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.
INC.: Don't you look at the strength of the local economy?
HENDRICKS: No, I look at the weakness of the local economy. When the economy's weak, you find good values. When it's strong, everything's overpriced. So right now, for example, we're going into the Northeast because it's so depressed. We went into Texas in 1985, and we're absolutely a powerhouse there today.
INC.: Do you ever start up a local operation from scratch?
HENDRICKS: Not unless we have to. It's just so much easier to buy existing companies. You can grow so much faster. An existing company already has employees and customers, and that's all I need. With those two things, I can do anything I want to with any business.
INC.: Wait a second. What if there's a basic problem with the business -- say, its location?
HENDRICKS: So what? We move it. That's another example of what I'm talking about. Everybody likes the new building on the outskirts of town. I was in a city not long ago, and the real estate broker wanted to sell me property in some new suburban industrial park at $3.50 a square foot. I said, "Hell, no. Why would anyone want to locate a roofing distributorship out here?" Not only are you paying through the nose, but you're surrounded by brand-new houses with guaranteed roofs. You're not going to sell a new roof out there for 20 years. So we're driving around, getting closer to the center of town. He's showing me places, and I keep saying no. Finally, we get to the oldest, most run-down area. The guy says, "You don't want to be here. Look at the condition of these places." I say, "You're right. Haven't you got anything worse?"
INC.: Why would you want to locate a store in an area like that?
HENDRICKS: For one thing, that's where our business is, in the center of the city. Seventy-five percent of the roofing and siding we sell is for houses that have been around for 50 years. Those houses aren't out on the loop. And we also want to be near our customers. Our customers are roofers. They don't live in new houses outside of town. They're remodelers. They buy junk houses in the city and fix them up. When they need supplies, they go to the place near where they live. The more pickup business we get, the less we have to drive and the lower our costs will be.
INC.: That makes sense, but I'm not sure what it has to do with loving and caressing other people's garbage.
HENDRICKS: You should see some of the buildings we buy. We've got a factory we're renovating right now. Before we came along, it was just sitting there, rotting away. The city wanted to tear it down. We said, "Don't do that. We'll rebuild it." After we fix it up, it'll be good for another 50, 60 years. You don't have to dig any new quarries; you don't have to make any brick; you don't have to put in any steel. It's all there, so why waste that value? We can rebuild that factory at a fraction of what it would cost to build it from scratch, and it will be better than new when we're done.
INC.: OK. Location is not a problem for you. Where do you find people to run these failing operations you take over?
HENDRICKS: Usually, it's the same person who was running it before.
INC.: I thought most of these businesses were badly managed.
HENDRICKS: Yeah, there's a lot of room for improvement.
INC.: But the old managers are losers by definition.
HENDRICKS: So we try to make them winners. Look, where am I going to find great managers? And what happens while I'm looking for somebody new? It's going to take me a year anyway, and even then I've got only a 50/50 chance that he'll be good. Why not give that chance to the guy who's already in place? His family's there. His kids are in school. Why disrupt his whole life? It's the same principle as before. Everybody thinks you solve problems by hiring a new manager. Just because your car breaks down doesn't mean you should buy a new one. Who says the new one isn't going to be a lemon, too?
INC.: That sounds very big of you, Ken, but what if the guy just can't hack it?
HENDRICKS: I'll let him go eventually, but most of them make it. Trust is important. I'd say 80% of the ones I trust are still here. Then, if they're willing to learn and ask questions and follow what we tell them, they can be very successful and make a lot of money. It may take them two or three years, but they'll do it.
INC.: So how do they make this transition from losers into successful businesspeople? What exactly do you do?
