DW: That's understandable, since The Goal describes a produc- tion problem.
PH: Yes. So I was one of those stupid people who couldn't see the whole picture. So then Eli explained the bigger picture and the bigger
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application of it. He slowly forced me to think-sometimes by yelling at me, "Think!" It was a hefty morning. And this story is described by him in It's Not Luck-the candy wrappers case. We finally made some money over there. Actually, a lot of money. Later I discovered that my nephew, who was the other 50% owner of the company, wasn't doing much and was taking out more money than we had agreed upon, so we decided to split the company in two. I did the split and he chose which part he wanted. I never imagined that he would keep the printing business, which I had been running, and leave me with the office supply business, which had been his responsibility.
DW: Did you know anything about the office supply?
PH: No, nothing at all. The company was pretty big, it was number four or five in the Netherlands. It was making an awful loss. Com- petition was suddenly fierce and only concentrated on price. Other companies were very subtly sending brochures to every small business in the Netherlands with prices on the front cover that I couldn't get for myself as a wholesaler. This was really awful. All our good custom- ers became suddenly more and more interested in price. They said, "How is it possible that we pay twice as much as what's on the front cover of this brochure?"
DW: It sounds like an impossible situation .
PH: Well, it was, it was really awful. We had something like four or five thousand customers, 20 sales people. The only thing we could think of was to also lower prices, and do it only on items where we had to. That was not a long-term solution but that was what every- body else was doing. So the conventional way of doing business in office supplies was pretty soon completely gone. We got tenders for office supplies-which was unheard of-where you had to fight with three or four competitors. In the past, orders for office supplies were just given to a local good-performing company. Now everybody was focusing on price.
DW: So what did you do?
PH: We started to build, as Eli calls it, the current reality tree. And of course this time I didn't make the mistake of making it about our
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company but I made it about the customers' situation: Why is this customer complaining so heavily about price? After long thought and a lot of discussions with my sales people, the only thing we could come up with is that he's thinking this is the only way that he can decrease the total cost of office supplies; that he can't do anything about the tremendous cost of having to stock supplies, and store them, and the cost of bringing the stuff to the right people in the building. Well, I know what kind of a mess customers can make out of it. In most of- fices where you open drawers, there's more stock in the office than anybody can imagine. While at the same time they are screaming for a specific item which has to be brought to them by taxi in crazy short delivery times. In Rotterdam we are down to four-hour delivery times! Not even 24, just four-hour delivery times, which is completely crazy for office supplies. I mean, we're not saving lives here.
So this is what we offered our customers: That we would take over all this hassle of supplying everybody in the office with the right equip- ment, the right articles, at the right time. We offered them cabinets with office supplies in them. We owned both the cabinets and the contents. The supplies were for a specific working group. Whatever they took out was considered sold, whatever was left was still ours. We replenished these cabinets every week. We made it very easy for them to check on us. And more importantly, we could give specific data about each department, explaining that certain items were consumed fast. For instance you might need a new pair of scissors once in three months, but not every week.
DW: So you could discover theft?
PH: Well, we didn't call it theft, we called it overconsumption. But of course it was theft, yes. So suddenly this guy who was responsible for office supplies had much better tools to go after his dishonest personnel. He's not interested in how many pencils someone uses. Everybody knows that people take pencils home; you do that by ac- cident and it doesn't cost anything. Toner cartridges, that's a bigger problem. So when the theft of these ink-jet cartridges went up very much, we advised them to buy bigger printer machines, which we could also supply, to make them different than the machines people had at home. Things like that. But those cabinets were a big, big invention. While our customers might have paid 20%-25% more for
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the actual articles, the total cost of providing office supplies for their workers dropped by 50% because they didn't have the internal hassle of misplacements, overstocking, and things like that. So they didn't care that much anymore about the original price we charged. When I sold my company a couple of years ago, the due diligence took a long time because they couldn't believe our added value.
DW: What were the numbers?
PH: Normal gross margins in the industry were very much below 20%. Above 20% was suspicious. We were above 30%, which makes a lot of difference. And we were not ripping people off. They were extremely satisfied with our service.
DW: How did you go about selling the concept to your
customers?
PH: We had a department which was making appointments with financial directors, not the guy normally responsible for purchasing office supplies. That other guy was scared for his job when you came with this solution. And we made a short movie to show the current situation in their office and how people were screaming for office supplies and things like that, and how great it would be if we could take over their stock and their responsibility and solve this problem. And this worked really great. Something like 30% of the sales visits were successful sales. Again, the prices we were charging for supplies was no longer an issue
DW: For anyone?
PH: Not exactly. We still had some customers who were focused on price. We didn't chase them away. We just gave them completely different conditions. We told them that if price is what matters most, you have to buy big quantities and you shouldn't care about delivery times: "You can get the lowest price possible but you have to stand in line." Now a good thing for us about the cabinet system was that we had one-week advance notice on our purchasing needs. I mean, what the customer used last week I didn't bring the day I was checking. I would bring it the week later. So I hardly needed any stock anymore. My suppliers could deliver in a day but I had a week. So now I could
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start buying on price. And I could combine my orders with those of the bigger customers who still wanted to do business just on price.
DW: Those must have been a very satisfying couple of years for you as you explored this new way of doing business.
PH: Well, yes, for a couple of years it's really fun. Because you're winning a race. Of course at the beginning I was relatively small; I was number four or five in the country. I was really afraid the bigger companies would copy my cabinet system.
DW: Did they?
PH: Yes, a little bit. But they didn't get the message. It was actually really funny. They were prepared to deliver cabinets but the customer had to buy the cabinet and the content as well. They were never willing to do it on consignment terms, which is what made it work. So that was a big difference to start with. Secondly, they didn't understand my replenishing system of stuffing the cabinets full enough that you could survive a couple of weeks. What they offered was so different that we could immediately show the customer that with our competi- tors, you'll still have to do it yourself, you'll have to take responsibility. Whereas in my case, when you change a printer, for example, and you don't tell me, I will find out you don't use this cartridge any more and I'll adjust. These cartridges are very expensive, do you want the responsibility? That's the main difference of consignment.