A significant factor contributing to any company’s success is the attitude and performance of its employees. And, with its award-winning ESOP program firmly in place, Dakota Supply Group believes they have the winning formula to drive high-octane performance day in and day out.
In an industry comprised of so many family owned businesses — and after numerous ownership changes — DSG went in a different direction. What began as Fargo Plumbing in 1898, went through several ownership and name changes: an original ESOP in the mid-1950s, a couple of private equity turns, a shift in product segments, and then the current ESOP and return to its plumbing roots. The current ESOP plan was finalized in 1996 and the name was changed to Dakota Supply Group in 2000.
Today, Fargo-based DSG operates 30 locations across five states. With more than 300 product lines and 40,000 products in stock, DSG realizes more than $400 million in annual sales with 600 employees. In addition to the Plumbing & HVAC/R divisions, DSG serves customers in the electrical, communications, utility, automation, waterworks, filtration and metering technology markets.
As President Tom Rosendahl described, “Our employee owners pride themselves on creating partnerships with customers. No matter who in the company someone is dealing with, it’s always an owner. That means excellent service, high standards and quick decisions. Our promise to our customers is ‘All the right connections.’ That means that we do everything necessary to help them build their businesses.”
Plumbing Segment Manager Ryan Tracy added, “We tell ourselves we should be different. When we hire someone, it’s because we want them to join us as an owner, and everyone takes great pride in being an owner.
“We’re also very open book when it comes to management; we don’t hide anything. We teach our people about the financial side of the company so that they can understand profits and how to make money. And what they realize is that they’re not just making money for the company — they’re helping themselves as well. People can retire from DSG and have a very comfortable life; I want the same, and want to help ensure the next generation can look forward to that as well.”
Todd Kumm, who is the CEO, has been with DSG since the ESOP was formed with 34 initial employee-owners. Within 10 years, DSG has become a fully owned ESOP, with every employee participating. A self-described “finance and accounting guy at heart,” Kumm described the structure in more detail.
“We formed the ESOP to get employees more involved and give them a great opportunity,” he said. “After one year and 1000 hours of service, employees are enrolled in the ESOP. Traditionally, ESOPs out-perform other companies by 8% to 11% a year. It’s allowed us to grow organically and through acquisitions. We’ve now got brick and mortar locations in places we would never have imagined. We’ve found it really improves customer service, too, because employees act like owners and are very involved with our customers.”
The philosophy must be working. DSG was selected as Wholesaler of the Year by the PHCC in 2009, and ESOP Company of the Year by the National ESOP Association in 2014.
One of the incredible gestures that DSG makes with its ESOP is that when they acquire other companies, they honor the years of service of all of its employees for years going forward — and give them the equivalent amount of shares in the DSG ESOP. “We want them to share and reap in the profits as well,” Kumm explained. “Overnight, they become an owner too. It’s all about a feeling of inclusion. For all of our employees, the longer they’re in it, the more they realize what it means. After five years or so, they probably have more money invested in the company than in their houses.”
Rosendahl added, “Our employees aren’t all on the same bus at the same time, but the more we can get them together, and working toward the same goals, realizing that the success of our customers is integral to the success of our own company — and the more they understand profit isn’t a dirty word — the more successful we’ll be.”
A value-added experience
At DSG, they want to make transactions turn into encounters; they want them to be an experience. “We have a singular focus of adding value to the customers,” said Kumm. “And we take our commitment to the industry and community very seriously.” To that end, they have implemented a number of value-added services and offerings:
• A centralized purchasing system ensures that orders can be filled and shipped smoothly all the time. Personnel at each location can view all locations’ inventory any time to make accessing and shipping product easier.
• A diversified training program that goes beyond traditional product knowledge courses to sessions that are designed to help contractors run their businesses smarter — and more profitably. The P4 Learning Lab includes courses on improving daily operations, setting hourly rates, business segmentation and the pros & cons of flat rate pricing. Meanwhile, the Success Connection course features topics like planning for retirement, insurance and tax strategies.
“Our P4 Learning Lab is comprehensive,” Tracy explained. “We bring in outside business and financial experts for a three-day program. Contractors confidentially share their P&L statements with them, and they’ll go through it with our customers step by step to come up with some better options to help them be more profitable and plan for the future. In turn, we think it helps us build profitable customers for life.”
• Technology is used as a tool at DSG. Rosendahl put it like this: “You don’t want to go into a new job with just a regular screwdriver. You want a power screwdriver. We want to give them as many tools as we can to be successful in their businesses.” The DSG Contractor Portal was developed from an idea to design an intranet for customers.
As Tracy explained, the portal allows contractors to be efficient by putting information at their fingertips.
“Each customer has their own log in so there aren’t proprietary concerns,” Tracy said. “It allows them to manage their employees and their business in so many ways: a timekeeping capability, an appointment calendar, contact list, invoicing right from our site, inventory management, product catalogs and repair manuals, conversation calculators, online ordering, etc. It’s basically everything they need to run their company. It was created to be easy to use with very few levels of navigation because we know that when they’re on a job they don’t have extra time. So one click and they’re where they need to be.
“Running a contractor business is so important. Once they realize there is help out there, it makes their life much easier. We realize there will be shortage of trades people in the future, so we’re looking at ways to make their time more efficient. Our sales guys really help encourage them to use it and walk them through the various steps to get them comfortable. We encourage our sales team to work with their customers ON their business, not just IN their business. Their success is our success.”