HENDRICKS: We go back to basics. When a business fails, there are usually two big problems -- two things you need to instill if you want to turn it around. One of them is what I call character. I mean that people have to believe in what they're doing -- all the employees do. They have to feel everybody is committed to the company, and nobody's going to steal from it to help themselves. They have to understand that, by working together, we're all going to do well and feel good about our jobs. And along with this goes integrity. You have to be honest with your customer. You have to understand your customer. I was in the roofing business, so I understand my customers very, very well. I can truly say I love my customers. I think that's one of the biggest reasons for our company's success.
INC.: Do you instill those attitudes, or do they come from the managers?
HENDRICKS: They start with me, but everyone has to be in sync. When managers don't work out, it's usually because of character problems. Of the ones that get fired, I'd say that 80% just plain don't care about anybody else. For example, they would not love their customers; they wanted to screw their customers. When employees see that, it destroys the character of the business.
INC.: You said there were two problems in these failing businesses.
HENDRICKS: The other one is the culture. They're in a failure culture, which we have to destroy and build a new one in its place. When I say culture, I mean how we make money. Culture is, we don't buy anything new. We buy used trucks, used buildings, used computers, and we make them work better than new. Culture is, we turn our inventory at least six times a year, which means we're not going to buy things we can't sell. Culture is, we want the best job we can get for the least amount of money, and we don't want to get ripped off. It's getting rid of waste. These businesses are filled with waste, which is why they're failing.
INC.: There's something I don't get about this. Here you have a manager whose business got into trouble because it was filled with waste. Why hasn't he already eliminated the waste?
HENDRICKS: Because he's not aware of it. He doesn't see the waste. That's true of most businesses. People don't see the waste because there are no standards. How many employees should you have? How much rent should you be paying? How fast should you be turning your inventory? People don't know the answers. Sometimes they don't even know the questions.
INC.: So you give them both the questions and the answers.
HENDRICKS: Right. For example, we want $450,000 in sales per employee. That's our standard. Well, the guy in this failing business hasn't ever had a standard like that to go by. He might be working with three employees at $150,000 per employee, which means he has two too many. Chances are, they're bitching about their jobs, too, saying they need more help. Bored people are the most unhappy people in the world. They hate their jobs, and they complain about how lousy the company is, as demonstrated by the way it uses their time. People have to feel good about getting a paycheck. Otherwise, they look for a reason to level it in their own minds. That comes back to trust and character. You destroy character when you employ too many people to do a job. Busy people are happy people.
INC.: Let's stick with the standards for a minute. How many do you have, and where do you get them?
HENDRICKS: We have standards for everything. We get them from experience. I've done most of these jobs myself. I know how to turn inventory because I've done it. In my roofing company, we used to fix our own trucks, so I know what that costs as well. Real estate? I spent 10 years buying and selling real estate. The point is, if you can do a job, you can figure out what you should be spending. Or you can make a study of who does something better than anyone else, find out how he does it, and then use that to set up your standards. But you have to have standards, or you won't know where the waste is.
INC.: But how do you figure out what categories of standards you need, what numbers you should be measuring?
HENDRICKS: You have to look at your P&L. Where are you spending money? Everywhere you've got an expense you need a standard to tell you how much it should be. Then you have to show your people those numbers on a regular basis, so they know how they're doing. And make sure they get a big reward when they beat the standards.
INC.: How often do you show people the P&L?
HENDRICKS: Every month. They get it on the 10th of the month, both for the store and for the whole company. Everybody sees the numbers on the same day.
INC.: You do all this by computer?
HENDRICKS: Hell, no. This is manual. We've got computers in the bigger stores, the ones with more than $3 million in sales, but nobody's on-line to the central office. I checked on what a computer system would cost for our company, and it was something like $6 million. Our whole system -- people, mail, everything -- doesn't cost us $500,000 a year. That's less than the interest on the damn computer system.
INC.: How far down the organization do you let people see the numbers?
