The Best Supply Chain Company You Have Never Heard Of

Ferguson PLC, value added distributor of plumbing and heating products, came out with their third quarter results on June 14^th. In the nine months ending April 30^th they generated over $20 billion in revenues, grew by 27 per cent, and generated three quarters of a billion in operating profit. Despite their size, few people outside their industry have heard of them.

Following their earnings, Michael Jacobs was made available for interviews. Mr. Jacobs is the senior vice president for supply chain at Ferguson. While nominally a distributor, “supply chain management is our core competency. We have built our organization around this.” In particular, Ferguson’s supply chain is built for speed and to provide high service levels. “99.8% of in-stock products ship the same business day from our DCs; that is best of breed for any industry.” Ferguson built their supply chain around the needs of their customers who require access to a wide variety of products, high fill-rates, and speed of delivery.

The Ferguson Supply Chain

Ferguson has a big and complex supply chain. Ferguson provides plumbing and heating products to 9 specialist customer groups – over a million customers – in the US and Canada. They sell over a million products that range in size from very small copper fittings to 40-foot pipes. The company sources goods from 34,000 suppliers out of 30 nations. 22,000 containers move annually through 53 ports. They operate, both their own fleet and a dedicated fleet, that has 5,300 trucks. These trucks range in size from semitrucks to delivery vans. The goods flow through 2 import centers, 14 strategically located distribution centers in North America, 66 final mile shipping hubs, and nearly 1,700 branch locations.

Across the US, Ferguson has 6.5 million square feet in 10 distribution centers and 35 million square feet across its branch network. That is what makes possible same-day and next-day delivery to over 95 per cent of the US population.

Goods are fulfilled to customers in a variety of ways. Products, of course, can be picked up at the branches. But online ordering supports in-store pickups of already picked and packed products or curbside pickups. Products can be shipped to a work site or a place of business. Deliveries, in turn, can ship out of a distribution center or be drop shipped from the supplier. The company is piloting secure lockers for stock at their major sites. This will allow for 24 hours a day, seven days a week, access to their products.

Adding to the complexity of the supply chain is that Ferguson is an acquisitive company. In the financial year covered by the annual report, the company had seven acquisitions and one divestiture. The acquisitions added hundreds of millions in revenues.

Getting the Most out of People

Driving an excellent supply chain depends on how people are recruited and managed, processes, and the technology used. In the annual report where they report on their key performance issues (KPIs), they don’t just report on core financial metrics and the NPS, they also have people metrics. Their associate engagement survey allows Ferguson to understand the driver’s impacting engagement across their 31,000 employees.

The survey focuses on four engagement questions on advocacy, pride, satisfaction and commitment. Associates must agree with all four questions to be recognized as “engaged.” 56% of employees surveyed were engaged.

The company also does internal climate scores of employees at corporate, the branches, and the warehouses. There is a climate score for every location that looks at the level of engagement and satisfaction of the team at that site. If you want engaged employees, you need good managers. “Scores have a lot to do with the way manager handles issues, coaches, and leads operations,” Mr. Jacobs explained. “It is a big part of a manager’s responsibility.” The manager’s direct reports give anonymous, bottom-up ratings on their managers. These scores affect the manager’s own ratings.

If you want engaged workers, safety needs to be a priority. The company recorded 1.9 injuries that caused a worker to have to get medical attention or go home for every 200,000 hours worked. This was a 10% improvement over the prior year. The company has shown sustained improvement on this metric. According to Mr. Jacobs, this safety culture was reflected in the way they managed COVID. The company was designated an essential business that needed to stay open. The company worked hard to create the right environment to keep their people safe.

Training is also clearly important. The annual report mentions a variety of different types of training offered by the company. But Mr. Jacobs discussed the training of a specific corps of supply chain analysts. The company uses a network design tool from Coupa. This is an important analysis tool for maintaining a well-run supply chain. Network design software can provide sophisticated analyses of where inventory should be located to minimize costs while improving service; where facilities should be to achieve the same goals; important mergers and acquisition insights; and an understanding of how big the fleet should be, what kind of vehicles are needed, and where they should be based. Ferguson does 20 to 30 studies a year using this tool. A single study can drive millions in savings while maintaining or even improving service levels.

There is, however, training and a maturity model associated with using this sophisticated tool effectively. Coupa’s maturity model is quite detailed. It examines the skills of the people on the team, the process, technology, and strategy associated with supply chain design. Ferguson is working diligently to move up that maturity curve.

