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Supply Chain Management of Hughes Supply, Inc.

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Supply Chain Management of Hughes Supply, Inc.
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Supply Chain Management of Hughes Supply, Inc. - January 10th, 2011

Hughes Supply, Inc. is a wholesale distributor of a broad range of materials, equipment, and supplies to the construction industry. Their major product lines include electrical, plumbing, and electrical utility equipment; building materials; water and sewer products; heating and air conditioning equipment; and pipes, valves, and fittings. In fact, in the mid-1990s, Hughes Supply was distributing more than 95,000 different products from 5,000 different manufacturers through over 170 wholesale outlets. Major suppliers to Hughes Supply included Rheem, American Standard, Charlotte Pipe, Grinnell, Mueller, and Square "D".

Although little information is available on the company's early history, by 1928, Hughes Supply was operating in Orlando, Florida, having been founded by Clarence Hughes and his son Russell Hughes. In its early days, the company focused on distributing electrical supplies and equipment for use in residential construction in the Orlando area. The company weathered the Great Depression, and by 1939 had opened its first wholesale outlet outside of Orlando, in Gainsville. Steady success prompted the opening of another outlet in 1941, this one in Daytona.

From 1941 through 1944, as the country prepared and eventually entered World War II, material shortages forced the company to shift the focus of its operations to wartime production. In fact, Hughes Supply opened a manufacturing plant that produced casings for artillery shells, and that plant continued operations round the clock until the end of the war.

Returning to its distribution business after the war, Hughes Supply added a line of plumbing supplies to its product line, as electricians were starting to perform both electrical and plumbing work. Postwar economic and building booms benefitted Hughes Supply, as new housing starts led to increased demand for electrical and plumbing supplies. The company was incorporated in the state of Florida in 1947 and continued to operate from its three distribution locations in Orlando, Daytona and Gainesville.

In 1949 the company diversified its business, establishing long-distance trucking operations through which it hauled Florida produce north and returned with vendor materials. This trucking operation would later prove very profitable in the 1980s, when the trucking industry was deregulated.

During the 1950s, Hughes Supply expanded and set up wholesale outlets in other areas of Florida where there was little competition: St. Petersburg, Lakeland, Sarasota, Clearwater, and Venice. In the 1960s Hughes Supply continued its expansion in Florida with five more wholesale outlets. During this time the company also broadened its product line to include electric utility supplies and equipment, industrial supplies, tools and contractor supplies, in addition to its staple plumbing and electrical supplies.

In 1970, Hughes Supply was taken public, offering 350,000 shares of common stock at an initial price of $17.60 per share. In its first year as a public company Hughes Supply achieved approximately $45 million in sales, and net income of $1.2 million. In 1973 Hughes Supply's sales volume reached $100 million.

In 1975 Florida suffered the worst year in construction business since World War II. Hughes Supply's sales suffered accordingly, dropping by 30 percent in one year. The company was forced to reduce personnel, cutting back from 1,100 employees in June 1974 to approximately 800 by January of the following year. In spite of the downturn in business, however, the company remained profitable, earning $865,000 in fiscal 1975.

The Florida construction market began to recover soon thereafter, and Hughes Supply's sales increased to $80 million. During this time, Hughes Supply celebrated its 50th anniversary in 1978 by hosting a trade show for its customers and vendors. This show had the distinction of being the largest show of its type organized by a single company in its industry to date.

At this time, Hughes Supply was still operating exclusively in Florida, and nearly all of the company's business was related to residential construction. However, Hughes Supply management was well aware of the impact of economic downturns on the residential construction market and regarded itself as particularly vulnerable to such downturns. So, the company's management decided to implement a strategy designed to minimize some of this vulnerability and, at the same time, set the business on the path to aggressive growth in the next few years. Their new three-part strategy was to diversify its product line and geographic scope, reduce dependence on residential construction, and capture more of the local construction dollar.

Hughes Supply expanded its business initially by opening new wholesale outlets in other Florida locations. Throughout the 1980s, however, the company began a series of acquisitions, the first of which was The Marbut Company, based in Georgia, in 1981. Marbut added heating and air conditioning supplies and equipment to Hughes Supply's product line, as well as geographic expansion into Georgia. Initially Hughes Supply sought out companies with strong local markets, with annual sales in the $5--15 million range. By 1982 Hughes Supply's sales had reached $200 million.

In 1985 Hughes Supply acquired Carolina Pump & Supply Corporation with its 11 branches in North and South Carolina. CP&S specialized in the distribution of water systems, as well as water and sewer equipment, in the Carolinas. Two more companies were bought by Hughes Supply in 1987: Paine Supply in Mississippi, a plumbing and HVAC distributor, and USCO, a plumbing wholesaler in the Carolinas. These two acquisitions brought the total number of Hughes Supply outlets to 75 in five southeastern states.