HENDRICKS: Everybody sees the numbers. Hiding the financial statements is the single biggest mistake I see owners making. If they're losing money, they're afraid employees will find out and quit. If they're making money, they're afraid employees will leave and start a business of their own. Meanwhile, they've got people who have no idea what it costs to do business. We've asked new employees how much they think we make on a $20 bundle of shingles. The answers range from $12 to $6. This is a 20% margin business. We're making $4, tops. A guy making $8 an hour can screw up and come back two hours late from a delivery, and he's just blown the job without knowing it. I absolutely want them to see the numbers and know what they mean.
INC.: OK, but how? What if they can't read a P&L? What if they don't care?
HENDRICKS: You've got to train them. You've got to show them how it works. We make it as simple and as clear as possible. Our whole management system is on two pages that we send out to the stores each month. One page is their P&L for the previous month, with comparisons with a year ago. It gives them everything -- sales, cost of goods sold, salaries and wages, rent, vehicle repair, travel and entertainment, the works. On one page. Then there's another page called the contribution report, where we show the corporate costs being allocated to the store, deduct those from its net operating profit, and calculate how much annual bonus they've earned so far, if any. If you run a store, you live by those two papers. You show them to all of your employees, and you say, "Hey, we've got to beat the standards on this." Because if you beat the standards, the company makes money, and so do you. The employees get a big share of the store's profits.
INC.: How is it divided up?
HENDRICKS: The manager gets 40%, and the balance is distributed at the company's discretion. In a lot of cases, that balance comes out to $7,000 to $10,000 each -- for secretaries and truck drivers whose regular wages may be $18,000, $20,000 a year. You're talking about big incentives here. We have managers earning bonuses of $80,000 a year. So everyone has a stake in beating the standards.
INC.: Do they have standards for everything on the P&L?
HENDRICKS: Yes. We give them a standards sheet that runs down the companywide P&L for the previous year. It shows the percentage of sales represented by each line on the P&L. You can compare those percentages with your own and get a pretty good idea of how you're doing.
INC.: You make this all sound very easy. It's as if you set up the bonus program, give people the standards, send out the monthly reports, and -- presto -- the business is transformed. The losers become winners.
HENDRICKS: It's not quite that easy, but there's nothing very complicated about it, either. It's all basic stuff. Business is basic. You've got to be able to identify value, and you've got to know how much it costs to bring it out and where you're spending too much. We're giving people the tools to do that. If they use the tools, they can turn the business around in no time. We've got a window plant right here in Beloit that we turned around in two months.
INC.: How did you do that?
HENDRICKS: We just applied these principles. The plant lost $650,000 last year. There were 18 employees, and I knew it was overstaffed by a third because of the 30% rule. Remember, in any business, there's 30% in lost productivity just because of people goofing off. So we went around the plant and asked people, "What if we paid you 50¢ more an hour? Could you do your job plus this other one over here?" The ones that said, "Oh, yes," got the job. We laid off 6 people in one tour of the plant. Now that the 30% is out of the way, I go back to the employees and say, "What can I do to make your job quicker and easier?" They come up with the idea of a production chart to show the improvement. In two weeks we go from 2.8 hours a window to 1.1, which means we've more than doubled our output with a third fewer people. This is in two weeks! Meanwhile, I'm making sure they get rewarded as the production goes up -- a 10% pay increase, 20%, and so on. But now we have a quality problem. So I go to the guy at the end of the line, the one who wraps the windows. He's the last guy to see the finished product before it goes to the customer. I make him the foreman. I say, "I don't want you ordering anybody around, and you can't hire or fire, but I want to know when there's a part on the window that isn't proper." He never had to call me once. He went back to the people in the plant, and he said, "We've got to do this better. This part has a rough edge, and the window isn't going together right." Our costs go down another 20%. Wages go up another 20%. We went from building 30 windows a day with 18 people to 100 windows a day with 11 people. Two months.
INC.: Yes, Ken, but that's you. What about a manager who's not used to operating that way?
