to set up our distribution to support vending. And part of what we need is we're going to drive volumes. Let's figure out some ways to shed some cost in your product. And we did a number of things.
We also said to them, we're going to have a Fastenal brand as well to complement our business and some suppliers could see that as a threat. What I could say to every branded supplier, I can tell you this, wherever we have a great private label of an exclusive brand complement, our branded customers' suppliers grow faster because we're a player in that market. And so we've raised our gross margin over time in that business. Today, about 20% of our vending sales are a Fastenal brand. We've done a nice job continuing to aggregate that branded spend into fewer and fewer suppliers.
And I suspect that Fastenal Brands with component will continue to grow as part of our discussions with customers today is here are the suppliers we really want to support that are the brands that are important to you. Here are our brands we want to support that has a fit, form and function. You decide what makes the most sense. But let's not have 120 different suppliers for gloves because that doesn't bring value to our customer. And so you do things like that to keep improving the gross margin profile, which changes its ultimate impact.
Same thing, the organization I joined 20 years ago, 3% of our business was national accounts. Over 80% of our business was Fasteners. Look at how that's changed over the last 22 years. And not only were we able to manage our gross margin, our gross margin is lower than it was 20 years ago. We were also able to manage our operating expenses and you have a business with a materially higher operating margin and better returns.
And so I think it's a great trade off, but we're not venturing into the waters of on-site without some examples already in our business, where it really works. One of the most challenging aspects in the short term to doing the on-site is if you think about it, the pathway to profit leverages nicely as we're adding revenue because we're probably in the same building, so you're leveraging the occupancy. You are able to leverage the people. One of the most challenging aspects we have with the branch network today, so I have $150,000 branch operating at 25% just as an example. And we pulled 30,000 out to go on-site over here.
We've just had a massive deleverage of that branch until we catch back until we grow back into that. So we're experiencing some of that right now, but I think long term, the ability for us to have operating margins that are better than they are today, there's evidence to say that's a stronger probability of outcome than being lower. In the short time, there's some growing pains. And some of those growing pains are self inflicted. When I look at Q1, there's some things I'm really proud of about Q1.
In Q1, we demonstrated culturally the change that we have brought to the organization over the last 2 years. We signed 100 on sites. That's something we couldn't have dreamed of 2 years ago. But we moved our mindset and our discussions with our customers to make that happen. The second is, I'm a bit frustrated and I expressed it on the call last week with the fact that of all these pieces we did really well, 15% of our businesses are locally priced faster.
We just dropped the ball. That's a leadership issue and that's squarely on me. So I'm a bit embarrassed by that in all honesty. And I shared that embarrassment with our team. We challenge each other.
And so our team knows that there's a frustration there, but that's not me yelling at them. That's just me saying, hey, you know what, I didn't push you guys hard enough. I didn't push the team hard enough. We can't let things like this happen. The other aspect, Holden is right on the operating expense leverage piece.
I'm a little bit embarrassed that we grew our operating expenses 14%, I mean our labor is not employee related, yes.
We're doing
a whole bunch of things right now. And maybe a piece of that is, they have a new CEO that is trying to do this, this, this, this in about 20 different places, something Fast and Has Been Guilty Over 50 years. And we got ahead of ourselves with expenses a little bit. I'm but I guarantee you this, if we hadn't dropped the ball a bit on that chunk of business that's fasteners, we probably wouldn't even be having this discussion because our earnings we'd leverage our earnings. It had been a different call a week ago.
Our folks would have heard a different call from Dan when I put out video, but we still would have been talking about 14%, 14%, careful guys, slow down a little bit. But I answered more than your question there, but since I haven't been in the right and then I do want to touch on Dan's first point because that was the point of the chart that I put in my preamble, right? And I get the question of what as national accounts can grow in the mix, is that going to be a threat to your operating margin? And the truth is, national accounts have been growing in our mix for a long time. And it wasn't until 2011 that we became a sustainably 20% plus operating margin company.
