January, 2006

Entrepreneur of the Year: Mill Creek Lumber & Supply, Broken Arrow, Ok

Mill Creek Lumber & Supply, Broken Arrow, Oklahoma

By Greg Brooks

Jeff Dunn was more than a little surprised at what he was hearing. The president and CEO of Broken Arrow, Okla.-based Mill Creek Lumber & Supply was moderating a monthly meeting of the company’s safety committee. "We were devising a driving safety program,” recalls Dunn, and he had just proposed a cell phone policy that would require all drivers to use hands-free devices. In the middle of the discussion, one driver—a 22-year-old with barely 60 days on the job—stood up and challenged him.

"In front of 75 people in the room, this individual starts a dialog with me saying, ‘I don’t think that’s right, Mr. Dunn.’” The driver had done his own research and found out that it doesn’t matter whether you use a hands-free set. The simple act of talking on the phone while driving reduces your reaction time to about the same as if you had the legal limit of alcohol in your bloodstream.

What happens when you prove the boss wrong in front of everybody? Just what you’d expect: "That kid’s no longer driving a truck for us,” says Dunn. Instead, he was moved in to the sales counter.

"From that little discourse, he was promoted and we expect him to continue to promote. This kid is sharper than a tack—he’s one of our up-and-comers.”

The Innovator’s Dilemma

Everyone enjoys a success story, but this one is special to Dunn. It illustrates what he believes to be the key to the future for Mill Creek Lumber & Supply.

The Tulsa-area company was founded by his grandfather, Pete, in 1934. Dunn’s father Jim, an engineering physicist who spent the 60s working on the Apollo space program, returned to the family business in 1970 with an MBA in finance from Stanford.

Broken Arrow (just outside Tulsa), has never been Atlanta or Phoenix, but the market has never been a pushover, either. Today, Mill Creek’s competitors include Hope Lumber, 84 Lumber, and half a dozen strong independents, and competition in the lumber business was equally tough in the 70s. The solution was to diversify; over the next 30 years, Jim Dunn earned a reputation throughout the industry as a master strategist with a keen eye for niche opportunities.

So keen, in fact, that the name "Mill Creek Lumber & Supply” is a misnomer today. The company is more accurately described as a portfolio of diverse but interrelated businesses. Mill Creek Lumber itself includes six lumberyards and six millwork operations, plus divisions that sell and install fireplaces, kitchens, windows, doors, and specialty products for builders in Tulsa, Oklahoma City, and secondary markets across eastern Oklahoma.

Bent River Lumber is a two-step building material wholesaler serving dealers in the region, while Professional Tools & Fasteners delivers tools, fasteners, and repair services to Tulsa tradespeople. Wood Systems is an architectural woodworking subsidiary that produces casework, stairs, and other custom-built assemblies for commercial and high-end residential projects throughout the South Central states.

Last but not least, there are the home improvement businesses: A chain of 17 carpet-and-tile stores sell and install floor coverings for homeowners under the name Mill Creek Carpet & Tile in Oklahoma or Peek’s Carpet & Tile in Dallas. Mill Creek Home Improvements replaces doors, windows, and vinyl siding, while Mill Creek Kitchens provides kitchen and bath upgrades and replacements.

Top Ten Remodeler

With its home improvement businesses accounting for $63 million of the company’s more than $200 million in 2005 gross revenue, Mill Creek Lumber & Supply is not only a top 50 pro dealer but also one of the top ten remodeling firms in the U.S.

The company’s sales mix may be unusual by most pro dealers’ standards, but the challenge Mill Creek faces at this juncture in its development is universal. Early on, entrepreneurs grow companies. Once you reach a certain level, says Jeff Dunn, the company has to learn to grow entrepreneurs.

"Jim Dunn did the best job in the world of taking the company from $1 million or $2 million in 1970 to more than $100 million four or five years ago,” Jeff explains. "My challenge is to take that foundation and go from a personality-driven situation to a systems-driven situation where we have the processes in place to take us to the next level.”

To some, that’s merely an administrative matter: policies, procedures, and infrastructure to leverage newfound economies of scale. Not Dunn. "You can create levels of bureaucracy that don’t add anything. The important thing for us is to add systems that make sense for a company that is $200 million to $500 million. We have to figure out the niches and the right way to grow, and decide where to put our capital resources—and our human resources.”

The brain trust behind that strategy includes Dunn, an attorney who spent just short of a decade in private practice before returning to Mill Creek in 2001; Jim Dunn, now the company’s chairman; and COO Rich Bass, a long-time industry veteran with hands-on experience in all facets of the business. And all three are quick to point out that a brilliant strategy plus two dollars will buy you a small coffee at Starbucks.

The Secret to Growing Smart

The plan itself is relatively simple: Grow by acquisition, but make sure each acquisition is not only a good fit culturally, but also appropriate for a company Mill Creek’s size. "We looked at an acquisition that was absolutely great—a great business and profitable, with great people,” says Jeff Dunn. "But it was a $2 million endeavor and if we doubled the size, it’d be a $4 million endeavor. We would have spent a whole bunch of human capital and we wouldn’t have had an impact.”