HENDRICKS: We do everything we can to teach him, and we make it awfully hard for him not to learn. At our regional meetings, we put up charts comparing how the stores did in each category. We'll have a chart on inventory turns, with all the stores listed in order of performance from top to bottom. We'll do the same thing with receivables, sales per employee, vehicle expense, and so on. I don't have to say a word. Nobody wants to be on the bottom.
INC.: What's the difference between the stores at the top and the bottom? Are the ones on the bottom in tougher markets?
HENDRICKS: No, it's execution and the learning process. Remember, we're growing 35% a year, so a lot of the managers are new, and some of these guys literally don't know how to read a P&L when they start. We've got one manager who had been a salesman. He came here for training three times. He'd say, "I don't mean to sound stupid, but would you explain the P&L to me one more time?" Today he's one of our best managers, but he was unprofitable for two years.
INC.: But what exactly are people learning? It's not just a matter of understanding the numbers, is it?
HENDRICKS: It's paying attention to details. It's seeing how all the details add up. I have one manager who kept giving me a hard time about our trucks. I told you before, we don't buy new trucks. When we get them, they're falling apart, and we rebuild them from the ground up. By the time we're through, we may have $25,000 in that truck, but it's worth $50,000, and it runs as good as new. Anyway, this store was spending a lot on maintenance, and the manager was blaming the trucks. He said they were junk. He wanted to lease new trucks, thinking he'd save on maintenance. I said, "You're wrong," but I let him go on handling the problem his way, and it cost him his bonus.
HENDRICKS: Because he didn't have an equipment problem. He had a management problem. One day I'm standing in his yard, and a truck drives out with a full load. As it goes around the corner, I can hear the driver grinding the gears. This is a 10-speed truck, and he's going from first to fourth to eighth to the end, because it's faster that way. He's a lazy truck driver. So I say to the manager, "Let's go inside and pull the maintenance on that truck." Sure enough, four clutches in one year at $1,800 each. He spent $7,200 because of that driver. That's half the driver's wages. Do you know how much roofing you have to sell at a 20% margin to make $7,200? $36,000. The point is, you have to pay attention to the details. If you're spending too much on maintenance, you have to figure out why. Today that manager has the lowest truck-maintenance costs in the company, 0.03% of sales, and with the same trucks as before. He got one of the largest bonuses this year.
INC.: It sounds as though you stick with these guys a long time.
HENDRICKS: Yeah, well, I want them to catch on on their own. I want them to start doing things I didn't think of. It's important for them to feel the business is theirs, and not mine. Sometimes that process takes two, three, even four years. But once they learn how to manage, they're there for life.
INC.: What happens?
HENDRICKS: They see the bonus money, and their employees see the bonus money. Nobody really believes it, or gets it, until it happens. But once they ring the bell, everybody's on and things start falling into place. Then you'll see them just go up, up, up.
INC.: Meanwhile, they're losing money, aren't they?
HENDRICKS: Yeah, or they're just breaking even.
INC.: Doesn't it bother you to be carrying these guys for years?
HENDRICKS: Not really. As long as I feel they're giving it an honest effort, the money is no big deal. That's a mistake my competitors make. They are out there for the money. They want people under their thumb. I don't. I want systems in place. I want people who can figure out a better way and let me know what it is, so we can improve on what we've got. I'm trying to create entrepreneurs. My competitors are looking for more and more control. That's why I have no fear of their stealing my secrets. I really don't have any secrets. Everything I do is basic business. My competitors would have done it a long time ago if they understood it. I'm beginning to realize they don't.
INC.: Wait a minute. Did I hear you suggest that your goal is not to make money?
HENDRICKS: Making money is the result of good business; it's not the goal. If you make it the goal, you get into trouble. I think the biggest mistake people can make is to go into business to make money.
INC.: Isn't that a little ironic? After all, you devote a lot of time and energy to teaching people how to make money.
HENDRICKS: Knowing how to make money is not the same thing as being motivated by it. I personally believe wealth is a cancer. I don't like most wealthy people. I never associate with them. I want to associate with real, honest-to-goodness thinking, working people in the trenches.