2011 is not when we started national accounts. We've been doing national accounts and growing them in the mix well before that. It did not limit our ability to sustain a 20% operating margin. As Dan mentioned, Wisconsin, Illinois has more Onsites than any other region in our business. It's north of where our margin as a company is today.
Operating. Operating margins. Yes. Signing Onsites in that region has not limited the ability for that region to become a better than 20% margin business. And then the point I made this morning in that slide is, what's the difference?
At some point, the level of investment we need to make stabilizes. At some point, we get better at doing that business. And as those things happen, we begin to leverage the SG and A. And that's why I showed you a 30 year chart where gross margin has been going down for 30 years. That's not new in our growth drivers, But our SG and A as such as sales have been going down for 30 years as well.
But eventually on the on sites and again, it was shared that our older Onsites, our pre-twenty 14 Onsites, they are not diluting the company margin at this point. We just need, but we're adding so many at such an accelerating pace that at some point we're going to get to the point where average unit size will go up to where we'll be spending less incrementally every year to build up that business and we'll get better at running them. And at that point, we still think we're going to have a very rich operating margin.
Hi, this is maybe a question for both of you, but probably more for Dan. As you think about on-site and vending, even bin stock, obviously, there's a cost to increase share of wallet, a customer's a cost to develop new business. And I'm wondering how your people maybe cross sell one of these things. If you have a bin stock location, can they cross sell to that same customer vending? If you're on if you're a bin stock location, can you cross
sell on-site, what have you, that sort of triangle. Can you talk about that a little bit? Yes. First off, it's think of all these as an extension of our existing network. So vending is an extension of our branch network.
Binstock is an extension of our branch network. A customer can easily have both. And a lot of times it depends on the product that's being consumed and the rate at which it's being consumed. So the one aspect of vending, a lot of in stocks might be fasters. Economics of fasters, the vending doesn't bring the same value in my mind to fasteners as it does to the other products because they're the nature of how they're consumed is different.
But taking some of the supply chain aspects of vending and applying the bin stock, and I'm sure John got into some of that, that makes a lot of sense because that's about having a more efficient supply chain. But as far as the person being able to sell 1 or multiple, absolutely. And one of the transitions we've had to make as an organization is picture you're a branch manager and you're the manager of that $150,000 branch I just described who's about growing their business And we talked to branch managers and say, hey, we'd like to take this $200,000 or $301,000 business and move it out. And you're sitting there like, woah, woah, woah, woah, woah, woah, that's my customer. That's my business and I get paid off that and you're going to move it into another business and I stop getting paid off it.
So there's a natural conflict within our organization. So there it's sitting down with the branch manager and saying, here's how we're going to reward you for that to make it a win for you and a win for the customer and a win for Fastenal. And it's aligning that because if we get 2,300 branch managers aware of what it is and seeing it as, wow, I've seen numerous examples of branch managers say, I like this a lot and I think I'm going to go with the on-site. And this Joe or Sally or whomever that's in the branch who's my right hand person, they can step into the branch because I think this is the right opportunity for me and my mindset how I go to market. But the ability of who can sell it, you can sell both because they're just they're different modes of fulfillment of supply chain to the same customer.
And I think to a point that John made, think about the amount of data that we have. And data can be zeros and ones, but data can also be the number of people we have touching the customer on a regular basis. 74% of our employees touch the customer directly. We have 21,000 employees. That means they have over 15,000 employees that are directly touching the customer.
So when that employee walks in and he fills that bin, he's also seeing what other competitors might be providing for that providing that customer how they're doing it. And he's there having a face to face interaction and he's essentially collecting data on how that customer is operating, who they're operating with and he's there to have that face to face conversation of how we might be able to do it better. And if all we're doing is doing bins and we're supplying fasteners into that bin, he is going to be on-site looking for, well, who's doing the safety products, right? Who's doing metal cutting? And he's going to be having conversations.
