WD-40: Systems Transformation and Brand Expansion

 
 
By Edward Cone  |  Posted 2003-10-17
 
 
 

WD-40: Systems Transformation and Brand Expansion


Mike Freemans job was to fix something that wasnt broken.

WD-40 Co., where Freeman is president of North American operations, makes WD-40 lubricant spray. For decades, that was all it made, and the San Diego company was expert at getting those iconic blue-and-yellow cans onto its retail customers shelves.

But when WD-40 embarked on an acquisition strategy in 1997, Freeman had to reinvent the information systems supporting manufacturing and distribution. He ended up building a system from scratch to integrate new products, manufacturing partners, suppliers, and sales channels. "We looked at our supply chain, and it was ruthlessly efficient, but not real flexible," says Freeman, who was chief information officer at the time. "We had to break it apart and put it back together with the flexibility to handle different products."

Today WD-40 has seven brands, including Spot Shot stain remover, 3-in-One Oil, Carpet Fresh rug cleaner, 2000 Flushes toilet cleaner, and Lava and Solvol soaps. Only about 60% of its $238.1 million in revenue for the 2003 fiscal year, ended Aug. 31, came from its original WD-40 product. Income for the year was $28.6 million, or $1.71 a share. "They have done a good job of integrating the acquisitions into the business," says Liam Burke, a stock analyst who follows the company for brokerage Ferris, Baker Watts in Baltimore.

As part of a four-year plan to almost double sales and earnings per share, the company hopes to reach $275 million in sales and $1.90 in earnings per share, respectively, by the end of fiscal 2004.

"There has been no report to indicate that they wont get to those objectives," says Burke. The strategy originally called for the first two years growth to be driven by acquisitions, and the subsequent two years by organic growth, including new products based on the existing brands, such as a version of Spot Shot now under development for sale in pet stores.

Freemans challenge was to create an information system that could track sales and inventory for all WD-40 products, and that allowed the companys wide range of customers to order and pay for all products on a single invoice. A common system was essential to the efficiency needed to meet WD-40s financial goals.

Freeman, 50, bet on an unusually close relationship with a key software vendor to make the new brand integration work. After looking at enterprise resource planning systems from major vendors such as SAP and Oracle, and smaller ones like QAD Inc., he chose a package called Innatrack from Draves & Barke Systems, a small company in Eden Prairie, Minn., with $1.5 million in revenue this year.

The relationship is almost symbiotic. WD-40 agreed to test early versions of new Innatrack releases, into which the vendor would build the functions WD-40 needed to support its expanding product base, such as the ability to handle the promotional and rebate demands of grocery chains.

Draves & Barke Chief Executive Roy Barke says larger companies may profit from reexamining the ways they work with their own software vendors. "Its a trust factor," he says. "Were like a consultant, and we can bounce ideas across to each other, think outside our organizational constraints. We watch out for the needs they express." Says Freeman, "We communicate directly with them without any third parties for development and implementation. That costs less and gives us more value for what we spend."

Next Page: Fortress mentality.

Fortress Mentality


Fortress Mentality

As long as WD-40 occupied what it called the "Brand Fortress" built around that single powerful name, its mainframe-based system—a Unisys machine operated by San Diego-based Data Systems, running homebuilt applications for order management and other basic jobs -- worked fine. But when Chief Executive Garry Ridge decided to move to a "Fortress of Brands," including products that would be No. 1 or 2 in their categories and occupy some niche of what the company calls the "squeak, smell, and dirt business," the system had to change. New product types and new retail channels had to be accommodated.

It was a whole new world for a company that began producing its core product in 1953, doing business at first as the Rocket Chemical Co. WD stands for "water displacement"—the process by which the lubricant does its job—and 40 was the batch number that finally worked. By the time Freeman, a native Southern Californian, joined the company in 1990, the lubricant occupied a special place in the lives of handymen everywhere, who live by the adage, "If it moves and its not supposed to, use Duct Tape; if it doesnt move and it is supposed to, use WD-40."

Freemans background was in marketing. To get a notion of how critical that is to WD-40, consider this: Its information technology reports to the head of marketing. Thats who deals with the contract manufacturers and retail channels critical to the companys success.

WD-40s core business operates much like Coca-Colas. The company makes concentrated lubricant, then ships it to contract manufacturers who package the stuff and ship it to retailers. The company owns very little inventory at any time; packagers own the product until they ship it to the customers who have purchased it. WD-40 systems track that product flow and manage relationships with the retailers, which include a wide variety of hardware stores, big-box retailers, and specialty stores.

