Corporate Culture

It took a cross-country search, but we found him--plus some truths about frugality you might not expect

Captain Kirk searched for Mr. Spock. Monty Python searched for the Holy Grail. I searched for the cheapest company in America. It wasn't easy. I surfed the Net, perused business journals, called financial reporters across the nation, and harassed my colleagues for possible leads.

After nearly two months of running up Inc.'s phone bill, I had my shortlist--a handful of the most bone-tight business builders in the country. It was time for me to get on the road. "Have fun; enjoy yourself," advised editor-in-chief George Gendron, not without irony. My mission: six companies in five states in eight days.

In Louisville, I saw Tova Industries, a manufacturer of dry food mixes, whose used equipment and shrewd negotiations with suppliers keep operating costs minuscule. Tova impressed me. So did Keller Manufacturing Co., in Corydon, Ind. The solid-wood- furniture maker saves an estimated $75,000 a year by gluing together boards split by humidity. In Knoxville, Tenn., I found Regal Cinemas, the nation's fastest-growing theater chain. With its combination of cup-counting micromanagement and incentive programs, Regal wins the Academy Award for cheapness in the theater industry. Says president and CEO Michael Campbell, "We operate as if we're losing money every day."

But good as these companies are, and they're damn good, a midwestern nuts-and-bolts outfit is better. Fastenal Co., the pride and joy of Winona, Minn. (pop. 26,656), is to cheapness what Michael Jordan is to basketball: the best ever. This is the story of Fastenal and its leader, Bob Kierlin, winner of Inc.'s 1997 hunt for the cheapest CEO in America.

And You Thought You Were Cheap
Bob Kierlin loves a bargain. he's the type of guy who clips coupons from the Sunday paper and orders Extra Value Meals at McDonald's. He would never pay retail.

Frugality touches all aspects of his life. Kierlin, 58, eschews all small talk, speaking only when he has something to say. He drives an Oldsmobile and has taken home the same $120,000 yearly paycheck for the past decade, even though the Fastenal board has repeatedly authorized an increase for him. His office reflects his unpretentiousness: used furniture, a few photos of loved ones, and a PC, which he uses to type his own correspondence. He has no personal secretary.

And then there are his suits. At a discount store, they'd probably go for $200 apiece. But Kierlin didn't buy them there. He got them from the manager of a men's clothing store. Not from the manager's store. From the manager. The suits are used. "Luckily, we're the same size," says Kierlin, a triumphant smile crossing his face. "I picked up six of those suits for 60 bucks each."

Kierlin can afford new clothes. In fact, he can afford a fleet of BMWs, a Beverly Hills mansion, and maybe even his own professional baseball team. Kierlin, CEO of Fastenal Co., a hugely successful distributor and producer of nuts and bolts, is a very rich man. As Fastenal's largest individual shareholder--he owns nearly 12% of the stock--he is worth $248 million. That's a lot of suits.

The Fastenal Ethic
Is cheapness good? or is it just a quick fix, a touch of blush that rubs off in the morning? Either way, what we know for certain is that nobody does it better than the plainspoken, hardworking Kierlin.

In 30 years Kierlin's Fastenal has grown from a fragile start-up run out of a 20-foot-wide Winona storefront to a national powerhouse that operates 560 stores in 48 states, Canada, and Puerto Rico. The company sells and custom manufactures 49,000 types of nuts and bolts, as well as safety supplies, tools, and other industrial products. Fastenal's extensive product line, combined with its excellent customer service, has made it one of the hottest companies of the past decade. The $287-million company has posted a compound annual growth rate of more than 30% and an earnings growth rate of more than 35% since going public, in 1987. Net earnings in 1996 hit 11.3%, compared with 5.9% for industry heavyweight W.W. Grainger Inc., a distributor of maintenance, repair, and operating supplies based in Lincolnshire, Ill.

The company Kierlin runs--a place where scratch pads are fashioned from used paper and a little glue--very much embodies his values. Kierlin doesn't just worry about operating costs; he obsesses about them. "Being careful about your expenditures, whether large or small, requires a total commitment," he says. "Either you do a good job of cost control in all aspects of your business, or you start losing it."