INC.: OK, but why exactly did you go into business, if it wasn't to make money?
HENDRICKS: I went into business purely for the fun of doing it and getting other people involved in doing it. . . . This is ABC I'm talking about. I didn't have much fun when I was in the roofing business.
INC.: What was the difference?
HENDRICKS: Back then I was out there to get more money. If that meant cheating a little bit, I didn't feel there was anything wrong. But my employees saw what I was doing. They figured, if the boss did it, it was all right for them to cheat a little, too. Instead of putting four nails in a shingle, they might put in three. I was actually destroying their character, although I didn't really understand that at the time. Eventually, I just got sick of what I was doing, so I phased the business down.
INC.: I don't understand. Was your roofing company a failure?
HENDRICKS: No, no. We were one of the largest roofing contractors in the country -- International Roofing Co. I started it when I was 19 years old. By the time I was 26, we were doing $45 million a year. We did a lot of the K marts in the Midwest. We did Arby's, McDonald's. We did military bases all over the United States. I had 500 employees. I made a lot of money, all right, but it wore me out.
INC.: So the business was incredibly successful.
HENDRICKS: Yes, but there was no physical way a person could keep doing what I was doing. I'd have 20 jobs going at the same time and only four or five superintendents I could rely on. They were my friends, and I didn't grow anybody else. If one of them wasn't overseeing a job, I had to be there myself. So I was traveling all the time. I just got sick of it. I couldn't take it anymore. But the experience was very, very important to me, because it laid the groundwork for my whole philosophy about managing people.
INC.: It sounds as though it taught you how not to manage people.
HENDRICKS: That's exactly right. The problem was, I didn't include them, not even the people I brought in as managers. They were the employees, I was the boss, and my attitude was, Do the hell as I say. But there was no organization, no support, and they didn't know what I wanted. So they kept failing, and then they'd blame me. What I learned is, you can't give people a reason to blame anybody else for their failure. You have to have everything in place for them. It's a responsibility you take on when you hire people. You have to provide an environment you feel good about, where they can come to work and it's a challenge, not a job. But I couldn't see that at the time because I was in it for the money, right? I wanted to hire employees for the least amount I could and then get the most out of them I could. So it was a chess game between them and me.
INC.: Was that because of you or because of the business you were in?
HENDRICKS: It was because I didn't understand people. I didn't understand their wants. You've got to serve the wants of your people. Forget about your own wants. Once you solve their problems, yours is taken care of.
INC.: So your management philosophy came from doing all the wrong things in your roofing company. What about this obsession with waste?
HENDRICKS: That really goes back to my father, who was a roofer and then some. Talk about bringing out the value of things. He could fix anything that had to do with real estate. He could put up a wall, pour a floor, do the plumbing and the electrical, whatever. You send Joe Hendricks out to build a house -- it might take somebody else three months. My dad would do it in 30 days. All by himself. People would say, "How did you get those trusses up there?" Who knows? He did it. He had a system. And I respected that so much because the other guys were just wasting time.
Of course, he never got credit for it, because roofers get a bad rap. That wore way down deep in my gut. People would say, "Oh, you're Joe Hendricks's kid. He's a roofer." You could tell what they were thinking. My dad made more money than any of them. He just didn't belong to their damn country club. He didn't play golf. He carried a lunch pail, and he went to work at 5:30 in the morning and came home at 6:00 at night, and he worked every Saturday. Yet they talked about him as if he were a bum. So that built my character way down inside. It's a big reason why I feel the way I do about my customers.
But my dad did have one fault. He was one of those guys who thought no one could ever do anything as well as he could. So his business never grew. He had two or three employees, but he could never keep them because he wouldn't give them their space. He ended up having to do it all himself, which was a waste. There was just so much more he could have done if he could have taught other people to use his skills.
That's sort of what I'm doing here. The skill my dad had was that h