Using data as your next competitive edge | Erik Gershwind

Benj: I'm Benj, founder and CEO of Proton AI, the AI-powered CRM built specifically for distributors. You're listening to In the Mind of a Distributor, where we interview the smartest minds in distribution. Let's get into it.

Benj: Erik, thank you so much for coming on the In the Mind of a Distributor podcast. As everyone I'm sure knows, Erik was the long-time CEO of MSC, one of the largest industrial distributors in the US. So glad to have you here. Excited to start with a retro on your time at MSC and your 30-year history there.

Erik: Benj, my pleasure. Thank you for having me. It's a pleasure to be back. I think we got to do this once before, so thrilled to do it.

Growing up in the family business

Benj: We'd love to start from the beginning. You sort of grew up in the family business, but we'd love to hear your story of actually joining and your history getting into distribution.

Erik: Much like you can probably relate to in many ways, MSC was kind of like growing up around the dinner table. From a young age I became exposed to the company. Along the way the company grew up, I grew up, the company went public. As the company evolved and matured into what is today a true public independent company, I evolved and matured.

Throughout my time in school, I found this natural gravitational pull back to the business. I loved it. My summertimes, instead of taking internships at cushy jobs, I was going back to MSC and sweeping warehouse floors, literally painting floors, answering phones in call centers. It gave me a great appreciation for the business, for our people, and the opportunity to learn from the ground up.

I went into law school thinking maybe there's a chance I practice. But again, that gravitational pull brought me back to MSC. I was fortunate to have the opportunity to see virtually every area of the company and work my way through.

The agreement I had with my uncle at the time, who was our CEO, and our board, was that I was afforded the opportunity to get the initial intro into the company and then from there had to earn it. I thought that was the right way. It's the way the family always treated the business. We wanted to be good stewards for our entire shareholder base. It's the only way I'd want it.

It's been an amazing run of 30 years, seeing every nook and cranny of the company from the ground up. The last 13 of those 30 years (or 15 if you extend my time as CEO to include president) were for me the ultimate privilege and honor.

Going public without losing the family's values

Benj: When did the company go public? And I'm curious how that changed the dynamic within the family.

Erik: We went public in December of 1995, so it's been 30 years of life as a public company. I always say that we're really lucky. I think we punch above our weight for what is considered in the investment world a mid-cap company, a market cap plus or minus $5 billion. I look at our board of directors and say, boy, how are we so lucky to get these great people to join the company?

Certainly there were changes. The company goes from private to public, and there's changes from a governance standpoint and from a sophistication standpoint around compensation. But two things stay true.

One was the family's perspective on the business. Even when we were private, we always viewed ourselves as stewards of something bigger than ourselves. We never tried to treat it like a family business that was in service of our family. We always viewed a stakeholder community that we were accountable to. So in a lot of ways it was a natural transition for us.

The other thing that's been really cool is staying true to my grandfather's values. He started the business in 1941 and was a very principled man. He wasn't a particularly vocal person. He was the type of leader who did it by actions, but there were a few values that came ringing through. If he were alive today (I got to work closely with him for many years before he passed away), I think he'd be really proud. And what he'd be most proud of is the way we carry ourselves. The accomplishments have been great, but it's the way we've done it: his values. Integrity and doing what you say you're going to do. Empathy and caring for people. A focus on the customer. And an insatiable desire to always get better than you were the day before. Those are some of his values that he lived by, and we've been able to retain that.

A lateral path through the business

Benj: You joined the business right around the time it went public. Give us the run-up through becoming president. What was your journey there? It's especially interesting for me coming from a family business myself. I'm curious how you thought about learning the business when you joined.

Erik: There's been this cool parallel path of how I grew up and matured in the business and how the company evolved and matured into what it is today. For me, the path was really to move cross-functionally through the business. My path looked more lateral and across than the traditional up and down, particularly in the early years. That was so I could get a 360-degree view of the business. Much like you entering a family business, I realized if you can understand all sides, number one, it makes you a better leader. Number two, it helps cultivate empathy, which I think is a really important skill: the ability to walk in someone else's shoes if you've done the job.

My first role with the company was in the '90s when we were acquiring a lot of bolt-on distributors for geographic expansion. My first job was to build out a team, a process, and an approach to integrating those businesses into MSC. It gave me an enormous crash course into distribution because through that process we had to learn supplier relationships, customer relationships, technology and systems issues, and most importantly the culture and people issues of how you assimilate. From there it was into sales, into product management. I spent some amount of time in almost every part of the company.

Stepping into the CEO role

Benj: Then you became president, then CEO about 15 years ago. What was that transition like?