Organic growth is also strong, but no matter how it happens, the core issue is this: Mill Creek is far too large to be managed on a day-to-day basis by its corporate executives. Years ago, its field managers were able to focus on sales and operations, and rely on Jim Dunn’s financial expertise. Today, they need to think like owners.

One of the company’s major initiatives has been a development program to give its branch managers the tools they need. "In our quarterly reviews, we take an entire week to sit down with the managers and talk about financial statements, capital requirements, employment problems, operational difficulties, and anything that affects their businesses,” explains Jeff Dunn. "Early on, I certainly had a lot to learn about how to conduct those meetings, but our managers have gotten a whole lot better at using their financial statements to diagnose problems. They’re coming to the table with solutions before they start.”

Training for front-line employees has also come front and center, but the emphasis is as much on culture as it is job skills. "Mill Creek University was Rich Bass’s brainchild,” says Dunn. "It wasn’t uncommon for someone at Wood Systems to know nothing about our other operations or any of the people, so we devised a loose curriculum of 12 programs anyone could enroll in. It was kind of a ‘get-to-know-you’ session.”

The topics ranged from product knowledge to job skills, business skills, and even leadership, and the response was so strong that "it piqued our interest in training and cross-training,” he adds. "It’s gone from a training program to something that really does affect our culture—who we are, what we believe in as a company, and what we’re trying to accomplish. We’ve had about 120 people graduate.”

"And not everyone graduates,” adds Bass. "You’ve got quizzes and attendance requirements, and a huge time commitment.”

So where does the motivation to make that commitment come from? Like most successful dealers, the engine driving Mill Creek’s success is less about hot niches or tight financial maneuvers than it is about the things that happen every day in the yard and on the job site—which is to say that it’s about the people who make them happen.

Eight Yards and a Cloud of Dust

Rich Bass has been in the lumber business all his life. He’s been in management positions at one-horse independents, a regional chain, a top 20 pro dealer, and even a warehouse retailer. But it may well be that the most relevant and valuable skills he gained were learned not in a lumberyard, but in the time he spent away from the business earning an MBA in quantitative analysis.

Everyone knows the book on incentives: "Be careful what you ask for because you just might get it.”

Bass knows what to ask for.

"For a long time, we solved problems by hiring extra people to fix it, to placate, or whatever,” he explains.

"Instead of getting to the root of the problem, we added people. The way our pay is structured today, they don’t want to add people; they want to figure out an answer to the problem that doesn’t cost money.”

He’s not just talking about the managers, either, but that’s an obvious starting point. Like most, Mill Creek’s managers are paid based on the bottom line their operations generate. But their compensation package is also tied to a series of carefully designed key performance indicators or KPIs, that align their interests with the company’s in ways that contribute to net profit.

For example, explains Bass, "All our managers have two components in their package that relate to safety. One is that we do a 100-point check on every operation every month, and turn it into a numerical score. We’re looking for DOT, OSHA, and general safety and cleanliness factors. They have to score 90 or better to be in their bonus pool for that month.”

The second component is related to workers’ comp. Mill Creek is self-insured, and "we measure that reserve relative to injuries as a percentage of the gross margin dollars generated by the profit center,” explains Dunn. "If you drive your reserve dollars down, you share in that to some degree.”

How much? Well, that’s the rub when it comes to incentives. The theory says that there are five essential components to an effective incentive. The first is an obvious one: It has to be significant enough to be a motivator.

Next, it has to be timely. For managers who tend to operate on monthly cycles, Mill Creek’s bonus pool accumulates monthly; for yard workers who get paid weekly, incentives are paid weekly.

Third, whatever behavior you want has to be measurable. "Wherever possible, we incent people to improve their KPIs,” explains Bass, "but we develop metrics around all of them.”

Weighing in on Productivity

Unlike many dealers, Mill Creek measures productivity in pounds; the weight of each SKU is entered into a custom field in its ECS Pro system. That not only enables Bass to structure incentives for hourly workers, it also helps the company’s management team make better decisions.

"If someone says, ‘I need a truck,’ we know it’s worth $1.8 million in delivery volume and somewhere around eight million pounds per year,” explains Bass. "If they’re not anywhere near that range, they don’t need a truck.”

That unusual metric also plays into the fourth component of a successful incentive: control. Years ago, Jim Dunn instituted the practice of breaking each profit center out with its own P&L, partly to ensure what he calls "clean numbers” and partly to measure productivity against the industry in which each unit operates—lumberyards versus NLBMDA, millwork operations versus AMD, Professional Tools & Fasteners versus STAFDA, and so on.

The problem is that there isn’t much in those numbers that a front-line employee can affect. So Bass designed incentive programs for delivery drivers and load builders based on the number of pounds they handle each week. The results were not only dramatic, but immediate.

