Thinking Out of the Box - Contractor Connection
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Thinking Out of the Box

By Joanne Costin

Article Date: 11-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


International contractor wants dealers to embrace innovation.

Website: http://www.costincustom.com

Dan Samford knows where you are coming from. The vice president of equipment for St. Joseph, Mo. -based Herzog Companies grew up on the dealer side of the business. His father ran a small used equipment dealership in Central Illinois, and he worked for several different dealerships before assuming his current role at the Herzog Companies 15 years ago. Today he manages a fleet of 2,000 machines with an estimated replacement value of $235 million*. Having worked on both sides of the contractor/dealer relationship, Samford provides useful insight into how dealers can better serve his needs and encourages dealers to start thinking "out of the box." (*Construction Equipment magazine, Sept. 2008)
Herzog Growth
While many companies are reducing their fleets or holding tight during this economic downturn, Herzog Companies is moving in the opposite direction – they plan to expand their fleet by 10 to 15 percent in 2009. The privately held company has seen revenues grow from $134 million in 2000 to $351.6 million in 2007. Founded in 1969, Herzog was initially focused on asphalt paving and airport construction in the Midwest, but they have since evolved into a diverse international construction services contractor. The company is comprised of four major divisions including transit services, railroad services, railroad construction and civil construction. Major transportation projects involve new track construction, track rehabilitation, station construction, bridge construction, and design-build projects. Projects are located throughout the U.S., including Seattle, Denver, Phoenix, Salt Lake City, Dallas, and in Southern Florida, California, and the Albuquerque/Santa Fe area. In addition, the company operates several landfill and waste recovery facilities. Internationally, the company has three asphalt plants in the Turks and Caicos Islands, and operates two ports in the Caribbean. Its ultrasonic rail detection business works throughout Canada, Mexico, Alaska and the lower 48 states.As state and federal funding for transportation has shifted focus from the standard design, bid, build process to alternative delivery methods, Herzog has responded by partnering with several national construction leaders including Kiewit and Stacy and Whitbeck.
Fleet Management Strategies
Equipment at Herzog is centrally managed. The location of remote maintenance facilities is determined based on project concentration and the length of the contracts. Of the five people who report directly to Samford, two are devoted to asset allocation and asset cost accounting. This includes keeping up with registrations, licensing, permitting and using the company’s Qualcomm reporting systems to ensure proper cost accounting for both utilization as well as ownership and operating costs. Three people take on service-related tasks such as working with the shops to ensure repair procedures, warranty administration, general replacement cycles and ongoing fleet analysis.Included in the Herzog fleet are approximately 750 pieces of "maintenance of way (MOW) equipment –
specialized equipment used in the maintenance of railroad rights of way. These machines represent 40 percent of the fleet and are managed quite differently from what Samford calls "civil equipment."
"On the rail side, we have to be more self-supportive that the civil side," said Samford. This is because in many cases, dealers are nonexistent and there are a limited number of manufacturers.Still, rail construction also involves a lot of traditional construction equipment. Often, equipment will be adapted for special applications, even though it might not even be on the rail. For example, tires on a wheel loader might be foam-filled because of the presence of railroad spikes in the work area.
An Updated Fleet Supports the Corporate Image
Equipment plays heavily into Herzog’s success and the continuous process of equipment replacement is part of Herzog’s internal policy. And image is important to the business.
"A lot of project owners’ bid analysis entails the equipment list and the depth of that equipment list," explained Samford. He contends that owners look at the age of equipment as well as for well-known brands. Concern about emissions provides yet another reason for project owners to look for a younger fleet. While price is extremely important in the bidding process, Samford believes qualifications such as the safety record, diversity, resumes, and the equipment fleet, all come into play. "Everyone realizes you don’t always take the low bid, because the low bid isn’t always the best bid," he said. Equipment purchasing also supports the company’s employee retention strategy. In contrast to traditional industry practice, company vehicles assigned to employees are equipped with power windows, locks and satellite radios. Samford also believes that an updated fleet provides greater appeal to mechanics who prefer working on newer machines. "There is a big tie between equipment and employee retention," said Samford. "Loyalty is not as strong as it used to be, and the equipment ties to asset loyalty."
Dealer Relationships
On a monthly basis, Herzog will work with about 50 different dealers across the country. Before moving into a new area, Samford will contact the national account rep, who will usually make contact with the local dealer. But Samford also utilizes the Internet on a regular basis to locate dealers and to find out what brands dealers represent.
Samford finds that his company has better relationships with dealers based close to Herzog’s home office, who know and respect the volume of their business. "They seem to respond the best, the quickest and the most effectively," he said. "If we need a machine and they have it rented to another customer, they will swap it out," Samford added. "They make things happen." Murphy Tractor, a Witchita, Kan.-based John Deere dealer and Road Builders Machinery, a Kansas City, Mo. Komatsu dealer, are two dealerships that Samford feels stand out as being proactive in meeting their needs.For a national contractor, moving into a new territory can have its challenges. While most dealers generally know who they are, frustrations mount when dealers are hesitant to react. "We don’t have a lot of excess time to wait for things to happen," said Samford. Credit checks, paperwork and document signings are just a few of the ways dealers can slow the process. "I have to be able to pick up the phone and have a relationship where my word is as good as my check," he said. "If that’s not in place, I lose efficiency." If a dealer does hesitate, Samford will act to meet his needs even if it means bringing in mechanics or support from outside the territory. One source of aggravation for Samford is dealers who complain when a piece of equipment purchased from Dealer A moves into Dealer B’s territory, and Herzog needs Dealer B to service it."That dealer is basically saying he never wants to do business with me," says Samford. A better strategy, he contends, is to go to the customer and ask what you have to do to earn the business.On long-term jobs, the dealer’s ability to support varying brands becomes a factor in the analysis of the best value. "That is where we will contact our national account rep and point-blank ask them," said Samford. Another aspect of the dealership that appeals to Herzog is the availability of late-model used equipment. He appreciates sales-oriented dealers that rent machines for three or four months, and then sell them, as opposed to putting them in their "rent-to-rent" fleets. "There are a lot of problems that show up in the first 200 hours that I don’t want to fool with," he said.Samford believes that manufacturers have, in many cases, diluted their dealership strength by purchasing dealers. Corporate rules have prevented dealers from being able to react quickly – creating a stranglehold of sorts that can interfere with responsiveness to customer needs.
Thinking Out of the Box

