A former insurance agent, Slaggie knows when insurance isn't needed. Fastenal carries no collision protection on its 1,100 pickup trucks. According to Slaggie's calculations, it doesn't have to. "Collision premiums would run us more than $300,000 a year, or $273 a truck," he says. "We can lose 20 trucks this year, complete losses, and we'd break even. We're guessing that's not going to happen." Similarly, Fastenal carries a $75,000 deductible on each of its stores. Risky? Perhaps. But a $75,000 deductible costs significantly less than a $1,000 deductible. "We'd have to have a total loss in two stores in the same year to say we'd made a bad decision," Slaggie says. "We're better than that." Last year Fastenal saved $300,000 through self-insurance.
Fastenal expects to earn $400,000 this year from a new freight-for-hire program--transporting other companies' goods in Fastenal trucks. The company now saves up to $100,000 each month in delivery costs by picking up products itself from vendors, mostly in and around Chicago. Fastenal trucks on the road are rarely empty.
Costs are slashed everywhere. In May, Kierlin and chief financial officer Dan Florness could easily have taken a flight to a conference in Chicago, a little more than an hour away by plane. Instead, they drove five and a half hours in a van, saving Fastenal hundreds of dollars. They lunched at A&W, feasting on burgers and root beers. (Cost: $5 a person.) They spent the night at a motel in Rockford, a Chicago suburb, to avoid the high city prices. The pair even shared a room. "This sends a message that cost control is important to everybody in the organization," Kierlin says. "By being attentive to all expenditures, you can really set the example at the top."
Employees at some companies might dislike a guy like Kierlin. They would consider him a killjoy and call him Scrooge. At Fastenal they respect him. "He never talks down to people, and he treats everyone with equal respect, whether they're a janitor or vice-president," Fastenal vice-president Will Oberton says. "Bob comes to work at 6 a.m., which shows he still cares. It would be real easy for him to put his feet up on a desk and let everyone else do the work, but he'd never do that."
The team Kierlin has assembled shares his values. Fastenal workers realize that cheapness helps the bottom line, which fattens paychecks. Coming from the same kind of modest background as the CEO, they are frugal both on and off the job. Like Kierlin, employees appreciate the value of a buck. "I wouldn't know what to do if I walked into one of those pricey hotels and someone offered to take my bag," says marketing manager Bob Strauss, a 20-year Fastenal veteran. "I can carry my own bag and park my own car."
Kierlin's frugality and employees' attitudes only partially explain the Fastenal cult of cheap. The management enjoys no special privileges. Not even Kierlin has a private parking space. That social leveling has created a bond between workers and executives. Borrowing a page from Adam Smith, Fastenal motivates workers by appealing to their pocketbooks. Every full-time employee participates in a profit-sharing plan that rewards cost cutting.
For all its tightness, however, Fastenal is still a growing company. It invests wisely in equipment and technology. The company will shell out about $8 million over the next year and a half on a computer system to increase efficiencies. Fastenal's fleet of trucks is mostly new; it doesn't want to see vehicles break down and customers fail to receive deliveries.
Although they're tightfisted in their personal lives, Kierlin and Slaggie are anything but cheap with their Fastenal fortunes. Along with Fastenal's three other cofounders, in 1987 they established the Hiawatha Education Foundation, which has invested handsomely in Winona's private schools. Money from Hiawatha, now worth nearly $50 million, has gone toward upgrading computer systems and funding scholarships, among other things. At Cotter High School, a private Catholic school that four of the company directors attended, Hiawatha gives graduating seniors an average of $4,000 apiece for further education.
But Is Cheapness Good?
Is this obsession with saving dollars and cents really worth all the effort? The advocates of scrimping are unequivocal. Cheapness increases profitability, they say. It keeps companies slim. It puts cash in the bank for future growth. And it gives businesses an advantage over their spendthrift rivals.
While many cost-cutting ideas are obvious (flying coach instead of first-class, eliminating extravagant expense accounts), true cheapness, the argument goes, is more than that. It is a mind-set, a willingness to hunt for excess fat at every level of an organization. All the time. It requires constant vigilance and hard work. It is understanding that watching pennies and nickels will save dollars.
Of course, most successful start-up CEOs are to the ways of the cheapskate born. They have to be. With money scarce, they scrutinize every expenditure, no matter how small. But as companies grow so, too, does their appetite for amenities. CEOs often become greedy. After years of sacrifice, they may come to believe they deserve to stay in four-star hotels, earn big money, drive fancy company cars. Their quest for the good life spells the end of leanness and marks the onset of corporate bloat. Not surprisingly, most U.S. companies grow in girth as they age, just like the CEOs who run them.
Cheapness should not be confused with stinginess. Cheapness is smart. Stinginess is stupid. A cheap company spends money when it has to. A stingy one doesn't. "If you hack away at costs incessantly, quality can begin to suffer," says Professor Eric G. Flamholtz of the John E. Anderson Graduate School of Management at UCLA. "Maybe you don't have a quality-control program, and somebody drinks your product and gets sick. You can carry low cost too far." Nor is cheapness synonymous with downsizing. A cheap company would never become so obese that it had to shed workers. Cheapness is proactive. Downsizing is reactive.
On the other hand, foes of frugality argue that its value is overstated. According to them, too many companies temporarily drive up their quarterly earnings by failing to invest in people and technology. That, the anticheap contend, might placate Wall Street analysts--but in the long run, cheapness can render companies noncompetitive. A company cannot survive on cheapness alone. Without good products, marketing, and distribution, cheapness means little. It is but one of several ingredients needed for success. Some question even that.
