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MSC Industrial Direct Co., Inc. is one of the United States' largest direct marketers of MRO (maintenance, repair, and operations) tools and supplies, catering mostly to small and midsize companies. It also sells cutting tools to the machine shop industry, the company's original emphasis. All told, the Melville, New York-based company offers more than 500,000 items, sold through a 4,475-page catalog (The Big Book), as well as by telemarketing and the Internet. MSC maintains 90 sales offices in 37 states, predominantly east of the Mississippi River, and four distribution centers strategically located in Atlanta, Georgia; Elkhart, Indiana; Harrisburg, Pennsylvania; and Reno, Nevada. Although a public company, MSC is majority owned by its founder and his family.
Company Founding: 1940s
MSC was founded by Sidney Jacobson, who was raised in Brooklyn, New York. In 1934, at the age of 16, he went to work for a machine tool shop. In 1941 he decided to strike out on his own, and using $1,100 he had saved and another $3,000 borrowed from his mother, he started Sid Tool Company to sell cutting tools and accessories to New York City machine shops. His small storefront was located at 177 Mulberry Street, now the heart of Manhattan's Little Italy but at the time was located close to the center of the borough's thriving machine tool industry. Before long, however, the United States was drawn into World War II, and Jacobson was drafted into the Air Force, where he served in the ordnance area loading bombs onto airplanes. He was forced to leave the business in the hands of his brother. When he too was drafted, the reins were handed over to a sister, who ran the company until Jacobson was released from the service after the war was over in 1945.
Sid Tool was doing about $3,000 a month in sales when Jacobson regained control. It was during this period that he landed a pair of significant Long Island customers after becoming friendly with their buyers: Grumman Corporation and Republic Aircraft. Around this time he always became involved in the production of promotional materials. With the help of a friend he learned how to put together brochures, which he used to good effect in promoting special sales items. Like many returning servicemen he moved to the new suburbs to raise a family, relocating to Great Neck on Long Island. Tired of commuting into the lower east side of Manhattan, in 1955 he decided to relocate Sid Tool to Plainview, Long Island, where he was able to find a suitable 25,000-square-foot building. Moreover, most of his business now came from Grumman and Republic, while Manhattan was beginning to undergo some major changes, with traditional manufacturing operations leaving the city and present-day Little Italy and Chinatown neighborhoods beginning to take shape. Sid Tool prospered during the postwar years but gradually the company became overly dependent on Grumman and Republic, which by the early 1960s accounted for 90 percent of all sales.
In 1964 Jacobson decided to use the experience he had acquired in assembling brochures to launch a catalog business to diversify his sales mix, and to reach out to more customers than he could ever hope to visit to drum up new business. What set the catalog apart was that Jacobson was able to offer imported cutting tools at discount prices, something no one else had attempted at that time. He had assembled his slate of imported products by attending trade shows and contacting manufacturers, and with the success of the catalog he would soon be contacted by manufacturers interested marketing via the Sid Tool publication. What would become known as the Big Book was anything but in 1964, roughly 150 pages in length and featuring the most elementary of production values. Recalling the first catalog 40 years later in an interview, Jacobson guessed that he had about 2,000 copies printed, mailed to addresses pulled together from Dun & Bradstreet.
Computerized Inventory Control System: 1969
Within a few years catalog sales surpassed regular sales, and the company reached the peak of its capabilities. It became increasingly difficult to keep a handle on the business, especially since so many of the products Sid Tool offered were imported. According to Jacobson, in the late 1960s there was one particular import item he thought he had in adequate supply; however, he discovered it was out of stock. To replenish his supply from the foreign manufacturer took six months, far too long a lag time to keep customers happy. Believing there had to be a better way to keep track of his inventory, he took the unprecedented step in the industry of installing a computerized inventory control and order processing system in 1969, this during the days of punch-card processing. The competition thought him crazy, Jacobson recalled, but the investment in computers proved to be the crucial element in the company's success, leading to the development of an industry powerhouse while many of Jacobson's carping competitors fell by the wayside.