Cost cutting comes naturally to him. The youngest of five children, he swept the floors of his father Edmund's auto- parts store at age 7 and worked behind the counter at 11. His folks never ate out; they couldn't afford to. Vacations consisted of afternoons in the local park. During his college years, he spent weekends with his family in Winona and returned to the University of Minnesota in Minneapolis with enough sandwiches and cookies to last him a couple of days. "Frugality is an attitude you develop," Kierlin says. "Once you have it, it sticks with you in everything in life. You don't have to think about it."

Cofounder Stephen Slaggie feels the same way. Working alongside his childhood pal Kierlin, Fastenal's corporate secretary has helped save the company millions through risk management, his area of expertise. Along the way, Slaggie has accumulated a nice chunk of stock. Not that the money has changed him.

"My college dream was to own a Corvette," says Slaggie as he drives by a row of the sporty cars. "I could buy one now if I wanted, but I just can't do it. It seems like a lot of money for a car." Slaggie's stock is worth $121 million.

How Fastenal Stays So Slim
Fastenal finds all sorts of ways to save money, both big and small. The company offers no 401(k) plan. ("I believe people should be paid all their rewards up front and make their own choices on how to spend their money," Kierlin says.) Fastenal also offers no stock options and no meal per diems for business travel. ("Hey, you're gonna eat anyway," says Slaggie.) It has never purchased an airline ticket for more than $400 and belongs to no trade associations. Money for the annual Christmas party comes from the "pop fund," profits generated by company vending machines. Some Fastenal furniture is secondhand, often purchased at government auctions. The company produces annual reports in-house for 40¢ a copy, a small fraction of what other companies spend. "There are always ways to save money," says Slaggie. "We're never satisfied."

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.

"It's a good thing to strive for, but it isn't the source of a sustained competitive advantage," says Clayton M. Christensen, associate professor at Harvard Business School. "You can become more profitable by putting your corporate headquarters in a cinder-block building, staying in Motel 6s, and eating at fast-food restaurants. But other companies can do the same. And as soon as they do, what advantage do you have?"

Plenty, if Fastenal's record is any guide. And Kierlin is happy to let that record do the talking and to leave the management-style debates to others. Sages and fads don't interest him. Fastenal's ways, he likes to say, are just the product of good old-fashioned common sense. "We've never really cared how everybody else does things or tried to follow them," he says. "We've found that hard work and good thinking have led to the best possible results."

What Kierlin's modesty prevents him from saying is that cheapness is more powerful than its doubters imagine. Fastenal's obsession with costs promotes a kind of attentiveness to the mundane that inevitably improves quality and increases efficiency. What's more, it spreads accountability and responsibility everywhere. In a culture like Fastenal's, you don't call somebody else to fix a problem; you fix it yourself.

The Shack at the End of the Road
To the experienced cheap hunter, Fastenal's headquarters is gold. A functional two-story concrete building with blue trim, it is practical, austere, and solid, just like the men and women working inside. The clanging of metal and machinery reverberates through an adjacent warehouse, notable for its clashing orange, white, and tan shelving, which Fastenal purchased used for 25¢ on the dollar. Signs decorate managers' offices: "Expenses: Just Say No!"

Fastenal throws away little. Cheapness reigns supreme; it probably always will. The company's penny-pinching has created more than a few millionaires in Winona. Stock prices, when adjusted for splits, have soared more than 6,800%. "Frugality has helped make us profitable," Kierlin says, "and profitability is what you need to continue to grow."

Even the king of cheap, however, has his limits. In the old days Kierlin used to shovel snow at corporate headquarters and sort mail himself. He no longer does so, he says, because he has more productive ways to spend his time. Still, he collects free pens given to him by suppliers and uses them at the office, lest he waste company resources.

"Bob Kierlin's built himself a wonderful company with a wonderful return to shareholders, himself, and his employees," says Brian Woolf, author of Shrinking the Corporate Waistline: Hundreds of Practical Cost-Cutting Ideas from America's Cost and Profit Leaders. "He's the walking epitome of cost consciousness, which makes good business sense."

