Rob Rodin, 43, can't sit still. The president and CEO of Marshall Industries, a billion-dollar electronics distributor headquartered outside Los Angeles, is wearing a telephone headset and pacing nervously, swinging a baseball bat to ease the tension in his office. He stops for a moment to check one of his three computers. Then the phone rings. It's a major supplier. The market for one of its products has exploded, and now it wants to "reallocate" to its direct customers shipments that it promised to Marshall.
"You have a moral obligation," Rodin pleads. "We've been with you through thick and thin. Can't you peel off 1% from IBM? That would cover us." Rodin agrees to send a revised order and the supplier agrees to send what he needs.
"I go through that a hundred times a day," Rodin says. "We're a professional organization that knows how to go to market. We also get the loose ball at any cost. We have to. Suppliers and customers measure product life cycles in months. They have problems with inventory, manufacturing, quality. They expect us to solve them."
The market seems to like Marshall's solutions. In 1991, the year before Rodin became CEO, the company had sales of $582 million and a stock price as low as $9 per share. Last year it had sales of nearly $1.2 billion and a stock price as high as $37 per share. It achieved these record results with 1,400 people — 250 fewer than five years ago. Sales per person have more than doubled since 1991, from $360,000 to $740,000. Profit per person has tripled.
But Rob Rodin isn't just running a company. He's reinventing an industry. He's designed a far-reaching, still-evolving program to anticipate and build the middleman of the future. Rodin is changing the rules and tools of a notoriously conservative business, betting the company on what he calls "virtual distribution." It's an experiment with obvious implications for any organization that sits uncomfortably between demanding customers and fast-moving suppliers — in other words, practically any organization.
"The middleman is becoming obsolete," Rodin declares, "and our company is by definition in the middle. We are a junction box between suppliers and customers. The forces around us are so intense. Our suppliers compete with each other, but they all want the same thing - 100% share of mind. No two customers have the same needs, but they all want the same thing — free, perfect, now."
Free. Perfect. Now. Rodin's job is to make sure everyone at Marshall chases those impossible goals. Fueled by his own blend of anxiety and exhilaration, the CEO repeats his rallying cries until they become company touchstones. "It's all about time," he declares. "The future is now. Not the next five years but the next five minutes. Think like the customer. Let their voices design what you do."
Much of what Marshall does is familiar, even prosaic. Put simply, the company moves boxes — from 150 powerful suppliers such as Hitachi and Texas Instruments to more than 30,000 demanding customers such as Bay Networks and WebTV. It sells parts — 170,000 different items from semiconductors and capacitors to liquid crystal displays and programmable logic devices. It operates huge sales and distribution facilities — a 200,000-square-foot warehouse bursting with computers and fast-moving robots, a cavernous "bullpen" staffed by fast-talking salespeople arranged in row after row of metal desks.
But Rodin's commitment to virtual distribution forces Marshall to think and act outside the box. Forget old-fashioned pay for performance. In 1992, soon after he became CEO, Rodin scrapped the compensation system Marshall used to pay every one of its employees, including its 600 salespeople and their managers. There'd be no more commissions, contests, or prizes, Rodin declared. No more bonuses for individual victories. Everyone at Marshall would be paid the same way and share in a companywide bonus pool. It was an act of heresy that rocked the industry and remains controversial.
Forget handwritten sales logs, paper-based catalogues, endless phone tag between customers, salespeople, and the warehouse. Under Rodin, Marshall overhauled its global operating system, creating 700 new computer programs to process more than 700,000 transactions per day. Marshall's real job, Rodin and his colleagues say, is to move information, not just components. Using Marshall's robust Internet presence, customers can monitor orders until the parts arrive at their assembly lines; check backlogs and inventories; measure their materials usage against demand projections. Suppliers can watch what's moving in their markets by part number or region, in dollars or units, and tailor their production, pricing, and forecasts.