Erik: One of the really cool things is that I kind of feel like there's been a few things we've gotten right over our 85 years as a company. Martina, who I transitioned to, is our fifth CEO in 85 years. We've developed over time this playbook for doing transitions. I learned from my predecessor, David Sandler, who learned from his predecessor, Mitch, who's our non-exec chair. It's really a process of pressure-testing somebody over an extended period of time.

David laid out a game plan with me that extended over many years. We had a great transition. There's always an element when you're starting your own business that when you're in the seat, there's no reproducing it through practice. You're in the game and it doesn't feel like anything else. But I did feel as prepared as I possibly could be because we had a really good succession plan that was extended out over a long period of time.

The other thing it did for me was give me a perspective on when the time came for my own transition, which just happened in January. I had a playbook to work from. So that transition, while it occurred in January, was years in the making.

Repositioning MSC after Amazon's B2B move

Benj: Early in your tenure as CEO, Amazon talked about entering the B2B market. That played out to be less of a big deal in retrospect than it seemed at the time, but at the time I think everyone was really freaking out about it. How did you think about Amazon relative to the MSC value prop? How have you thought about it going forward?

Erik: Our feeling at the time was that it was going to be a tough putt for Amazon to pivot from B2C into B2B, and particularly within B2B into technical, high-touch areas. It was a very different animal. But we also felt like it's Amazon. They have tremendous staying power, the smartest people in the world. If they want to, they could probably figure it out. And even if they don't figure it out, they could do some damage along the way and set off a chain of events we couldn't imagine.

We looked back at the last chapter we were coming out of and I would refer to that as a spot-buy model. MSC in the industry was known at the time as a catalog house, but essentially our role in the world was we had this awesome logistics engine, a massive product assortment, high-quality product assortment, great customer service experience, and we got product to customers next day for unplanned spot-buy needs. That was a tremendous role we played, but nothing lasts forever.

In the spirit of reinvention, we felt like that's what Amazon could potentially not only reproduce but take to another level if they were to be successful. It was the impetus for change.

At the same time, an interesting dynamic was playing out. We were a few years removed from the global financial crisis. While it was a few years removed, that event had a profound impact on our customer base. MSC's customer base is 70% of revenues into the manufacturing sector. Many of them had a near-death experience. Going back to economics 101, in this time of crisis, cash is king. Our customer base had an awakening.

The awakening was: it's not just about piece price. Winning at manufacturing is about throughput, being really efficient and being really fast to market to be able to get products into customers' hands faster. While the Amazon move was real and the reaction was somewhat defensive (how do we defend against Amazon?), there was a similar dynamic playing out that was more offensive. We started to see white space in the distribution market because these manufacturing customers were crying out for help. They were saying, "We need help running our business better." That meant getting more efficient and streamlining their cost structure, because they were facing disintermediation from technology, competitive overseas threats, and margin pressure.

It played out in the form of speeding up throughput, because again, cash is king. How do we free up cash from inventory and get it into customers' hands? It also played out in how do we speed up the manufacturing process so we can generate revenue faster and be more nimble for our customer base.

We took a look inside MSC and said we have some assets beyond just the next-day delivery engine and a broad product assortment. We can help these manufacturing customers actually solve their problems. As we took stock, we saw a deep heritage going all the way back to my grandfather in metalworking supplies, cutting tools, abrasives, and finishing supplies, and the technical expertise around that area. We thought that was so important because those product lines were more strategic, more mission-critical as part of the manufacturing process. You can actually influence the output, as opposed to stuff that was just happening around the plant.

The confluence of those two things led to a repositioning of the company. If I looked back on my tenure as CEO, the headline would be: repositioning MSC from what was a spot-buy supplier to a mission-critical partner on the plant floor of North American manufacturing. That repositioning took hold in a number of different ways, but that was fundamentally the shift we made.

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Investing in digital as more than e-commerce

Benj: How did investments in digital play into all this? Today, 60% of MSC sales are digital. It's been a pretty amazing transformation. How much of that came from this Amazon moment? My impression is that a lot of digital sales are spot-buy, so I'm curious how that played into the overall strategy.

Erik: The investment in digital predated Amazon. Certainly the Amazon momentum accelerated it. COVID then accelerated it again. The efforts around digital started even during the prior chapter.

For us, the key with technology has always been: don't fall in love with the technology. Technology is in service of delighting customers and doing things we otherwise couldn't do. The realization we started to have was that digital technology is allowing us to do things that will fundamentally change the game and improve lives for the customer.