And so as Dan said, we try to create an integrated service model. We want to sell you stuff that you get through bins. We also want to sell you stuff that you get through vending. And because we have so many people in front of the customer shaking hands, having a conversation every single day, we're in a position to seek out that business and make that pitch all the time in a very personal way. And so like I said, we can integrate all of these services.
And I think the reason we had Jeff talking before Chris is because it often times it starts with that bin and that bin turns into a vending machine. And then as you get deeper and deeper, it might turn into an on-site or it might not. But that integrated solution goes hand in hand with our ability to collect data because of all the people we have touching customers on a regular basis. So yes, that absolutely is integrated.
So I think I understand the strategic importance of On-site, and I understand the natural maturation of those relationships and how that impacts operating margin. We used to get store cohorts and you could see that kind of maturation as stores matured, but now you're pulling revenue out of the stores. And so I understand why that's not so relevant. But I think On-site, the maturation of On-site is relevant. And so I wonder if you would consider giving us the same sort of information we used to get on stores, both growth and operating margin by cohort for On-site.
And that would help us to understand what the natural maturity of this business is.
I think particularly when you have a small number of a relatively small number of customers, I think giving that information in the early days of this initiative, not all customers perhaps are that eager to sort of have that information put out there, right? I mean, I'm not sure when we started giving that information on stores, whether it was early on, whether it was much later. But are you talking about the pathway to profit or just the growth information we started 30 years ago? Dollar per store, right, that sort of information, right?
Well, you showed cohorts
by years, by groups and what the growth average daily sales from those growth numbers
were at
the stores.
And there's always a balance. We as investors are being asked to come along with a new strategic vision that's been maturing over the last few years.
And I totally understand that, and I'm totally supportive
of that. At the same time, it would be very helpful if we see the maturation of On-site by cohort both in terms of profitability and growth.
Two thoughts to that. 1, one of the things we attempted to do starting several years ago when we started talking about our top 100 customers. And we're trying to frame up the business a little bit. So our top 100 customers are about 25% of our revenue, so about a little over $1,000,000,000 in revenue there. One thing we try to do is capture, okay, we have about 50% of that group growing.
We have 20% of that 50 percent 20% of that 50% is growing double digit. So what we've tried to do is present that in a way that would be indicators of what's happening to this group. So today, I think we're at 76% or something like 75% of that group is growing year over year right now. And on-site vending are big drivers of that. One thing we're very mindful of, I thought Holden might be going here on the first point.
We have a business model that's going to a subset of our customers. So we have 700 Onsites today that's going to a subset of the group Bill talked about because 3 quarters of our I believe it's 3 quarters of our on sites today are to national accounts and the other quarter are to regional counts. We're very mindful of that's a different end market from the standpoint of if we're too transparent, that's an end market that might pay attention to what we're talking about. Whereas when we were disclosing branch numbers 30 years ago, that wasn't an end market. That end market looked at it and said Fastenal is a great supplier for me in Albert Lea, Minnesota.
I don't necessarily A, the information wasn't publicly available because there wasn't an Internet back then. In fact, Elgoire hadn't invented it yet. But it wasn't readily available. And the customer probably wouldn't care anyway. All they care is we're a great supplier and I spend $500 or $1,000 a month.
There is a different customer today and we are mindful of what we do or don't disclose for competitive reasons in all honesty.
Yes. Hey guys. Thanks for this day by the way. I appreciate it. Just two things.
1, can you just talk about how aggressive you plan to be at accelerating the On-site
program? I think the numbers in some respects speak for themselves. We've been pretty aggressive, right? We signed 270 last year. This year, we plan on signing between 360 and 385, and the Q1 was an excellent start to that number.
We have made investments along the way in national accounts in those various areas that Bill Drazkowski sort of shared with you in order to be able to do that. We recognize that as a publicly traded company, we have to balance the interest of profitability and the interest of growth. And we, I think, manage that fairly well. And so we recognize the importance of Onsites as a growth driver. We've invested heavily to continue to accelerate it.