"We certainly look different from how we looked five years ago," Rodin says, "but not nearly as different as we will look five years from now. Virtual distribution means customers can reach us about any problem, from any place, by any method, 24 hours a day. What choice do we have? Companies are running two or three shifts around the world. Engineers work around the clock. We have to be there when our customers need us."
You Get What You Pay For
Rob Rodin shakes his head and chuckles at the mention of the topic. There has not been a single day in the last five years, he says, that someone — a customer, supplier, investor, journalist — hasn't asked him to defend his company's controversial pay plan. He usually offers the short version: "Yes, I'm the heretic who took the entire sales staff of a $600 million company off commissions, overnight, and lived to tell the tale."
The real story, he admits, is more complicated and nerve-wracking. And the payoff has been more profound. Rodin is adamant: none of Marshall's strategic innovations could have happened if the company had not first abolished its decades-old compensation system.
Marshall was founded in 1954. By the late 1980s it was a prosperous midsized player in a fast-growing industry, one of the top-ranked electronics distributors in the world. Like so many companies in so many industries, it was also indistinguishable from its competitors and managed with what passed for conventional wisdom. It had an easy-to-forget company motto, "Satisfaction Through Service," and a hard-to-argue-with goal: "Number One in the Marketplace." People were ranked and reviewed based on individual or small-group performance — the credit department on days' receivables outstanding, division managers on P&Ls, the sales staff on gross profit dollars. Internal competition was keen — between divisions, product lines, and especially the company's salespeople, who battled constantly to win a nonstop round of supplier promotions and contests, 15 or 20 at a time, with TVs, VCRs, and cruises awarded to top performers.
The system worked. The numbers were good. But Rodin was worried. Customers were making unprecedented demands for quality; suppliers expected new standards of service. It seemed like Marshall was running faster and faster just to stay in place.
"Something didn't feel right," Rodin says. "We worked so hard but it felt like we were burning empty calories. I'd get home on Friday and I didn't feel any different from how I'd felt on Monday. And I didn't feel like the company was any better. For all our success, there was a sense of emptiness: Are we building an institution that's going to survive?"
Why the empty feeling? "The problems were always the same," he says. "We lived from month to month. We'd ship more than 20% of each month's total sales in the last three days and stretch the warehouse past the breaking point. We'd ship orders to customers a week ahead of schedule, even though many of them measured their own performance in one-day windows. We'd hide customer returns or open bad credit accounts just to hit our monthly targets. If a product got scarce, one division would actually hide its inventory from another division — send it out on a UPS truck so it could truthfully say there was 'no supply on hand.' And we squabbled constantly about things like how to split commissions from a customer who did design in Boston but purchasing in Texas."
Rodin hadn't grown up in the electronics business. He was a psychology graduate from the University of Connecticut who fell in love with restaurants, opened a place of his own, and lost everything in bankruptcy. He joined Marshall in 1983 and quickly started climbing the ranks — from sales manager to general manager to vice president of sales, marketing, and operations to president and CEO. He led with his adrenal glands. He always knew how to pump up the troops. If sales were faltering he'd run around in a Batman costume or boost the company's promotions and contests. If he saw regions or divisions fighting, he'd make stirring appeals to teamwork and loyalty.
"I'd tell people, 'We've got to stop shipping ahead of schedule. We've got to stop hiding inventory from each other. We're a team; we've got to work together. Pursue excellence. Fight and win.' Then I'd show a video of fighter jets and say, 'You've got to be like a fighter pilot and kill the enemy.' I'd play rock music and everybody would hug and get in a frenzy — and nothing would change."
One of the catalysts for change was a four-day seminar run by W. Edwards Deming, the aging prophet of total quality management. At the 1991 seminar, and really for the first time in his career at Marshall, Rodin slowed down and looked at the business from a distance. He didn't like what he saw. The company had been built around a simple idea — buy low, sell high — but the world had become more complicated. Marshall had prospered, Rodin says, "but only through staggering manipulation and brute force."
