In this article I’ll talk about the ZEB Staples acquisition, changes, and issues.
I acquired ZEB in 2004. It originally started in 1950 and was taken over by the prior owner about 20 years earlier. They produced staples for both industrial and specialty uses.
I was attracted to the company because it was a consumable products company. This means that staples are used up and the customer needs to buy more. The company had a number of machines that produced staples from wire and could run 24 hours per day with operators monitoring multiple machines. ZEB had fixed assets (equipment), inventory (finished goods and raw materials) along with hourly and supervisory employees. I could see that the company had a lot more equipment than the sales reflected, thus having a potential to improve sales at little to no capital cost. ZEB made over 900 different types of staples.
One of my previous positions had been COO of a capital equipment company (CSM). It required a large capital commitment from the customer, along with CSM’s training to operate and maintain the equipment. This equipment lasted a long time, so customers were not buying them unless they were expanding their businesses. Some of the components are consumable so there were small recurring sales. A recession would cause capital equipment purchases to slow down so it was necessary to maintain the consumable part of the business to cover overhead. I was looking for a company less susceptible to general recessions.
ZEB was attractive because of its large consumable product component. The disadvantage was that this kind of business had lower gross margins when compared with the capital equipment business, and also more dependent on recurring sales. But these tend to be more consistent businesses overall. ZEB’s prior owner showed me records going back those 20 years with gently increasing sales over that period having a growth standard deviation of less than +/- 2.5%, another attractive feature.
How I found ZEB was an interesting story. I talk about this on my LinkedIn page in my “How to buy a Private Business” presentation in the Featured section. Basically, I used an online database available to libraries called Reference Solution (formerly ReferenceUSA). I searched for small companies with a twenty-five radius of my home zip code within a certain size range; large enough to have enough employees and small enough to be an affordable acquisition. I found over 300 companies meeting that criteria. I sent a mailing to the owners asking if they were interested in selling their businesses. I received interest from two dozen companies. Since they were nearby, I visited all of them. I signed NDAs with ten for further interest and to obtain financial data, and then proceeded with five. ZEB was the best candidate.
I acquired ZEB and met the largest customers accounting for 80% of sales (distributors), and the largest suppliers. In between those meetings, I shadowed the employees to understand their jobs and bottlenecks. I also reviewed the financial systems entries and details.
An early task was to tackle the obvious improvements. I learned that ZEB was not recording sales by product, only sales dollars by customer. I also wanted data by product, so I created a new part-numbering system that enabled orders to specific products to be recorded. After a few months we were accumulating useful data and I could determine which products were the popular ones. Customers had requested shorter lead times, so having popular products in stock could increase sales using a minimum of working capital.
ZEB didn’t have a website, so I obtained a domain and created a new and interactive website. I took our entire product catalog and put it online, allowing customers to search by application and staple gun. It also included wire dimensions, points and material types. I tied it to our inventory in an online store with existing customers having custom discounts and new customers able to retrieve pricing online and, in special cases, contact us to get approved for special pricing. Over time 10% of our sales were coming from the store, at much higher margins than the existing customers who still ordered directly. We also joined several trade associations to improve our visibility in the space.
While all of these things were going on, there were a number of significant challenges.
Staples are made with wire. ZEB was making staples using mostly 70 pound flat wire spools. They were manageable and easy to load onto the machines. A disadvantage was that they only lasted a few hours and so the machine needed to stop and reload another spool. Then, our key wire vendors notified us that they were doubling our cost! We knew we could not tolerate this much of an increase, what with our foreign competition having a much lower cost.
We knew that our products were better, in that our material was a higher strength wire that did not collapse. We learned that our competition was using less expensive low strength wire. That meant the users had many failures in a strip of staples. The staples collapsed instead of digging into the substrate and ours went straight-in every time. We posted a video to our website showing this and the value of using our product. Our product brochures also touted this advantage.
Looking at buying options, I found we could buy 700 pound flat wire spools at half the new cost. This required new spool holders that could handle the weight and also required fork lifts to load the spools. We switched to the larger spools to keep our price the same and we also benefited from the fact that the spools now only needed to be changed one/tenth as often. Machines could run longer without shutting down and productivity improved by about fifteen percent.
That production method lasted for a few years. Again, our wire producers came to us saying they were doubling the cost! Looking the current buying options, I found that we could buy round wire at half the cost. Our machines were taking in the flat wire from the spools and using a flattening mill to make the staple wire more precisely to the dimensions we needed. I had the team do some experimenting to see if we could take the wire from round all the way to the precise flatness we needed. And we could! Our machines were powerful enough to do that. So we switched to buying round wire. This also allowed us to reduce the different types of wire we were buying since we could make more types of staples with wire of one diameter and flattening them to different heights and widths. This saved us inventory space.
Our objective was to keep our pricing about ten percent above the Chinese and Dominican-Republic competitors since we could not compete in a price war and preferred competing on product quality differentiating ourselves with the higher strength product. These changes enabled us to do that and improved gross margins.
All of our changes and improvements kept our company efficient and profitable until our primary competitor decided to eliminate the use of distributors and sell direct to stores, lowering their prices by over twenty-five percent. That forced us to reduce prices by approximately 5% on average. In order to maintain our customer base, we continued to focus on better products. Our higher gross margin gave us the room we needed to reduce prices. We also spent time meeting with distributors to re-teach them differences between our quality staples and the competition. End-users offered our best endorsements! Again, we were able to be flexible as the market changed.
In conclusion, creating a successful company involves involves listening to customers, paying attention to the competitive landscape, staying nimble and being open to manufacturing and marketing changes, engineering the right changes, improving financial reporting detail and improving product quality. These are all good qualities and guidelines for any manufacturing business.