I'll give you a great example. Search on an e-commerce site has been really hard for us because our catalog was so clean and so easy, but it's bounded. It was limited and we had reached the maximum capacity of the catalog. One of the things we were hearing from customers is that as many SKUs as we had, they had assorted needs for other products. E-commerce gave us the ability to open that up and not be bound by a physical print.

Another great example would be our digital marketing efforts, which have really picked up steam as of late (thanks to the help of Proton, I might add). The traditional catalog-house approach to marketing that MSC benefited from for many years was print brochures. With a brochure, we would curate a set of products we thought were relevant to customers, storyboard them out, and come up with a print brochure that would last the month. It would go out, we'd see returns relatively quickly, but by the time we could make adjustments we were two or three brochures out, two or three months later.

Contrast that to digital marketing today, which is a cornerstone of our marketing programs. We curate product assortment and merchandising decisions daily. We see results hourly and we make changes daily. Literally by the next day, if we see something working or not working, we can adjust. Our lead times went from at least six weeks in a print world to 24 hours to move on a dime. Those are examples of thinking about technology in service of something, as opposed to the end in itself.

Extending the footprint inside the customer

Benj: You've invested in digital capabilities beyond, "I go on the website, I search for an item, and I buy it." How have you thought about digital as a service layer to the customer?

Erik: Part of what we did when we made this pivot from spot-buy to mission-critical on the plant floor was move and focus within our portfolio on product lines and services that are technical or high-touch. We literally extended the footprint of MSC inside our customers.

In the old spot-buy chapter, our role in the world basically stopped when the UPS truck delivered to our customer's loading dock. Fast forward 10 or 15 years, and our role is as much as anything inside the customer's operation. There are two ways that plays out, and data and digital assets are at the core of it.

One is our inventory management systems: vending and VMI. Our vending machines are secure units that can dispense tooling. But that's only half the benefit. The other half is that these machines are capturing data, capturing usage patterns by job, by person. Being able to mine that data brings value to customers because we can go back and help them across jobs. We can identify training opportunities where one group is using X amount of cutting tools and the same group doing a similar function is using two or three times that. Harnessing that data is powerful.

The other program that has extended our reach inside customers (and is also anchored in data) is our in-plant program. For larger customer relationships, we'll actually place an MSC associate, one or more full-time, inside our customers. This one's really picked up steam, in large part because for most of our customers, one of their biggest challenges right now is access to qualified, trained labor, particularly in the manufacturing end market. We're helping overcome that.

That program went from pre-COVID about 1% of sales (we did it reactively when we had to) to today over 20% of sales and climbing. Our people are playing a role of procurement and put-away and light manufacturing services like kitting and value-add. They're also capturing data, whether through a vending machine or any procurement portal.

It's interesting. The role of a distributor today: if you went back 10 or 20 years and asked, "What is the biggest asset we have?" I would have said, aside from our people, it's inventory and distribution centers. Today, data is really at the heart of what a distributor does. By data, I'm referring to the intersection between product, supplier, and customer. There's no other entity like a distributor that has access to the intersection of all those three. That's really at the heart of what a distributor does now.

Designing the in-plant role

Benj: I want to dig into that on-site program a little more because it's been such a big success. How did you think about designing roles and role clarity as you were rolling out the program? A lot of mid-size and smaller distributors offer some version of on-site help, but through their outside salesperson who really should be selling. The roles get all jumbled. How did you differentiate the roles, and at what scale did you say, "We don't want the outside salesperson putting stuff away. We're going to have someone dedicated here"?

Erik: Pretty early on, as we hit the accelerator on the program (and we hit the accelerator because we were hearing it from customers), it was pretty clear that customers were asking for somebody full-time and dedicated. You're exactly right. The outside salesperson who was generally compensated to grow revenue or gross margin dollars has to move around from account to account. What the customer needs is different from somebody just adding on new products. They need somebody who essentially becomes an extension of the customer, part of the fabric of the customer's team and operation.

What's interesting on the people front, as much as structure, is that it led to a different challenge. The old model of an inside person was that they would exist in a branch or a customer care center where they're surrounded by a management structure and team members. These folks are often either on their own or maybe they have one or two other people, and they're inside our customer. From a training and development standpoint, the skills needed are different. You're talking about somebody that's got to be more autonomous and has to be able to make decisions independently with some guardrails, but has to be equipped to make decisions on the spot. In the past they could just lean over their shoulder, look at their manager and say, "What should I do?" It's a different game. If you try to take that model into an in-plant, you're going to slow down dramatically.

Benj: How did you guys get around that?

Erik: A combination of training and culture and leadership around what the expectations are. That it's okay to make a mistake as long as you learn from it. Some training, and then some expectations and leadership.