The problem wasn't inside the system, he also came to understand. The system was the problem. It made sense for one division to hide inventory from another; they were paid to compete. It made sense for salespeople to ship orders ahead of schedule or hide customer returns; they were paid to make their monthly numbers. The system persuaded good people to make bad decisions.
"When I went back to work after the seminar," Rodin says, "the situation looked absurd. And that was scary as hell. I just kept saying: 'I don't know what to do, but we've got to change.'"
Rodin crisscrossed the country in an aging corporate jet, looking for answers. "What do we want to be?" he'd ask small groups of managers. "What's in the way?" It didn't take long to identify the biggest barrier: how Marshall measured results and paid its people.
It was bizarre, really. The company had spent years developing microscopic measures of internal performance — how Marshall was doing against its plans, how groups inside Marshall were doing against each other. But it had almost no measurements of external performance — how well it was meeting the detailed needs of its suppliers and customers.
The system had to change. "We eliminated commissions, incentives, promotions, contests, P&Ls, forecasts, budgets, the entire functional organization chart," Rodin says. It was a radical move. Contests and commissions — internal competition — were a way of life in the industry, the universal motivational tool. Rodin was hammered when he unveiled the plan in an open letter to the industry. One competitor accused him "of kissing Deming's ring." Another called the system "communistic." Electronic Buyers News, the industry bible, published a biting editorial.
Even the CEO's wife was a skeptic. "I remember the night before we made the change," Rodin says. "I was lying in bed, kind of tossing and turning all night. My wife finally asked me what was wrong. 'Oh, big stuff at work,' I said, 'lots of changes.' 'What changes?' she asked. 'I'm taking all the salespeople off commission tomorrow.' And she screams, 'What are you, crazy?'"
But Marshall's sales staff took to the new system. Denise Stoll, 41, was one high-profile convert. Stoll is one of Marshall's sales superstars, an account manager in Silicon Valley. She thrived under the old system. Her key account was SynOptics, the networking-equipment manufacturer that later merged with Wellfleet to create Bay Networks. She took the account from zero to $26 million, a major achievement with big commission implications. In fact, Stoll says she took "a pretty dramatic cut" when Marshall abolished commissions.
A few years later, though, Stoll experienced the upside of the new system. In 1996, Bay Networks announced it would outsource manufacturing. Literally overnight, Stoll lost her most lucrative account — and the source of her big commissions.
"I went from shipping millions of dollars a month to Bay Networks to shipping a few hundred thousand dollars," she says. "But under the new system my income didn't change. And why should it? I still call on engineering at Bay Networks; I work hard to get my components designed into their products. We do the same amount of business with them — we just do it through contract manufacturers."
Dan Kates, 29, another Marshall salesperson in Silicon Valley, says the new system has a second benefit. It encourages salespeople to invest months, even years, prying companies away from other distributors and turning them into Marshall customers. Kates made big investments in WebTV, the consumer-electronics startup recently acquired by Microsoft. A year ago Marshall did no business with WebTV. Now it does about $1.5 million a month. Next year Kates thinks Web TV can generate as much as $4 million per month.
The new system "is an advantage to me," he explains. "I can look out for the interests of the customer. I can take the long view. I can invest time with a new customer without worrying about paying my next gas bill."
Anything, Anytime, Anywhere
In early 1993, when Rob Rodin convened a strategy session with Kerry Young, 33, his newly hired director of distributed computing, he didn't talk about the Internet. He'd never heard of it. He didn't even talk about Marshall's outdated computer systems, the official subject of the meeting. Instead he described his late-night fears about preparing Marshall for a future he couldn't yet define. Rodin understood that the traditional middleman was a dinosaur, too stupid and slow for the pressures it was facing.
But he didn't know what Marshall should become. He suspected information technology would play a key role. "It was obvious there were ways to link things with computers," he remembers. "But no one had figured out what should be at the end of the wires or how to make them go."