In 1970 Sid Tool acquired another cutting tool marketer, Manhattan Supply Company, to serve as a vehicle to increase the distribution of its imported cutting tool business. It was the initials of Manhattan Supply that would form the basis of the MSC name, although for many years business would be conducted under both the Sid Tool and MSC names in Plainview, where in 1978 the company opened its first distribution center. It was also in 1978 that MSC became one of the first distributors in the country to launch a fully integrated Quality Assurance Department.
By the mid-1970s MSC was posting $7 million in annual sales. At this point, in 1976, Jacobson's son Mitchell Jacobson, a recent graduate of New York University School of Law, joined the company on a fulltime basis, having previously worked summers and holidays while attending Brandeis University and law school. By the end of the decade Jacobson's wife was experiencing some health problems, which placed a great deal of strain on Jacobson, as he tried to simultaneously run the business and take care of his wife. He decided to devote himself to his wife and withdrew, at least temporarily, from the day-to-day running of the company. He turned to his son, telling him he could either choose to run the business or sell it. Electing to keep the company, Mitchell Jacobson then embarked on a research trip that took him to a number of industrial supply houses, from which he identified their best practices and brought them home to apply to MSC, setting up the company for the exponential growth it would realize over the next quarter-century.
In 1982 Mitchell Jacobson replaced his father as president of the company. Under his leadership, MSC began to add branch offices at a steady clip, many by way of acquisition, growing from three in the mid-1980s to 26 in 1990, when a second distribution center opened in Atlanta. Also of great importance in 1980 was the introduction of a Total Quality Management (TQM) initiative, dedicated to improving the quality of every aspect of the business. According to Long Island Business News, this program "enabled Jacobson to flatten the organization's structure, empower its employees with decision-making responsibilities and streamline its operations." Most importantly, TQM resulted in an improved ability to quickly fill customer orders. The back-end operations had improved so much that by 1991 MSC was able to ship 98 percent of orders on the day they were received, but competitors were also improving their fill rates. MSC found a way to stand out from the crowded field. It guaranteed that any order taken before 4:30 p.m. would be shipped that day, if the item was in stock, or the company would send the customer a check for $50. Although a gimmick, the ploy worked. Fulfillment employees took up the challenge to get orders out the door, so that it was a rare occurrence when a check had to be cut (0.01 percent of all orders in the first three years of the program). As a result of this near perfect fill rate, the company earned a sterling reputation with customers, driving up sales, further stimulated by the 1994 move beyond its traditional cutting tool lines to include MRO product categories, expanded geographic reach, and increased catalog distribution and other mailings. In 1993 the company mailed 2.4 million pieces, a number that increased to 6.6 million two years later. The shifting emphasis to the MRO market was a natural progression, given the declining manufacturing base in the United States that adversely impacted the sale of cutting tools and the fact that MSC's competitors were already offering MRO products and services, making it almost imperative that MSC follow suit.
Net sales grew from $118.9 million in 1991 to $248.5 million in 1995. To spur further growth, the company made plans to go public. In October 1995 MSC Industrial Direct Co., Inc. was formed as a holding company, an initial offering of stock was conducted two months later, and shares began trading on the New York Stock Exchange. Also in that month, the company completed a minor acquisition, picking up Kaja Productions, Inc. for $1,000.
More acquisitions followed in 1996 as MSC looked to continue expanding in the MRO field by adding existing marketers. In June 1996 the company acquired D.T.C. Tool Corp. and Cut-Rite Tool Corp. A month later Swiss Precision Instruments, Inc. was added, followed by the November purchase of Brooks Precision Supply, Inc. Four more acquisitions were completed in 1997: Dolin Supply, Inc.; Anderson Industrial Supply, Inc.; Enco Manufacturing Co.; and Discount Tool and Supply Company. Moreover, MSC expanded its warehouse and distribution capabilities. In 1996 the company opened a 275,000-square-foot facility in Elkhart, Indiana, which not only allowed MSC to better serve the Midwest but also acted as a pilot for a new warehouse and distribution center that opened in Harrisburg, Pennsylvania, a year later. The Harrisburg center then replaced the three facilities the company maintained on Long Island: a 100,000-square-foot shipping and receiving facility in Central Islip, an 83,000 square-foot small parts shipping facility in Plainview, and a 60,000-square-foot small parts receiving facility, also located in Plainview. The leases on all three of the buildings were set to expire over the next few years.