Indeed, the cheapest CEO in America is the embodiment of lesson number one from Inc.'s nationwide search for no-frills management: The fount of cheapness is simple common sense.

Which helps explain the finding behind lesson number two: that cheapness is a geographically concentrated phenomenon. It most often takes root in the Midwest and the South, America's heartlands, where old-fashioned values survive. It is no coincidence that the headquarters of Wal-Mart, Food Lion, and Fastenal are located in Bentonville, Ark.; Salisbury, N.C.; and Winona, respectively. "There's not a lot of haughtiness here," Slaggie says of Winona. "It makes no difference to your friends or acquaintances if you have a lot of money or a little money. It's who you are that matters. That might not be the same elsewhere."

But if that's bad news for would-be cheap artists on either coast, the final lesson from the cheap hunt is worse: If your company doesn't work this way now, it probably never will. Older companies with ingrained bad habits will find it difficult, if not impossible, to slim down. Admire Fastenal if you will; not every business can emulate it.

So the advantage goes to the start-up. "It's easier to do this up front than to try to dismantle an organization halfway through its maturity cycle," says author Woolf. "When you ask an overweight man to run a four-minute mile, you're asking an awful lot."

Marc Ballon is a staff writer at Inc.

Cheap-Hunt Runners-Up

Tova Industries
Louisville; $8-million, privately held dry-food-mix maker

The bulk of Tova's savings--about $200,000 annually--comes from smart purchasing. Zacky and Yael Melzer, the husband-and-wife team heading Tova, routinely play suppliers against one another. "Our goal is to get the best possible deal," Zacky says. Other big savings come from buying used machinery and, on occasion, building equipment. Zacky, who has a master's degree in mechanical engineering from the University of Louisville, recently designed an assembly line to fill and seal 50-pound boxes and bags. Savings: $17,000.

Regal Cinemas
Knoxville, Tenn.; $270-million theater chain

Some companies count pennies. Regal Cinemas counts cups. The company pays hefty bonuses to theater managers with high concession sales. But God forbid that a few soft-drink cups or candy bars should vanish. "We charge managers the retail price of a Coke against their commission," CEO Michael Campbell says. "If a manager's missing 100 small cups at $1.50 apiece, that's $150 that comes off his bonus. As a result, we don't have a lot of shrinkage." Regal has become the industry's most profitable operator by doing things just a bit better than the rest. Theater listings, for instance, run from 6 to 8 column inches in newspapers, compared with an industry average of 10 to 12.

Keller Manufacturing Co.
Corydon, Ind.; $55-million solid-wood-furniture maker

At Keller, low-budget starts with cosmetics. Even in CEO Bob Byrd's office, mismatched chairs surround a scarred, 30-year-old desk. Nothing in the company goes to waste. Sawdust and scrap wood fuel the boiler. Drawer sides and backs are made in-house from wood that used to get thrown out. Savings: more than $1 million over three years.

Unlike its competitors, the company uses No. 2 lumber, which has more knots than the No. 1 premium grade but costs less. The company can still produce superior products because it cuts the defects out of the raw material. "The furniture's a hell of a value for the money," says Jerry Epperson, a furniture-industry analyst with Mann, Armistead & Epperson Ltd., in Richmond, Va. The 1996 savings from No. 2 lumber: $3.25 million.

K&G Men's Center Inc.
Atlanta; $88-million discount-clothing retailer

Minimal operating expenses are credited for the 30% to 70% price breaks that have fueled K&G's growth. The company's 19 stores are located primarily in low-cost warehouses, where some rents run $3.50 a square foot versus $22 at upscale malls. Shops are open just Friday, Saturday, and Sunday, which holds down labor costs. Overall operating costs represent only 16% of net sales. At competitor Men's Warehouse, they account for 31%.