And we haven't necessarily given our plans at this point for what our signings will be in 2018 or 2019, little bit early, I think, for that. But we have a tremendous opportunity. They shared with you what the number of customers that we've identified that could be on-site like that we can address. And it's our interest to continue to invest in that business to grow it. I don't know if you're looking for something specific about signings in 2019 or how what the thrust is?
Well, we'll always take as much specificity as you're willing to provide. But just as we model out some of the dynamics we've been talking about, it would be helpful to have some sense. I mean, does that go to 600 signings next year, 800 the year after that? I mean
just Yes, I would suspect no to that answer to that question. Think of it this way. We're going to push as hard as we can with the things we do, growth drivers, some of the stuff that the folks talked about today, whether it was Walter talking about distribution, etcetera. We're going to push as hard as we can. Nick Lundquist has a great expression when he's talking to his team.
We're going to push as hard as we can within the financial constraints of the business. And that means, folks, let's grow rapidly. There's a financial constraint what we can do. There's always and we've talked about this before, there's a people constraint. You know, one of the when you have a business that's about bringing value directly to the customer in a local fashion, our biggest constraint for 50 years has been people.
And that's why we've created things like the Fastenal School of Business to help be in a position to invest faster and develop our team faster. That's the ultimate gating factor. But within our financial constraints, it's an important one. And we probably lost a little bit of sight of that in the Q1.
Yes. The other question was just about how we should think about working capital intensity going forward. It seems like all the growth drivers are more working capital intense. I mean, we've talked a lot about pushing more inventory into the field, but also I think since the growth drivers tend to be with larger customers and they get better payment terms, I think from a receivables perspective too, there'd also be more pressure on working capital. I mean, any thoughts on how to think about that?
I'd say, if I
take that one. What's that?
You'd care if I take that one?
Yes, you'd like. If I think about the growth drivers that we have today, it's really no different than the growth drivers we've had for 50 years from the standpoint. Our growth drivers have always required a tremendous investment in working capital. And I consider even though lending is fixed capital, I consider that working capital from the standpoint of mentally within our business because it's something that's deployed with the customer just like inventory is. And so we've I've had discussions with numerous of you over the 20 some years that I've been in this role about, geez, Dan, when you guys have 6 months of inventory.
When does that change? And my answer has always been, when we can't generate return on it is when it changes.
If it that's part of our moat.
Part of the reason our distribution costs are lower is we've moved inventory economically as close to the customer as we can. And now we've added to that things like vending. But when I think of something like vending, the inventory going through a vending machine turns faster than our historical inventory. So we traded some inventory dollars for fixed capital dollars in the case of a vending machine. But if those 2 added up are the same as the old inventory number and we can generate a return on it, that's great business.
When I think of On-site, I don't think of On-site, yes, there is an investment upfront, no different than there was when we were opening branches at 15%, 20%, 25% a year and we had $100,000 worth of assets going into a branch. You had $50,000 of inventory. You had a truck, a point of sale system, all these things. And then you'd have a period of time where you lose money. They all took a tremendous amount of resource.
The real question is, can you generate a return on it? Now in the discussion I had with the executives of a bunch of national account customers, that's why I wasn't in here earlier, we had a Q and A at the end. And one of the items in the Q and A and I'm glad there was a question that allowed me to tee this one up. I looked around the room and because the question came up about investment in certain things and some of it included countries we're going into, but it also included assets we deploy to help customers in their business. I said, when I think of what we're doing with On-site and the example that was cited, where we saved $3,000,000 for that customer.
When I think of what we're doing with vending, we're deploying assets into our customers' business within our financial constraints, but within our business and those are supply chain assets that help our customer. But I also looked at that room and I challenged them. I said sometimes you come back with us and say, oh, we love the vending, we love the inventory, we love the on-site, hey, we need to we'd like to pay you 90 days or 75 days or 60 days. And when I think of the value we bring to our customers, and I think this bluntly to their face, us putting assets in the supply chain to support you and close to the point of use to manage that overuse is a great asset that we're putting in place for you. If you ask us to give you an extra 15 or 30 or 45 days of dating, you're asking us to provide something that doesn't bring you any value.