Key Processes

Processes underlie how a company works. In many cases, process is instantiated in applications that direct how and what workers do. Process is a very big topic, but two sets of processes are worth mentioning in more detail are Ferguson’s sourcing and global trade compliance processes.

During COVID, many companies were struggling to get supply. “Lead times expanded even for domestic manufacturers because they sourced raw materials from overseas. Lead times went from 2 weeks to 14 weeks, Mr. Jacobs explained. Procurement is critical to being able to stay in stock with the most important products. Ferguson tends to work with larger more sophisticated manufacturers and seeks to share a six-month order forecast through planning systems that are integrated with their supplier’s systems. During Covid, Ferguson told their vendors, “if you can only produce 40% of our orders, these are the 40% we want. 20% of our stock keeping units (distinct products) drive 80% of our sales,” Mr. Jacobs explained. “We wanted to prioritize what was important to customers. We maintained a 97% fill rate during COVID!”

The company is also CTPAT certified at the highest tier. Customs Trade Partnership Against Terrorism (CTPAT) is a program of the U.S. Customs and Border Protection’s (CBP) to strengthen international supply chains and improve United States border security. Staying on top of the global trade processes surrounding this certification, allows Ferguson to move goods through customs quicker, with fewer inspections, than those that lack this certification.

Ferguson Invests in Best of Breed Technology

Mr. Jacobs mentioned a well-known industry analyst consulting group that makes recommendations on what kinds of supply chain software a company should buy. He believes this company tends to recommend integrated solutions offered by the big enterprise resource planning companies. That is not the route Ferguson has gone. “We look at the integrated solutions, but ultimately, we are looking for best possible product.”

In addition to Coupa, mentioned above, the company is working with Logility for demand planning and Infor Nexus to provide supply chain visibility to their global inbound supply chain. In both cases, they are examining using their data scientist team to employ machine learning to improve the forecasts and estimated times of arrival. Mr. Jacobs summed up their technology strategy by saying “we have been upgrading our supply chain systems over the last 3 to 5 years to stay on the leading edge.”

They are using a legacy Koerber warehouse management system, but the system is effective, and they are not looking to upgrade or replace it. The Koerber solution is used not just to manage the distribution centers, but also to provide visibility to inventory at their import centers, pipe yards, and many of their depots.

They are using a transportation routing and scheduling solution from a small vendor that Mr. Jacob’s considers so strategic he was not willing to name them. This is one of the key applications integrated into their ecommerce platform that keeps customers updated with their order details Through geolocation technology implemented across the delivery fleet, customers can pinpoint the exact location of the truck that is carrying their order, and also know precisely what has been loaded on that truck. This allows contractors to plan for the coming day.

Additionally, Ferguson’s omnichannel capabilities accelerated during Covid, but these capabilities are largely not automated. They will put in a distributed order management solution from one of the largest providers of that solution, but he is not willing to talk about the vendor until after the implementation is complete.

But it is their investments in warehouse automation that are most noteworthy. A 450,000 square foot distribution center in Denver came online last year. This system is using 16,000 square foot goods-to-man robotics system to automate picking. 60 per cent of all product picks for the facility are being done by this system. The system holds 49,000 bins and 26,000 products and utilizes robots to run these product bins across a modular grid and out to a pack station. The system decreases manual handling of materials by 50 per cent which improves pick accuracy, reduces costs, and reduces injuries. A new facility in Phoenix, with the same automation, is about to come online. They will seek to bring more automated warehouses online in large metro areas in the coming years.

Conclusion

Ferguson uses the net promoter score (NPS) as their core measure of their customer service. They print this score in the annual report. The survey asks, “how likely is it that you would recommend Ferguson to a friend or a colleague?” Customers respond with a score between 0 – terrible – and 10 exceptional. The number represents those customers that scored them a nine or a ten minus those that scored them six or lost. They had a score of 52 – a respectable score. They were down 8 points from 60 – a very, very good score – largely they believe because of the difficulty of securing global supply and getting them through the ports in a timely manner. These supply chain problems, of course, were not unique to Ferguson; they impacted the economy as a whole and almost all sectors. Supply chain capabilities and their culture are key to their performance on NPS. And NPS in turn is correlated with financial performance.

I have never seen a distributor, retailer, or manufacturer discuss their supply chain in an annual report in the detail that Ferguson did. Supply chain management is clearly at the center of Ferguson’s strategy and competitive differentiation. Ferguson may be the best supply chain company most people have never heard of.