"A week or two went by and these people were coming in with just huge jumps in productivity,” says Bass. "We had facilities that saw as much as a 40% increase in capacity.”

The difference was control. "The employee has got to be able to relate to that parameter, like pounds,” says Jim Dunn. "Before, they didn’t realize they had control so they fell into habits that were convenient and easier. When they found out that in fact, they could control the variables, productivity was enhanced. The result is that we’ve grown about $50 million with fewer people.”

Employee-Owned Results

Moreover, the results spilled over into all aspects of the operation. Says Bass, "They’ll go out on a delivery, then call back and ask, ‘Are there any credits I can pick up?’ because they don’t want to go back empty. We’ve noticed a decrease in the amount of fuel we use because we’re making fewer trips back and forth.”

One load builder took to the program so seriously that his income now rivals that of a manager. "He’s building at a rate of 2.2 times anyone else we’ve got,” says Bass, which raises the bar for the rest. "One side of me says that’s a lot of money for a load builder. The other side says he’s saving us buying a $60,000 forklift and hiring two more people.”

Other metrics play into other positions. For example, at one yard, "the phone lines were always jammed up,” says Jeff Dunn, "and the response was always, ‘We’re too busy—we need more phone lines and more bodies.’”

So Bass designed an incentive program for inside salespeople that carefully weighs two variables. The first is the number of tickets written; the more calls you take, the more tickets you write. The other is gross margin dollars generated, to discourage salespeople from avoiding complex sales such as millwork.

"Today the phone never goes past two or three rings, and you can’t call out there and chat,” says Dunn. "You try and chat with them and they get right off the phone.”

Moreover, when one of the five salespeople quit, the rest went to their manager and asked him not to fill the position. "The other four said, ‘We can make up the difference,’” says Bass.

When you see dramatic increases, it’s always tempting to think the baseline must have been pretty low to start. Actually, Mill Creek was already meeting or exceeding most industry benchmarks before it began to refocus on its own internal metrics.

The difference is that properly designed incentives don’t simply serve as motivators; they also define what matters. Says Jeff Dunn, "They were hard-working before. Now they’re supercharged because we have communicated to them exactly what we want and aligned their behavior with our objectives as a company.”

So what does it cost? A lot, says Dunn, but not as much as the payback. "We still have conversations about, ‘My Lord, we’re paying a lot in incentive compensation,’ and Rich’s response every time is, ‘Would you rather not have the increase in performance?’ It’s the best money we can spend.”

Attitude 101

Leadership is critical to every successful company, and when you’re operating roughly 50 different profit centers, the issue is magnified to say the least.

But identifying and developing future leaders is an all but universal challenge in this business. Whether the barrier is an industry without much glitz or the work ethic of the so-called younger generation, many owners agree that there simply aren’t a lot of people out there with the "right stuff.”

Or maybe it’s just a matter of looking more closely.

One of the offshoots of Mill Creek’s obsession with metrics is that it shines a spotlight on potential. "It identifies your A, B, and C players,” says Bass. "There’s no longer any question who’s done the job.”

Adds Jeff Dunn, "Another interesting thing is that the managers would have in their minds who their A players are, and without exception, they were wrong. Some were A players and the numbers bore that out, but invariably they were surprised.”

The ability to identify A players is also an opportunity to develop them. Mill Creek’s Leadership Class is open by invitation only, on the recommendation of a manager. Most are salespeople, truck drivers, and other front-line employees. The one thing all of them have in common is that they are engaged, and the purpose is to engage them even more deeply.

"We’ve identified 22 people who are up-and-comers, and we discuss everything from John Maxwell to Ralph Waldo Emerson,” says Dunn. "In fact, last month I gave a talk on leadership and John Maxwell,” the best-selling author of The 21 Immutable Laws of Leadership.

Real-World Leadership Training

At one meeting, the group learned about capital expenditures. At another, the topic was how to calculate return on equity using the DuPont model, a financial analysis system developed in 1919 that has become a worldwide standard.

At yet another meeting, the group talked about acquisitions. "We had them assess an acquisition we were looking at,” recalls Dunn. "We got out the projector, flashed it up on the screen, and said ‘What do you think, guys?’”

If that seems like a chaotic way to train, it absolutely is. But there is more to employee development than simply identifying people with talent and teaching them skills. They also have to believe.

As Maxwell put it in another book titled Attitude 101. "We act in response to how we see ourselves. We will never go beyond the boundaries that stake out our true feelings about ourselves. Those ‘new territories’ can be explored only when our self-image is strong enough to give us permission to go there.”

The irony, of course, is that self-image is the one thing that can’t be quantified. But when you’ve got truck drivers who can hold their own in a discussion of return on equity with the CEO, there is clearly something special at work. Metrics may drive Mill Creek’s methods, but the objective is ultimately a leap of faith that, if people are engaged in the company, good things will happen. In fact, they already are, and the irony of that is not lost on Dunn, either.

"We’re considered effective leaders and we get all the glory,” he says. "But we look good because they are smart.”