And every dollar we put there is a dollar we can't put here. So I would challenge you not to take us there because it will squeeze down our ability to invest in things like inventory because we have what 2 10, 2 12 days of working capital right now. I'd rather it be an inventory, not receivable. But we get pushed on that. Yes.
But we get pushed back. Yes. And I think over time, as national accounts becomes a bigger part of our mix. I think the odds that our receivables go up from where we are, it probably does. And we're going to work hard obviously to limit that increase.
Again, I'm not sure that that's necessarily new either. But I'm not sure I would agree with you in terms of the inventory intensity, right? I mean, we know that the days are lower on an on-site than they are in the branch. And in vending, we know what the turns are there as well. The fact is these are close relationships with customers to know exactly what they need, when they need it and where.
And so if I think about the last 15 months, last year we reduced our inventory days. In the Q1 we reduced our inventory days. So some of that is no doubt the afterglow of CSP16 and benefiting from the inventory that we inject into the field. Some of it is probably the shifting in mix. But if you're referring to the likelihood that we're putting more inventory into the field through lift, that's a choice that we're making to service our customers better.
It's a choice that we're making to be able to service our vending machines better. When you talk about intensity, look at the number of units we have in the field, that's keep on growing and we need to make sure we continue to service them as efficiently as possible. So that lift decision is not a function of the increased intensity of our growth drivers from inventory standpoint. So I don't think I agree with that. It's a choice to get closer to the customer like we did in CSP 16.
And again, if you look at our inventory over time, our inventory over time has gone up. Our inventory close in the field, in the branches has gone up over time. And our returns have remained fairly healthy and we would expect that those dynamics would remain in force. That's the intention. I take it, I'm going to give Holden a little grace here.
In a lot of ways, I look at what Holden's brought to our table and I look at me in that role for many years and Holden's just a heck of a lot brighter than me in a whole bunch of things. And he's challenging the business in a refreshingly new way that frankly I hadn't been doing in the last few years. I did counsel him on a few things after I saw the slide deck and I said, so you and Walter are going to bring up Lyft, are you? I wouldn't. We haven't even started the darn thing.
I mean, we're writing programming for it. We're giving a lot of thought to it. It started as a discussion about Denver. I was out there looking at that market and our nearest distribution center is hours away in Edwardsville, Kansas, just outside of Kansas City and looked at it and said and came back and was talking to our distribution folks and they said, you know, our vending folks were looking at some ways to better service the vending machines in the larger metro areas. There's 100 large metropolitan areas in this country.
Maybe there's a better way to replenish our vending machines than through rather than through 20 branches in the Twin Cities, do it through several points. Maybe that's more efficient. We're investigating that. And that evolved into let's look also at certain markets where we don't have distribution. Maybe we should have some inventory in there because a typical branch has around 11,000 SKUs in it.
And that branch is and that's the CSP offering, then there'll be some customer specific inventory on top of that. And we looked at it and said maybe in an area like Denver, which is somewhat removed from Edwardsville, maybe we should stop the next 10000, 12 1000, 15000 SKUs. And we're still figuring out what that is in the market, not as a distribution center. If we have if we want to replenish our branches and our on sites and our business, we'll replenish that out of Edwardsville, Kansas, because that's a lot more efficient. But maybe we try this in a half dozen larger metro areas, maybe there's a market for the product right now today and we could supply that.
But the inventory investment for Lyft is in the scheme of all the things we're doing. We're talking about miners in the scheme of what we're doing from a balance sheet perspective. Like I say, I probably wouldn't have brought it up, but he's the one that's going to get the call from all of you when you ask quarter what's happening with Lyft. I won't. But the whole sort of thing, maybe just the overall reach out But I believe there's potential there, but we might find out that, you know what, the market doesn't evaluate.