Then, in December 1993, Young showed Rodin Mosaic, a Web browser that had been invented at the University of Illinois and was being commercialized by a still-obscure startup called Netscape Communications. Ninety days later "Marshall on the Internet" made its debut. It was just a start, but it was the future. Customers would no longer depend on paper catalogues published quarterly — a sales tool that was simultaneously too bulky and too flimsy, and obsolete the moment it appeared.
Ninety days after that Marshall launched MarshallNet, an intranet system to integrate Marshall's internal databases with the outside world. Customers would no longer have to phone or fax to check on orders; the data would be available instantly. Marshall also designed software to analyze a host of competitive issues: time-phased order planning, supply management and demand modeling, account profiling and strategic forecasting — all imbedded in MarshallNet.
Forty-five days later, Marshall unveiled a companywide installation of Lotus Notes. All 600 salespeople and their managers received high-performance laptops with access to spec sheets and technical information on 170,000 parts. They also got email templates to automate orders, work-flows, and status inquiries. No more typed-up notes to product managers, inside sales assistants, area managers, and engineers.
Why did Marshall move so fast? First, because as soon as Rodin saw Mosaic, he worried that competitors would beat him to the Net. In fact, it was a year before any of his major rivals even launched a Web site. Second, because Marshall's CEO is a fanatic about time — in particular, the amount of time his people spend with customers. "What if everything were free?" he asks rhetorically. "What would we argue about? Or what if every customer had all the information it needed? What would be the next competitive frontier? Time. It's the currency of the 1990s."
The real power of technology, Rodin argues, is that it frees people to spend more time with customers. He loves doing the math. "Most people have 2,000 working hours a year," he says. "That's 40 hours a week, 50 work weeks a year. People who do a good job with their time spend 800 or 900 of those hours face-to-face with customers.
"That's not good enough," he continues. "There are 8,760 hours in a year — 24 hours a day, 365 days a year. That's 10 times the average person's best effort! Our company goal is to use every one of those 8,760 hours. To maximize every tick of the clock. We want to create a whole new definition of time and space."
One Customer at a Time
At Marshall headquarters, the evidence of success is everywhere. Glass cases display dozens of plaques, clocks, and trophies celebrating Marshall as one customer's "Supplier of the Year" or a supplier's "Top Performer." Hitachi sent two polished steel samurai swords. Siemens sent an ornate porcelain beer stein. Interestingly, there's nothing in the cases from Intel or Motorola, nothing from Hewlett-Packard or National Semiconductor. By unspoken tradition many of America's most powerful electronics suppliers have refused to share shelf space with their Japanese rivals, and chosen their distributors accordingly. That is, until late in 1995, when Marshall once again broke the rules in its industry. "AMD Shares Shelf," screamed the front-page headline in Electronic Buyers News. "Breaking Tradition, Franchises Marshall."
The story deserved the prominence. Advanced Micro Devices hadn't franchised a new distributor in almost a decade. And it had never franchised a distributor that also carried Japanese products. EBN, once so critical of Marshall's pay plan, called AMD's decision "a major coup" and a sign "that the silent code that has acted as a wall between U.S. and Japanese suppliers is starting to crack."
Which is precisely how Rodin plans to keep moving Marshall into the future — one skeptical supplier or customer at a time, always challenging (and sometimes cracking) the industry's silent code. It's the nature of life in the middle — for Marshall and for everyone.
"The role of the middleman is going to keep changing," Rodin says. "Suppliers and customers make choices every day about distributors," Rodin says. "The choices can be almost instant: 'I like you, I don't like you.' The challenge is to develop relationships that are continually more meaningful to both sides. We have to provide sophisticated answers to problems our suppliers and customers don't even know they have." c
Curtis Hartman (firstname.lastname@example.org) is a contributing editor to Fast Company. You can visit Marshall on the web, http://www.marshall.com .