While working with dealers all across the country has its challenges, it has exposed Samford to more innovative ideas with regard to dealer support and pricing. On the acquisition side, Samford is looking for dealers to think out of the box – to brainstorm innovative ways to make the best package and best value. That includes support.
"Usually, a dealer has to lose an opportunity before he realizes he has to do something different," Samford remarked. An innovative deal might even include the placement of dealer field technicians in the purchase price. Similarly, Samford would like to see dealers fully embrace telematics as a tool for their business. All Herzog machines are equipped with Qualcomm technology. Selected after evaluating multiple systems during a three-year period, the deciding factor for Samford was the fact that Qualcomm technology could be placed on equipment of every type and brand. That simplifies Samford’s job considerably – he has to visit only one Web site to view the data on all their machines. Herzog has also created custom software that imports the Qualcomm data for use in accounting software. If the company utilized more than one telematic technology, the software would have to be written for each vendor – an impractical solution. Uses for telematics data continues to expand. Herzog has advanced beyond the obvious uses of maintenance and failure analysis. "It used to be you couldn’t justify the ROI based on just one or two things," he said. "After you make the commitment, you find it’s not just one or two things; it is 22 things that you can use it for." Herzog uses the data for geofencing, curfews, theft control and permitting. "The ROI is more than enough to justify the investment." Thinking out of the box, Samford envisions providing dealers with third party rights to view the company’s data and has already done so with local dealers. He hopes dealers will decrease their purchase price and/or lease numbers based on their ability to glean the data to generate revenue. Better service is another desired outcome. "There are little things that will add value if the dealer takes the initiative to manage the data that the contractors give him access to," said Samford. "I think there’s a real need out there." One stipulation of third-party access is that the data cannot be used against the contractor.Despite his desire to provide third-party access to dealers, Samford believes that until dealers are sold on the technology themselves, they will be reluctant to participate. Nevertheless, he sees a big growth in the use of telematics. "With the new emissions ruling, everything is just playing more and more toward asset tracking, information tracking, and information screening," said Samford. He views emissions as the biggest challenge facing their company, despite having a newer fleet.Another source of innovation promoted by Samford involves dealers taking on some risk. "We have seen where dealers have made calculations based on their history to reduce the monthly lease rate," said Samford. For example, the contractor anticipates putting 3,000 hours on the machine and the dealer offers a rate based on 2,000 hours. If the lease goes to 3,000 hours, the dealer is responsible for the last 1,000 hours. However, a smart dealer will watch the numbers closely and plan to purchase the machine and put it in the rental fleet, thus reducing his risk. "I thought this was really innovative," said Samford, "because at the end of that job we didn’t put 3,000 hours; we only put on 2,000." With 2,000 machines to manage, Samford is clearly not your ordinary customer. "Out of the box thinking" may not be what every customer wants. But at the same time, dealers might be pleasantly surprised at what they find when they embrace the idea –  customers like Herzog and perhaps a new competitive advantage.

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