And we'll pull it back into distribution and we'll go on from there. But it's a very small investment in the terms of working capital.
Two questions at the back. The first question is, I guess amplifying some of these previous questions about on-site and vending. But you're going I think you're admittedly going very aggressively and it makes a lot of sense strategically over the long term to improve the underlying efficiency of the network. So that's I mean, I think it makes pretty good sense. But I guess the question is, I mean, under what circumstances would you have to slow your role?
And in terms of what are the downside risks that you're kind of thinking about with going as rapidly versus history on what you've done in On-site and Vending? I mean, obviously, you create some tension with branches, particularly as you marginal branches will be under pressure, right? There's some other things you got to think about in terms of the growing pains with rolling this out as aggressively as you are. And how do you think about a situation where you may have bending slowing because you want to get the configuration right, in the past. So could you talk about that a little bit?
And I just have one follow-up. I'll look at
it from the perspective I learned from my predecessors. And if I think of Bob Kerlin in his role for years and Will in his role for years, when we moved at something, we moved aggressively. And one of the strengths of being a very decentralized organization is you can do things quickly. One of the challenges when you do things quickly, it can be really noisy. And sometimes that noise comes back of you guys looking at us and saying, hey, we didn't like that noise and all of a sudden, you put up a 2 years ago, if we had put up a 10% earnings growth quarter, you've been high fiving us.
You didn't high 5 us last week. And so part of the noise is that. But the limiting factor will I think will always center on the willingness of our population to embrace change, the willingness of our customer base to embrace change. And I think we've demonstrated over the last 2 years a strong willingness on both parts in the fact of what we're seeing with on-site signings right now. If I think of what we were doing in 2000 and and 8, 2009, 2010, 2011, 2011, 2012, 2013, we were going with reckless abandon in the vending.
And there was a lot of noise being created and there was a lot of conflict within our organization being created by that because we had to change mindsets of our folks. When we first were talking about vending a decade ago, there were a lot of folks within Fastenal looking and saying, we want to do what? This is crazy. And we put our shoulder into it and we kept pushing hard within the organization because we saw that there was something special here that we could provide value for our customer. So never say never on a willingness to slow down.
I think the intensity will probably be so we went from 8 to 12 on sites a year. In 2015, we signed 75 and we went to 175 and we went to 275 and now we're shooting for $375,000,000 I don't know that we'll come out next year and push even harder to go to $475,000,000 I don't know what that's going to be yet. We need to find a place that's digestible for our organization. I don't believe we'll have 700 new on sites in a year. On the flip side, there's things we're doing today.
I wouldn't have believed 6, 7 years ago, 8 years ago that we'd be talking about 22 vending machines, 22,000 vending machines this time or 23,000. And so your mindset changes when you realize what an organization is capable of doing. The fact that we're decentralized gives us the ability to move quickly, but it can be a little noisy.
The next question is a little loopy, but I'll ask it anyway. And you can answer it a little more obliquely if you wish. I'll probably ask it plainly. One of your largest deployments in vending is online player that obviously has some ambition down the road in your space. We don't know what that is.
What's the risk of them or other similar players you have large deployments with just coming up with in house or disruptive technology to yank your vending machines?
In other words, how do
you think about that risk? Because while it would probably only be several a couple of 100 basis points of your accurate fleet of vending, it would certainly be a terrible headline and terrible market signal. So just how do you assess that risk?
It's there. They could anybody could come up with a vending platform. One of the things that I think is special about our vending platform isn't the vending platform itself. It's the vending platform with our branch and on-site network. Anybody could deploy a vending machine to any point in the United States, any point in the planet, and I could monitor it and I could ship you the product.
Is that
a that's like a half
step in the better supply chain. We believe we're the full step in the better supply chain, because what are we doing? We're doing a whole bunch of things every day that are inside and outside that machine. So we're able to channel it through that same network. But could anybody else come up with a vending platform?
Heck yes. I assume I know who you're talking about. They spend $22,000,000,000 a year in R and D. They probably could come up with some things pretty fast. They've looked at what we have for a solution.