By January 1988 Hughes Supply's sales volume had reached over $400 million, and Hughes Supply opened the Hughes Training Center in Orlando for company personnel. In 1988 Hughes Supply acquired Stop Supply, Inc., a wholesale distributor of HVAC equipment and supplies in Tennessee and Kentucky, and Mills & Lupton Supply Company, an electric utility and industrial supply company operating in Tennessee and Georgia.

Hit by the national recession of 1991--1992, Hughes Supply's sales dropped by 12 percent for the fiscal year ending January 1992, and the company recorded its first ever loss. That year, Hughes Supply responded by effecting a number of internal changes and restructuring its operations; by January 1993, the company had returned to profitability.

In 1993 Hughes Supply acquired Alabama Water Works, a wholesaler of water and sewer equipment in Alabama. Electrical Distributors, Inc., the largest single-house distributor in Georgia, was acquired in the same year. Sales reached the $600 million mark by January 1994.

By the mid-1990s the average Hughes Supply wholesale outlet accounted for $5 million in annual sales, and a gross profit of approximately $1 million. It carried about $600,000 in inventory and $600,000 in trade receivables. Each outlet employed about 17 people in sales, warehousing, administration, and as truck drivers. Approximately one half of total sales volume was accounted for by companies acquired since 1981.

Indeed, Hughes Supply had made over 26 acquisitions since that time, with a strategy of seeking out companies with a product line and/or geographic coverage that would fill out its product line and geographic area of operations. Later acquisitions targeted larger companies with a strong market presence in selected product lines and geographic areas.

Analysts expected Hughes Supply's strategy of growth by acquisition to continue. In addition to targeting companies with new locations and complementary product lines, Hughes Supply also began seeking higher profit margin product lines, and diversification from new residential and commercial construction to a larger proportion of the repair and replacement business. A new product line, swimming pool supplies, was introduced in 1994. Pool supplies typically had a higher profit margin than Hughes Supply's other product lines, and Florida represented a significant market for these products.

By 1995, Hughes Supply was overseeing distribution outlets throughout the southeastern United States, and even in some parts of the Midwest, chiefly Indiana and Ohio. The company remained largely a family-run business. David H. Hughes served as chairman of the board and chief executive officer, and other members of the Hughes family were directors of the company. In 1995, however, Stewart Hall was named president at Hughes Supply, and he immediately set to work making internal reorganizations and streamlining divisions and subsidiaries.

Since going public in 1970, the company sustained a 12 percent annual compounded growth rate in sales, mainly due to its planned strategy of geographic and product diversification through aggressive acquisition. Nevertheless, the company remained highly dependent on the construction industry; roughly 55 percent of sales were to the commercial and municipal markets, and the remainder to the residential market. Moreover, Hughes Supply's business was highly cyclical, with its dependence on the new construction market. Still, to offset the effects of this cyclicality, the company had become more focused on the less cyclical sectors of construction activity, namely multi-family housing, public works, commercial construction, and industrial supplies.

Analysts estimated the size of the U.S. market for construction material and building supplies to be over $100 billion in the mid-1990s. Nearly all of Hughes Supply's competitors operated with only a limited product line or in one or two product groups with a smaller inventory. In a June 1995 report, analysts at Smith Barney stated that "in a highly fragmented market, Hughes' economies of scale provide advantages over smaller competitors." The same analysts also found that Hughes Supply's financing costs of five percent were substantially below those of most of its competitors, a critical factor in a business that made 90 percent of its sales on a credit basis.

No single manufacturer or supplier accounted for more than seven percent of Hughes Supply's total purchase volume in the fiscal year ended January 27, 1995. Hughes Supply served more than 45,000 electrical, plumbing, and mechanical contractors and subcontractors, electric utility companies, and municipal and industrial accounts. No single customer accounted for more than one percent of total annual sales. Less than one percent of sales are retail, and the growth in home center retailers, which served small contractors as well as do-it-yourselfers, was not expected to affect Hughes Supply's wholesale business which remained focused on large contractors.

Principal Subsidiaries: XSMC, Inc.; Carolina Pump & Supply Corp.; USCO Inc.; Paine Supply of Jackson, Inc.; Hughes Aviation, Inc.; One Stop Supply, Inc.; Mills & Lupton Supply Company; Twin-T of the Carolinas, Inc.; H Venture Corp.; HHH, Inc.; HSI Corp.; Electrical Distributors, Inc.; Alabama Water Works Supply, Inc.; Swaim Supply Company, Inc.; Olander & Brophy, Inc.; Port City Electrical Supply, Inc.; Elec-Tel Supply Company.

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