Fastenal: Focusing on Nuts and Bolts
What's behind the success of a 48-year old wholesaler and distributor of nuts and bolts? Their secret lies in the execution of a customer-focused business model.
Company Overview
Fastenal (NASDAQ: FAST), founded in 1967 and incorporated in 1968, is a wholesaler and distributor that sells industrial and construction supplies to end-users. The company’s offerings fall into two categories: threaded fasteners, such as nuts and bolts, and miscellaneous supplies and hardware. The company operates over 2,600 stores and 14 distribution centers across 50 states and 20 countries. [1] From 1987-2012, Fastenal was the highest-performing stock in the Russell 1000 index, growing 38,565 percent (not including dividends), and outgaining stalwarts such as Microsoft and Apple. [2]
Business Model
Fastenal began as a modest, 1,000 square foot shop in Winona, MN. Over time, the company found its niche and competitive advantage – an obsessive customer focus that would keep its customers coming back. This approach was later distilled in founder Bob Kierlin’s ethos “Growth Through Customer Service.” [3]
Source: [3]
This model, underpinned by opening stores as close to the customer as possible, staffing them with great people, and exceeding customers’ expectations, has guided the company as they’ve grown from a small regional supplier to a dynamic, high-growth wholesaler and distributor.
Operating Model
“What sets us apart is our locality to the customers,” says Cory Jansen, executive vice president of operations for Fastenal. “We open local stores and service local customers with local expertise. At the same time, we’re a national company with national buying power that happens to operate in a local fashion.” [4]
Fastenal’s business model is supported in large part by an operating model focused on three things:
- Decentralized Structure. Fastenal places a premium on ensuring its stores, products, and people are embedded in the communities they serve. Employees are empowered to take a flexible approach to serving customers – from creative sourcing of products to making emergency deliveries. In fact, store managers are encouraged to do their own purchasing and set their own pricing based on local market needs. [5] This principle of “local product and local people” ensures that the right product is on the shelf and employees are well equipped to meet customers’ needs. [6] Further, the combination of a wide array of products, and a technically
Source: http://www.nppgov.com/wp-content/uploads/fastenal_banner-600×300-1.jpg savvy and ultra-responsive workforce, leads to unprecedented entrepreneurial empowerment that is a natural extension of the company’s emphasis on a decentralized organizational structure. [5]
- Scale. While Fastenal has the look and feel of a local business, its operations are backed up by massive scale. This is evident in the company’s robust sourcing, quality, and logistics programs. Through relationships with thousands of supplier-partners and a massive distribution network, Fastenal can ensure customers receive quality parts locally and at low prices. Additionally, because of Fastenal’s scale, the customer can enjoy significant vendor consolidation opportunities and rapid (often same-day) product solutions. [7]
- Vertically-Integrated Supply Chain. Compounding Fastener’s myriad competitive advantages is the vertical integration of its supply chain. The company owns manufacturing facilities, a 6,000-vehicle transportation fleet, 14 distribution centers, inventory supply systems, and retailing and sales service facilities. [8] A cadre of supply chain professionals monitor retail inventory levels hourly to ensure product availability and can dispatch delivery trucks at a moment’s notice to any of the 2,600 retail locations. [9] All this adds up to a steady flow of material from the factory to the retail site.
https://youtu.be/-kRvQDdX_cw Source: [9]
Conclusion
Fastenal has performed remarkably well in building an operating model based on decentralization, scale, and a vertically-integrated supply chain, among other things. Further, each of these areas is tightly aligned with Bob Kierlin’s “Growth Through Customer Service” business model. Not surprisingly, the operating model traits are difficult to emulate and act as formidable barriers to entry for new competitors. Clearly, Fastenal’s tight alignment between business and operational models is driving strong performance.
Sources
[1] http://www.reuters.com/finance/stocks/companyProfile?symbol=FAST.O#K34eukE3eUFHo9Vj.97
[2] http://www.bloomberg.com/bw/articles/2012-02-23/fastenals-runaway-stock-success
[3] https://www.fastenal.com/en/99/our-history
[4] http://manufacturing-today.com/index.php/featured-content/230-fastenal
[5] http://investor.fastenal.com/releasedetail.cfm?ReleaseID=840693
[6] https://www.fastenal.com/en/94/company-overview
[7] https://www.fastenal.com/en/210/key-competitive-advantages
[8] http://www.forbes.com/sites/panosmourdoukoutas/2013/04/10/how-fastenal-wins/
[9] https://www.fastenal.com/en/211/distribution-overview
McMaster-Carr is a very similar company with a very different operating model. Instead of relying on brick-and-mortar stores to facilitate better customer service and engagement, McMaster-Carr focused on the development of an industry leading website to streamline direct customer ordering and leverages existing third-party distribution systems (e.g., UPS) to deliver its product to the customer on the next business. It is interesting to see how Fastenal has embraced technology to facilitate its internal parts transfers, but it is not clear how much of their digital infrastructure development has been focused on customer facing initiatives. Perhaps Fastenal is largely catering to a clientele that values face-to-face transactions?
Interestingly, neither company seems particularly well suited to address small or medium sized customers that need specialized fasteners or other construction components on the same day without requiring them to leave the job site.
NTH (Hi Nathan) brings up a good point.
As a former customer of both McMaster-Carr and Fastenal, there were reasons why I would choose to go to one over the other. McMaster typically delivers the next day, and was perfect for when time wasn’t the most critical issue. They also had a much wider selection than Fastenal. Their phone support staff was always very knowledgable, but sometimes describing the problem I was trying to solve was difficult to accomplish via phone, and sometimes I needed parts on the same day.
In those instances, I went to Fastenal. Their staff was also very knowledgeable, but the in-person interaction gave them a much clearer idea of what I was trying to accomplish and in almost every case, they had the fastener I needed.
Thanks for adding some color, guys.
Nathan – Fastenal does have some machining capabilities, though I’m not sure how well suited those are for small and medium size customers. Interesting point though.
Scott – your experience checks with the research I did. Fastenal prides itself on a really knowledgeable staff that goes the extra mile for the customer.
Unfortunately, in the military, I couldn’t really source products from either company. Most times I ended up using Grainger since it was a DoD-approved vendor.