They've felt it's a good solution for their distribution centers like a lot of other customers. And but there's always that risk from a multitude of competitive threats out there. Remember what Martin said when he was asked the specific question is, he's like we don't want to I get a box and then that box shows up and he has to deal with the box. If somebody else has a vending machine in there, he's going to have to fill his vending machine. So Dan is right.
I mean the vending machine, we make a really good vending machine. We put a lot of time and energy into it. We get great data off that vending machine. In some respects, you've been buying candy bars out of them for several decades. The value is the machine behind the machine.
It's our ability to fill it, right? It's our ability to take that box and make sure the customer never sees it and yet his machines are always filled. And until a customer wants to get that right or until a competitor wants to get that right, they can put as many vending machines in as they want. They're going to have to convince the customer that he's going to have to fill them. And we have some competitors that that's part of the pitch.
And yet we're the ones that have put over 70,000 of these things into the field and shown an ability to scale it. No one else has. And so we feel like we've seen some of these pitches and our model still seems to be the one that's scaling. So if you think of the example that Bill showed us earlier about the customer that was saving $100,000 a year using our vending platform in their hand protection. The first step on that wasn't about the vending machine.
It wasn't it was about understanding what are you doing and what are you using. And a big part of the value that we brought to the equation was in what you're doing, a cut resistant level 1 glove, it just wears out too fast. And going to a cut 4 glove will get you better performance on the glove combined with the vending. That comes from somebody being in the facility and taking a look at what you're physically doing and saying this is a better solution. That's I'm sure with artificial intelligence and a whole bunch of other things knowing what industry this customer is in, you can do a bunch of that kind of stuff.
That's not an easy thing to do because part of it wasn't just identifying it. Part of it was having that discussion with the customer because they didn't want to make the change. You want me to spend 30% more on this other glove? That's crazy. So part of it was having that discussion and convincing.
And I think that goes hand in hand with what we're able to do as a partner with our customer.
Dan, something you struck me, you said earlier, related to the missed execution near term around the local fastener pricing. And that was you said, I didn't push them hard enough. Have you contemplated looking at compensation structure for whether it's DM level or whomever to require more discipline specific around pricing? And then on a related question, this increasingly is a returns story, not necessarily just an earnings growth story. Yet I think your bonus
I think
it's both, but keep going.
Clearly, but returns is a much more significant aspect of the story than it has been perhaps in the past. I think your variable comp is largely tied to EPS. I think your variable comp tied to net income change year on year. How do you feel about those metrics also knowing that the organization should be focused perhaps on asset turns as well?
I personally like the simplicity of a lot of the programs we use because it's easy to communicate to a wide audience what we're trying to accomplish. There's nothing more powerful than being able to sit down with a branch manager, a district manager, a regional VP, literally grab a napkin and talk about their business and schedule out, hey, here's what you'd make next year, the year after that, if you do this. And so there's a certain beauty and that comes from Bob Corona, certain beauty in having incredibly simple. I'll be honest with you, I read proxies of different companies out there. There's oftentimes I read a proxy for a competitor or just a company in general and I get done and I really have no clue how they get paid.
I think you read our proxy, you have
a good idea how we get paid.
We add $100,000,000 of pretax, I'm paid on pretax, we add $100,000,000 of pretax, I get 1.25 percent of that. If we don't, I get 1.25 percent of that. I could see it evolving over time. No different than it's evolved from what it was when I joined the organization or what it was even 15 years ago. I think it was around 2000 that we started compensating using stock options.
Started for 3 years, we used Bob Kerlin's personal stock. And then when he thought it was okay to do it and he was willing to put the shareholders stock into the equation, but until then he wasn't comfortable enough to use his personal stock. Probably weren't too many companies doing that at the time either. But I've made changes in the last 2 years to compensation programs at the region level and at the district level and at the branch level, and we'll continue to do that. But it's usually trying to surface awareness of things we're trying to accomplish.