Bringing AI into MSC

Benj: I want to pivot to AI at MSC, which you mentioned is the next big shift we're going to see in distribution. How did you think about bringing in AI? What have been the opportunities, what's worked, what hasn't, and what have you learned?

Erik: Our interest and curiosity got piqued early, certainly before the craze that took off with generative AI. Go back to when you and I first met. It was at the NAW CEO roundtable. I was intrigued because at the time AI wasn't generative; it was a lot around big data and quantitative analytics and models.

You were onto the same thing that MSC believed in: there was no industry more ripe for the use of AI, big data, and quantitative analytics than distribution. If I take MSC as a microcosm, we've got 400,000-something customers, 2 million-something SKUs, leading to a gazillion transactions all the time. People have bounded knowledge of what they're capable of, and the amount of opportunity that a human being simply can't tap into to see pattern recognition across that many SKUs, transactions, and customers is huge.

We began slowly. One of our early steps was a partnership with Proton. We also brought on a board member. We felt like it was really important to get some expertise, not necessarily day-to-day inside the company, but at the board level. Rudina Seseri, co-founder of Glasswing Ventures, joined our board (also before the move to generative AI).

We had some early proof points. Proton was a great example. Cross-sell and upsell, which was our first use case together, was not a new concept for MSC. We had a tool that had been in place for years. But our A/B test showed the power that AI would bring, because the outperformance was dramatic. It was an early proof point for us, with pricing being another. We were early to recognize the power of this. We just took some baby steps in the early years pre-generative AI.

The future of work in distribution

Benj: I want to talk about where all the generative AI use cases are going. The big conversation now is around what's going to happen in the labor market. A lot of these use cases are replacing what used to be very manual tasks with AI. As you think about the top use cases within MSC and what that will mean for the future, at least within the industrial world, how do you see that playing out over the next five or ten years?

Erik: The way we think about AI is we look at the entire value chain of a distributor. From the time you figure out what to buy and buy from a supplier, to warehousing it, to getting it to customers, to servicing and all the stuff that happens after the sale, there's virtually not a spot in the value chain where there shouldn't be some application for AI technology. That could be to reduce cost or improve productivity. It could be to generate revenue, as we talked about with cross-sell, upsell, and marketing. Or it could just be to make life better and easier for the customer. It's got to go end-to-end across the value chain.

You raise a really good point about the role of the human being. Inside the company, we've always had this mantra that there's a bifurcation of people who believe the answer is in digital and other people who say it's in people. Our belief is it's both, not either-or.

It's hard to outrun the fact that over time, if you extrapolate out five years or ten years, there's work occurring today by human beings that will no longer occur with human beings. The role of the person has to change and evolve, and it has to move up the food chain to higher value-add work.

Ultimately the secret sauce of any distributor is fundamentally what you do for a customer. What AI is going to allow us to do is enabled by a fortunate position we're all in. Not just MSC. We're in a huge fragmented market. All of us are levered to different end markets, but most of those end markets are going to grow at GDP or better. A market growing at GDP or better and a huge fragmented one means so much growth opportunity that I don't think it has to scare people to say, "Oh my God, there's going to be no jobs."

When I think about our strategic plans at MSC, the company should be multiples bigger than it is today in five years and ten years. There's more to get done. The role of the person changes.

What's still on his mind: market consolidation

Benj: I ask the last question the same. Curiosity is one of our biggest values at Proton. After a long career in distribution, what's one thing you're still curious about or trying to learn?

Erik: I'll give you one I'm curious about, and one I think many people in and around the distribution space have the same question about, and I don't have a good answer for. This market is massive, $200 billion-plus however you slice it. And it's highly fragmented. The top 50 distributors only have 35% of share. Why hasn't it consolidated? And when is consolidation going to really heat up? I've never had a great answer for that one. I have some ideas as to why, but that's question one.

Question two: there have been catalysts or inflection points that were going to be the thing that accelerated consolidation. It was going to be the internet. It was going to be the indirect procurement tools like Ariba that gave visibility. Then it was inventory management like vending. Then it was COVID, some external events. None of them have lived up to the promise of truly accelerating consolidation.

AI is another one of those things that has the potential to be a step-function change in what a distributor looks like. But that's the thing that's still on my mind after all these years: how fragmented the market still is.

Benj: This really was awesome, Erik. Thank you so much for doing this. I super appreciate it.

That's it for this episode of In the Mind of a Distributor. If you liked this conversation, leave a review — it helps more folks in distribution find the show. If you're thinking about a CRM for your business, head to proton.ai to see how Proton can help you grow faster. Or if you want to connect with me, you can add me, Benj Cohen, on LinkedIn. Thanks for listening, and I'll catch you next time.