10 Tips from Tightwads

  • Don't offer meal per diems; employees have to eat anyway.
  • Use secondhand furniture; a new desk isn't going to make a company more profitable.
  • Buy used machinery for low-tech jobs.
  • Pay for major purchases within 10 to 15 days for the 2% discount.
  • Self-insure as much as possible.
  • Attend fewer conferences and drop out of all trade associations.
  • Buy directly from manufacturers if possible.
  • Give employees certificates or small monetary rewards for coming up with great cost-cutting ideas.
  • Have managers scrutinize operational expenses monthly.
  • Don't hire secretaries; you don't need them.

Did We Say Cheap?

Cheapness may be hip in this age of lean and mean, but commentator John P. Kotter--a renowned Harvard Business School professor and author--says cheap is exactly what the best low-cost operators are not.

INC.: So even Southwest Airlines, famous for undercutting its industry, isn't cheap?

KOTTER: Absolutely not. Cheap is trying to get your prices down by nibbling costs off everything. If you're selling paper plates, you make them thinner. You hire people at minimum wage. Mindless stuff. But customers will eventually see the cheapness of it all. They'll notice that the paper plates don't work as well. They'll get tired of going into a grungy store with surly personnel, and they'll simply say to heck with it if they have an alternative. They'll shop at Wal-Mart.

INC.: So how do the smartest low-cost players keep their costs and prices down?

KOTTER: By being unbelievably productive. That's what people don't understand. Those companies are thinking "efficient," which is very different from thinking "cheap." They recognize that you don't necessarily have to take a few pennies off of everything. Sometimes you might even spend more.

INC.: For example?

KOTTER: Southwest Airlines doesn't try to shave costs by buying used planes; in fact, it has the youngest fleet in the business. But it buys only one type of plane--and that results in all sorts of efficiencies. You don't have to inventory spare parts for different kinds of planes, for instance, and you don't have to have mechanics with expertise in 10 different airplanes, either. Southwest is not at all a cheap company. It's an efficient one.

INC.: Why don't other airlines emulate Southwest?

KOTTER: Because once you have an established pattern, it's hard to radically change.

INC.: Has the cheap model been discredited?

KOTTER: Not yet. I think lots of people are still embracing it in one way or another. Perhaps they haven't seen some of the consequences, including those to employee morale. Cheapness can make workers feel degraded, which means they won't be as productive.

INC.: Is cheapness ever worthwhile?

KOTTER: It's hard to come up with a situation where cheapness beats the more clever focus on productivity. Cheapness tends to be associated with a person or a small number of people who are frugal and make all the decisions. The paradigm I'm talking about almost always demands a larger number of people playing the game. The clever ideas don't come from one or two people. In an increasingly competitive world, the more complicated productivity paradigm is beating the cheap paradigm partly because you're getting more brainpower into it.

INC.: We found a company that is relentless in its search for ways to reduce costs. When this company's trucks deliver products, they return carrying another company's goods. I think the term is freight for hire. Isn't that an example of cheapness working?

KOTTER: That's not cheap. Cheap is looking for a less expensive truck. Your example is closer to the high-productivity paradigm. That's clever.

INC.: Another company has figured out a way to use a lower grade of wood to produce high-quality furniture at substantial savings. Isn't that cheap?

KOTTER: I bet the decision to go with that wood was a complex one. I bet it wasn't one guy who made the decision alone but a team of people deciding ways to better use company resources. It involved figuring out how to use and laminate the wood to make it look like an equal or a more expensive grade. That wasn't a simple one-two decision. By contrast, the cheap syndrome is kind of mindless. Make the wood thinner. A 10-year-old can think cheap but would have a hard time with productivity. That furniture company realized it had only x bucks for production and figured out a way to make the most of those x bucks. That's productivity.

INC.: Are cheapness and productivity mutually exclusive?

KOTTER: Cheapness as I've defined it is almost always a worse paradigm because it's much less clever. In the cheap model, a CEO might decree that all furniture at corporate headquarters be secondhand. The productivity model would raise an infinitely more complicated question. Why do we have furniture in the first place? Maybe we can get away with less furniture if we use it in a different way.