Waste Not, Want Not

Waste Not, Want NotHow Ken Hendricks has built an entire company around a passion for operating without wasting business resources

In business, as elsewhere, size is a state of mind. You can tell only so much about the size of a company by looking at its revenues or number of employees. What really separates small companies from big ones is an attitude, a way of operating, an awareness of the finite nature of resources.

By that standard, we have never come across a "smaller" business than ABC Supply Co., based in Beloit, Wis., a wholesaler of roofing, siding, and other building materials -- one that just happens to have annual sales of $350 million. At ABC Supply, cost control is not a project or a concern or a response to hard times. It is the company's entire culture. Founder Ken Hendricks has institutionalized an approach to business that places a premium on absolutely, positively getting the greatest value for the least cost in every aspect of the company's operations. That's something most small companies do out of necessity -- solving problems with hard work, ingenuity, and opportunism, because solving them with money is not an option. What usually undermines that ethic, ironically, is success. And yet, for some reason, success hasn't spoiled ABC Supply, making it (as Hendricks says) "the biggest small company in America."

It also happens to be one of the fastest growing. Indeed, we first met Hendricks when he landed on the Inc. 500, not once but twice -- in the same year. Aside from ABC Supply, which ranked #3 in 1984, he also owned and operated #30, International Roofing Co., an independent roofing contractor also based in Beloit. Shortly afterward he achieved another milestone when he turned International Roofing over to his largest customer, thereby making it the first and only Inc. 500 company ever to be given away. (Hendricks explains that he couldn't keep running International Roofing without competing against his customers at ABC Supply, and International Roofing's primary value at that point was its goodwill with the customer to whom he gave it.) Meanwhile, ABC Supply continued to grow at a phenomenal rate, moving from #3 to #2 to #1 on successive Inc. 500 lists, a feat that may never be duplicated.

Today ABC Supply has 92 stores from coast to coast, and it is still growing about 35% annually. Already the industry leader, it could well come to dominate its $10-billion market in the next few years. And yet there are no signs that it has lost the lean-and-hungry look of the start-up it was scarcely a decade ago.

Hendricks talked with Inc.'s George Gendron and Bo Burlingham at his headquarters in Beloit.

INC.: You have an extraordinary company here. What's odd is that you almost never talk about the usual stuff of business. All you want to talk about is waste.

HENDRICKS: I think that's the biggest factor in business today. I guarantee that in almost any company you look at, there's an absolute 30% in productivity that's lost just from people wasting time, and that's only the beginning. Everywhere you look, there's waste. It's the one thing I really hate about America, all the waste that goes on.

INC.: But can you actually build a business around getting rid of waste?

HENDRICKS: Are you kidding? That's what makes or breaks a company. Look, we know that the difference between success and failure in any business is basically 3% of sales, right? I'm talking about national averages here. After you've finished paying interest and dividends, when you look at what's left over, the surviving companies have earnings ranging from ½% to 3% of sales. So that's the difference between going out of business and having a successful company -- 3% of sales. Where do you get that 3%? I get one-third of it from purchasing on a national scale. I get one-third from operations -- equipment, real estate, corporate overhead, and so on. And I get one-third from having my employees on the same team. That's it. That's why we're successful.

INC.: But aren't you just talking about controlling costs? Every company tries to control costs.

HENDRICKS: Yeah, but very few of them do a good job of it. Of course, in some businesses, you can get away with a lot of waste -- if you don't have much competition, if you can charge whatever you want. Most businesses aren't like that. This one sure isn't. In roofing and siding, we're talking about gross margins of 16% to 20%. Our strength in this industry is a direct result of our ability to keep waste to a minimum and use our resources as efficiently as possible. Look at our rent -- 1.8% of sales. The industry average is about 3.5%. Our truck expense, including gas, is less than 2% of sales; the industry average is 4.75% to 5.5%. We get $450,000 in sales per employee; the rest of the industry runs from about $125,000 to $275,000. I can go on and on. When you do all the things we do, you don't have to worry about big companies coming in and eating your lunch. They can't do it. They can pump in as much money as they want, but they aren't going to be successful unless they cover all their bases.

INC.: So how do you go about covering your bases? How do you generate those kinds of numbers?

HENDRICKS: It's everything we do. We've got a whole company here that's built around getting the greatest value for the least cost. We take other people's waste, stuff that they don't want anymore, that they think is garbage and ready for the junk heap, and we love it and caress it and make it as good as new. It's our culture. It's the way we operate. It affects everything -- how we look at markets, store locations, people, equipment, you name it. Not that we're perfect by any means, but we sure do try.

INC.: Let's take a closer look at all that, starting with the way you decide to move into a new market. What's the most important factor in your mind?

HENDRICKS: That's easy. I'm in all the places I am because someone was having problems. I'm constantly talking to vendors, competitors, credit managers. I look for a death in the family, and the wife wants to sell. I look for partners who split up and go different ways. I look for someone who is ready to retire. I look for bankruptcies. I look for people who are late on their bills.