The first acquisition, 1997s purchase of 3-in-One Oil, fit easily into the existing supply chain, because the product is sold in many of the same places as WD-40. But the next purchase, a 1999 deal for the heavy-duty Lava brand hand soap, "started to break the supply chain a lot," says Freeman. "Lava was the a-ha! moment."

For one thing, none of WD-40s contract manufacturers made anything like the pumice soap, and the company needed to take on distribution duties for the heavy-duty skin cleaner.

The contract manufacturer WD-40 uses to make Lava, Valley Products, had to re-enter orders into the system of its third-party logistics provider—an inefficient process considering WD-40 is sold in 160 countries.

"That wasnt going to work for us, because we have so many trade channels," says Freeman. Grocery chains, for example, have a welter of special needs, such as deductions for promotions, fees to guarantee the best placement of products on shelves and coupons. Home stores have their own needs, which are different from industrial suppliers.

"We couldnt find an ERP package that could handle the promotional allowances and customer orders of different channels," says Freeman.

With more fields than its old system to handle data on new suppliers, products, and sales channels, Innatrack let WD-40 handle domestic and international order processing, do order processing through Electronic Document Interchange (EDI), maintain enough flexibility to process and ship in the face of many types of promotions, and track the promotional allowances for advertising and other expenses at some types of store.

"Other packages had no capability to handle these situations," Freeman says. "Using them would have forced us to bend our business processes to their capability, which is unacceptable, but very common in ERP packages. All other ERP systems we looked at, we thought we would get caught in the cycle of paying for implementation and enhancements and then paying to do the same work again with each major release or upgrade over the years … not good."

Innatrack also integrated into WD-40s pallet labeling and EDI systems more easily than the other ERP packages.

The Innatrack system went live in March 2000. Thirty days later, WD-40 bought Global Household Brands, the maker of 2000 Flushes, Carpet Fresh and X-14. That nearly doubled the size of the company and greatly increased its grocery store business, previously only about 5% of sales.

After running the Innatrack system in parallel to GHBs homegrown system for six months, the whole business was on Innatrack by the beginning of 2001. "We have found its best to pick the system that runs best and junk the other," he says. "Otherwise, you can spend forever integrating and synchronizing data and systems, instead of avoiding duplicate efforts and data."

Next Page: Taking a shot.

Taking a Shot




Taking a Shot

A year later, in January 2002, WD-40 made a quick decision when the opportunity arose to purchase the Spot Shot brand. The $35 million company was integrated into WD-40s systems within 30 days of the deals May closing.

Unlike the previous acquisition of GHB, Freeman chose not to import three years of sales data from the acquired company. "It was too much work for too little operational value," he says. "Every time, its different," he says. "In this case, it was too messy, so we just took their old system and put it in our warehouse building to use for financial reporting."

There were a few problems along the way that centered more on processes than technology, such as reconciling inventory it owned, such as cans, with orders shipped from contract manufacturers. "The first month or two after going live with Innatrack, were challenging," says Freeman. For example, if the company bought 150,000 cans from a can company, and 145,000 were filled by a manufacturer and sold, WD-40 sometimes could not find the 5,000 remaining cans in the system.

Knowing that large orders are frequently filled inexactly, plus or minus a thousand cans or so, and that some number of cans get lost in warehouses, thrown out for quality control, and so on, Freeman decided not to tinker with his software, but instead changed the process so that the can-maker now ships and invoices directly to the contract manufacturer.

The focus now, says Freeman, is on pushing newly packaged products into new sales channels, such as the Spot Shot product to be sold in pet stores. Like the acquired brands, Freeman expects new releases to fit smoothly into WD-40s information and business processes.

"Those new products just go right onto the system," he says. "Were flexible enough to handle them."

Next Page: WD-40 Base Case.

WD


-40 Base Case">
Company: WD-40

58%

The increase in earnings per share over a three-year period, from $1.08 in 2001 to $1.71 in 2003. This was achieved while absorbing a series of acquisitions including Block Drug Co. in 1999, Global Household Brands in 2001, and Heartland Corp. in 2002.

Business: Owns and markets branded products, including WD-40 lubricant and Spot Shot stain remover.
Headquarters: San Diego
Key Business Executive: Garry Ridge, chief executive officer
Key Technology Manager: Michael Freeman, division president, Americas

Project: Build information technology systems to handle orders and inventory in support of expanding product lines and sales channels.

Objectives: Integrate several acquisitions; continue growing by introducing new brands and selling in additional retail categories; increase earnings.

Technology Used: Draves & Barke Systems Innatrack enterprise resource planning system.

Lesson for Big Companies: Dont be afraid to start over on core systems if yours needs change.

Rocket Fuel