• DSG offers a variety of marketing tools to engage customers, including a Kids Club, which allows customers ‘ children to learn about DSG in new and fun ways, and DSG Outdoors, a creative way to share hunting and fishing trophies online.
“One of our realizations in recent years is that our marketing programs need to be communicated as much internally as with our customers,” said Tracy. “We want our employees to carry the torch for our marketing programs. They’re much more successful when they have a personal touch.”
• DSG also publishes its own bi-annual magazine, called Connections. They use it to showcase customers, and highlight some of the projects customers have been involved with. There is also a new products section.
“It’s evolved into more of a business publication with articles that have tips to help customers,” Tracy commented. “It’s a very professionally done magazine, with lots of interesting topics. We also include fun things like an outdoors column — and because of our where we’re located, we have some good-natured fun between rival football fans with pictures and articles. There’s also news about our associates. It’s got a nice personal touch. Connections is also available online.”
• DSG does a comprehensive annual customer survey to gauge their effectiveness. “Our customers seem to appreciate the large inventory we carry and our ability to get product in their hands quickly and accurately,” Kumm said. “They also value our service levels. We’re working to increase the DSG brand recognition. The world needs distributors. We provide cost-effective service and a valuable knowledge base for the supply chain. We believe there are a lot of opportunities to capitalize on that going forward.”
The branch level
With DSG’s roots, and with a lot of their branches in the Dakotas, they have experienced an uptick in business because of the infrastructure development associated with the Bakken Shale boom. Surrounding towns are expanding, with a double-digit growth in residential and commercial construction to serve all of the shale workers and management.
The majority of DSG’s branches are in small cities and rural areas spread over long distances, which makes inventory management challenging. As Tracy explained, there are roughly 4 million people in Minnesota — roughly the same number as in the Phoenix metropolitan area — while the Dakotas combined have 2 million residents — equivalent to Greater Kansas City. A number of their branches are located in towns with less than 10,000 people. This unique landscape is another reason why DSG is so valuable to those communities and customers.
“The structure and products at each branch is determined based on its location and customers,” Tracy noted. “We try to address what customers want. Contractors in small towns are typically multidimensional, offering electrical and plumbing services. So the fact that we’re diversified helps us gain their loyalty. We also do a lot of deliveries; in fact, it’s probably more than half of what we sell. Statistically, our will call areas account for less than 15% of our business.
“It’s a challenge moving inventory efficiently between branches. We have branches that are 1,200 miles from each other. That is why a central distribution center is not feasible; instead branches are responsible for maintaining their own inventory. We might have two branches that are 100 miles apart, but stock completely different inventory. It would be easier for us as a company to have the same inventory in each location, but part of being a good distributor is giving the customer what they want. Most of our manufacturers’ shipping policies are the same, whether the distributor is in New York City or Fargo. So most of the branches handle their own orders and receive inventory directly. They all keep a full stock of our A items. When we do have to transfer between branches, we negotiate with a third party to handle the shipment.”
Tracy went on to note how important their vendor relationships are, promoting the communication that is so critical between parties.
“It takes both of us working together to be successful,” he said. “We know our market and how our customers are using the products, and that is valuable feedback for our vendors. We also put together a Vendor Scorecard that gives us concrete data that analyzes their performance and ours. So when we sit down at conferences, our vendors are very impressed that we can show them real data on delivery, fill rates, accuracy, bid percentages, backorders, POs and size of orders, customers we sell to, gross margin percentage, turn & earn, and total sales. It allows us to have a very candid discussion.”
The predominantly rural territory DSG serves also makes it challenging when recruiting new employees. In addition to the smaller labor pool in general, there is also very little unemployment.
“We’re making an effort to recruit outside the industry,” Tracy said. “We go to job fairs at high schools and technical school, and participate in industry groups. We’ve formed a scholarship program that we’re promoting for contractors. Thankfully, we have very loyal employees, with an average length of service at about 20 years. But we work at it. We do employee surveys every year because we want their honest feedback. It’s important to know if they’re engaged. We ask specific questions about wages, managers, how we can improve. And we initiate changes accordingly. We’re very fortunate to be located in the Midwest where people have such strong values and work ethic.”
The road ahead
Tracy, who came to DSG through the Plainsco acquisition, has worked his way up the ladder from the warehouse to management. He credits Kumm and Rosendahl with many valuable lessons.
“Todd [Kumm] has been a huge influence on me,” Tracy shared. “He’s one of the most financially sound people I’ve ever known, and he knows ESOP regulations and our plan inside and out. Tom [Rosendahl] has also been very influential in my life and career. They’re kind of like ying and yang; Todd’s a numbers guy and Tom’s got a creative side. I’ve tried to take on the best of both and make myself as well rounded as possible.
“It’s also been very beneficial for me to be so involved with WIT, our buying group, and ASA, where I am a Young Executive and now serve on the Plumbing Division Board. That has allowed me to tap into knowledge and learn from people I would otherwise not have had access to. It’s priceless to me.”
As they look ahead, DSG leadership expect the company to continue to grow organically and by acquisitions in and around their trading areas.
“We’ll continue to look at opportunities when they make sense so that we can give our employees the best chance to grow,” Kumm said. “But it has to be the right fit. Large isn’t always better; we believe in profits first.”
And they believe in promoting the success for their supply chain partners. “Everything we do has one goal: help our customers succeed,” concluded Tracy. “We truly care about our customers. More than a century after this company was founded on that idea, it continues to influence what we do today.”