Ted Pincus

Replacement parts all in the family

BY TED PINCUS

They're the no-see-ums of the nation's consumer durables industry. Invisible but yet a fast-growing segment that touches our lives every time we replace a part of almost anything we own.

They're known by a term as arcane as their role in the supply chain: third party logistics providers (TPL). In non-corporatespeak, this refers to the hundreds of new specialized warehouse distributors who stock all the spare parts that the big retailers -- and manufacturers -- don't want to inventory any more. Like Woody Allen's Zelig, the industry thrives on efficient anonymity.

"We're the best company nobody ever heard of. When you order a part to repair a Black & Decker drill, it comes UPS in the B&D box to your home. But that part never came from Ace or Black & Decker. It came straight from our warehouse after originating from an outsource producer abroad," says the man who should know, Josh Johnson. He's the latest president in a fifth-generation family that virtually invented the TPL game right here in Chicago.

Johnson, 31, is president of Fidelitone Logistics, which began here in 1923 as a manufacturer of phonograph needles for record players and juke boxes.

In retrospect, you might say that field had a limited future. But as records gave way to audiotapes in the '70s, Craig Hudson, the family's fourth generation and still current CEO, was prescient enough to reinvent the company as a distributor.

More importantly, he became the exclusive U.S. distribution point for Sanyo TV replacement parts. It was like creating a new kind of aftermarket illusion. Everyone who ordered a Sanyo part saw the Sanyo label, and assumed that it came from Sanyo. But each one came from the huge inventory Fidelitone Logistics carried at its warehouse.

This led to a major breakthrough, Johnson says, an alliance as the exclusive private brand parts distributor for the nation's largest provider of home services, concentrating first on electronics products. By the '80s, the company went far beyond this category and beyond the home services client and Sanyo. It became the first company in the incipient TPL field to implement an individual drop-ship (an order sent direct from manufacturer to consumer) program. This is now an industry standard.

In the '90s, Fidelitone Logistics completed a major warehousing center and headquarters in suburban Wauconda, with 265,000 square feet of computer-controlled inventory operations. It also vastly expanded its home services client relationship, adding 350 more product lines (Diehard, Craftsman and other private brands plus many other labels).

In so doing, it became one of only three logistics providers named a Master Source. In the following years, it established similar ties with Best Buy and even with manufacturers such as Black & Decker.

The latter is a good example of how the process works, Johnson says. Black & Decker decided to outsource everything connected with spare parts. That meant inventory planning and control, inventory ownership, ordering, parts assembly into full components, packing and shipping and billing and collection.

This same process became commonplace for microwave parts, vacuum cleaner parts, HVAC, hot water tank parts, power tools and so forth.

"In fact," Johnson says, "we're still stocking and shipping pedals for sewing machines made decades ago. Sometimes we receive an order for a single transistor. But we're in the service business."

Today Fidelitone Logistics serves as the parts distribution arm for more than 1,000 brands. It stocks 120,000 SKUs and keeps more than 1.6 million items in its data base. Each day, more than 20,000 parts are shipped to someone's customer -- anonymously.

To do it all profitably requires the latest in automation, and Johnson says his inventory control system is state of the art, needing only 350 employees.

*While the TPL industry -- about 150 such companies -- is now growing at a 15 percent average annual rate, Fidelitone Logistics has been outpacing it.

And what may tomorrow hold for Hudson-Johnson and family? No IPO. No merger. There are two kids on the way up, a sixth generation of management. "Our ability to continue as a family run business is perpetual."

*Edited version of the August 2005 article.

Ted Pincus is a finance professor at DePaul and an independent communications consultant and journalist.