Technology Aiding Mid-1990s Catalog Publishing
In the mid-1990s MSC also began investing in new technology to improve its catalog business. A fully integrated database allowed MSC to quickly assemble the material. The days of employees taking their own catalog pictures and writing their own copy were all but forgotten. Now suppliers provided copy and photographs, which could be electronically downloaded and laid out for printing. As a result production costs were cut in half. In addition, the catalog turned to a lighter weight paper, a change that allowed the catalog to increase its page count to more than 3,500 in 1997. Although MSC cut down production costs, the Big Book was still a costly affair. Unlike catalogers, who do mass mailings in hopes of achieving a reasonable response rate, a Big Book marketer like MSC looked to trim its mailing, relying almost entirely on buyer files. The goal for such operations was to come as close to a 100 percent response rate as possible. In order to prospect for new customers, MSC began producing a monthly 60-page catalog, containing the best items to lure in new customers. By turning to the smaller catalog instead of the earlier practice of mailing the Big Book, MSC was able to cut its prospecting costs by more than half.
As the Plainview leases expired and the warehousing and distribution operations moved entirely to Harrisburg, MSC transferred its corporate headquarters and customer support center to Melville, New York, in 1998. The company also continued to expand through acquisitions, adding RMG Corporation and Drake-Atwood Tool & Supply Company, Inc. in June 1998, followed by the $6.2 million purchase of Specialty Company, Inc. in October. Sales reached $462.1 million in fiscal 1997 and grew to $614.5 million in 1998, which ended on August 29 of that year. But it was during the summer of 1998 that the company stumbled. According to Industrial Distribution, "the combination of a weak industrial economy, aggressive investment, and tight cost controls to manage earnings led to a higher-than-normal employee turnover rate and a temporary decline in customer service. These events further contributed to a decline in MSC's sales and earnings growth, as well as its stock price." Some of the problem was simply timing: Just when sales were trailing off because of the impact of economic problems in Asia, MSC was spending money to open a fourth distribution center in Reno, Nevada, in 1999. In addition, management was reportedly distracted for six months by a major acquisition that failed to be consummated. But Mitchell Jacobson refused to accept excuses for the company's performance during this period, telling Investor's Business Daily in 2000, "Our whole operation was not as crisp. We didn't answer the phone quite as quickly. Our people were not quite as well trained as they would have been. There were errors in our catalog. You name it." To get MSC back on the right foot, some organizational changes were made and a new compensation plan was introduced to revitalize customer service.
Although a major acquisition may have fallen through, MSC completed a pair of deals in 1999, paying $428,000 for Direct Line, Inc. and $6.2 million for Corbin Corporation. The company also began turning to the Internet to spur sales, in September 2000 launching MSCdirect.com, which gradually introduced the Big Book to the net. To drive customers to the site, MSC invested in direct mail and telemarketing efforts as well as customer training. While this web business fit in well with MSC's operations, other Internet investments proved ill-fated, given the dotcom meltdown at the time. In June 2001 the company announced it would write off $10.3 million invested in four Internet start-ups: MaterialNet.com, MROLink.COM. Tradaq.com, and Commerx Inc.
Due to the poor economy, sales dipped to $794 million in 2002 from $869.2 million the prior year. But business rebounded in 2003 as sales totaled $844.7 million and net income reached a record $52 million. The balance sheet improved even further in 2004, with sales reaching $955.3 million and net income soaring to $82.2 million. It was also during 2004 that Mitchell Jacobson gave up the presidency to COO David Sandler, relinquishing day-to-day responsibilities to concentrate on strategic planning while retaining the chairmanship and the CEO title. Sidney Jacobson, approaching 90, remained active in the company, continuing to serve as vice-chairman.
Principal Subsidiaries: Sid Tool Co., Inc.; Cut-Rite Tool Corp.; MSC Services Corp.; D.T.C. Tool Corp.; Brooks Precision Supply, Inc.; Anderson Industrial Supply, Inc. Dolin Supply, Inc.; Discount Tool and Supply Company; RMG Corporation; Corbin Corporation; MSC Direct Line, Inc.; Swiss Precision Instruments, Inc.
Principal Competitors: Applied Industrial Technologies, Inc.; J&L Industrial Supply; W.W. Grainger, Inc.
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