And I probably could have spoken more CRISPR earlier. It wasn't just didn't push hard enough. Sometimes that push involves surfacing the awareness to it. When there's lot of things going on in a business and a lot of moving pieces, you're stripping some business out of a branch and moving into an on-site. The branch lot of the branches that we're pulling on-site sell, their gross margin immediately pops up.
Because if you take a $100,000 branch, you pull out $30,000 of business that's at a lower margin. If I'm not paying attention, all of a sudden I can see, hey, my branch margin is going up, this is cool. Well, it should, it's just math. And so part of it is surfacing that knowledge as much as the push. But we'll always look at compensation programs And that's a discussion I have on an ongoing basis with my comp committee.
And not just about me, but I'm thinking about the whole executive team. I'm thinking about our regional leadership, our district leadership, because I share with them when I'm making changes, because I'm interested in their input of pointing out, hey, did you think about this? But we'll always be open to change. It. But it won't change in the next I don't see it changing in the next 12 months as an example or And as important as it is to always evaluate that, it's also important to understand where the challenge came from.
I mean, in the case of that group of employees that we're talking about, think about it. I mean, they we're talking about a bunch of $50 orders that go for some gross margin that was then 100 basis points lower than it was before. And that is captured in their $50 order with 100 basis points down, it's not a really big number. But it rolls up to a big number for the company, because again, there's 13,000 people in the branches making those $50 orders from with 100 basis points down. And that's why when Dan says that it's as much a matter of us making sure we're communicating the importance of what's going on in the field today.
It's just as important not to overreact something and start making a bunch of compensation changes at the same time, right? There's other ways to address this matter. If you think about it, it's a $500 impact in a typical branch on hundreds of transactions. So it's easy to just run right by it if you're doing a bunch of things. And our job is to raise the hand and say, hey folks, look at this over here.
We're not being crisp on our pricing. And all of a sudden you move that $500 back. Let me take one more. There's one more in the queue. Okay.
I'll take it up. Gary?
Dan, thank you very much for letting Holden do this yesterday.
I look, I was really a slide deck. He had some great stuff in there. I was impressed.
Maybe last question. We heard more about international from one
of your customers today than from all of you.
So that may answer my question. But is there a moment in time when your customers really demand that you
do something bigger outside of North America? That moment in time started 22 years ago when we started National Account because all of a sudden you're having a different type of discussion with your customer. It's no secret when we first went into Southeast Asia, Singapore and Malaysia, we went there with a handful of customers who had presence there, who were substantial customers of ours in the U. S. Emerson was a big reason that we went to Southeast Asia first when we left North America.
It was a safe way to put our toe in the water. We have great people at Emerson. We have a great relationship with them. It was kind of like going into the country with a big brother that had already been there for 30 years, who could demystify some of the stuff that's easy once you've been there, but really hard when you haven't, setting up a company, figuring out how to get product physically into the country, that gets pretty involved. If you've done it for a few years, it's easy.
And so but we have customers that are pulling up places every day. Yes. I mean the answer to your question is, I've often commented that in many of our growth drivers we have more opportunity and we have resources to address them overnight. And international is one of those. I mean we were in a meeting 2 days ago and with a customer and the customer asked us that very same thing.
How can you get to India faster? How can you get to these other places faster? There is an interest in having what we do brought overseas. And that's why if you look at our international business, yes, it's only 3% if you take out Mexico and Canada. But it's growing well north of 20% at this point.
We see a lot of interest there. And areas and Mexico by the way are growing that fast. Yes, Terry has the exact number. So you might correct
me if say
it wrong.
I think what have we opened up, 13 countries in 7 years?
16 countries in 7 years.
16 countries in 7 years. So we've been doing it rapidly with our customers for some time and now continue. We'll slow down a little bit. We need to digest a little bit. So there is unlike the on-site question, there is one where we will slow down a little bit.
That's 230. Thank you all for coming to this portion of it. And we can probably shut off the sort of the webcast at this point.