Fastenal – Fortune 500 Resources with SMB Flexibility
We learn how Fastenal’s unique, decentralised leadership structure helps it to meet its customers’ needs around the world.
Fastenal is an industrial distribution company focused on providing supply chain solutions for C-class parts and indirect parts in the manufacturing world.
“Within manufacturing, C-class parts are the items that make up 80% of the products bought by the manufacturer, but represent less than 20% of their overall product costs,” explains Andrew Davidson, regional vice president of Fastenal. “So, it features a very high mix of products but a very small spend overall for the company. We streamline that entire supply chain so that manufacturers don’t have to worry about managing those products and all the indirect costs that come with that.”
Fastenal is a global company with operations in 25 countries and more than 20,000 employees spread across 3,000-plus servicing locations. Some of these locations are branches that serve various customers; others are what are referred to as Onsite locations, essentially dedicated branches within customer facilities.
“We’re a very decentralised company,” Davidson tells us. “We make very few acquisitions; all the countries we’re in, we opened up organically. We are focused on our customers’ needs and bringing them solutions, which then creates growth and dictates how we build our business. That’s driven us to expand throughout the world and build out new systems and technologies.”
From Humble Beginnings
But before we go into that it’s worth taking a look at where Fastenal comes from. When Fastenal opened for business in 1967 it was the smallest of an estimated 10,000 fastener distributors in the United States. By the mid-1990s it had become the largest, almost entirely through organic growth. As company founder Bob Kierlin later observed, “We had to be doing something different. It wasn’t the product, and it wasn’t how we distributed the product. It was our belief in people.”
The way Kierlin tells it, the story started when he was 11 years old, and saw that automotive fasteners came in a box the size of a pack of cigarettes. It made him think if you could get cigarettes from a vending machine, why not fasteners?
He went on to envisage a 20 by 50 foot store lined with fastener dispensing vending machines.
But first he needed capital to get the business going. 30 investors turned Kierlin down before he convinced four friends, Henry Van McConnon, Jack Remick, Steve Slaggie and Mike Gostomski, to come on board. They set up shop in a 1000-square-foot building adjacent to Kierlin’s dad’s auto-supply store. Kierlin’s vision was to have 2,000 vending machines serviced by trucks with the name “Lightning Bolts” on the side. After some discussion the name of the company changed to “Fasten-all, which then lost the hyphen and one of the L’s to become Fastenal. The company logo was settled on when Kierlin read that blue on white was the easiest colour combination to read.
The company’s initial inventory was 1,400 different bags of fasteners. While the company was still figuring out how to get the machines made, it seemed like a good opportunity to make some profit, and so Fastenal opened as a shop.
Things were not easy during those first few years. The fastener kegs the store kept its product in frequently doubled as furniture. Long distance phone calls were always made before 8am. The company HQ became known as “the 55 Club”, after the temperature the thermostat was set to. During the 1980s they packed their products in surplus Ipana toothpaste boxes.
This is the ingenuity that saw Fastenal among the first companies to offer their customers products ranging from anchors to duct tape, just off the back of a single customer inquiry.
By this point Fastenal’s personnel were overseeing multiple stores, some covering an entire area or even state. However, the company’s growth was hindered by a lack of cash flow. To solve that problem, as well as giving the staff themselves an ownership stake in the company, Fastenal began looking into an IPO.
The company went public with Robert W. Baird, selling over 285,000 shares to create a charitable education foundation and another 100,000 to employees.
At the end of 1987 the Wall Street Journal ranked Fastenal as the top return on investment of the 500 IPOs held during the year.
The capital raised by the IPO set the stage for remarkable growth. Sales soared from $20 million in 1987 to $400 million by the end of the 90s, when Fastenal had grown from 52 stores to over 800.
The model has proven to be sustainable. Today, the company has revenues approaching $6 billion and more than 3,000 in-market servicing locations spanning 25 countries, including a fast-growing footprint in Europe.
The Secret to Fastenal’s Success
That growth is not surprising – Fastenal is a company with a lot to offer. When asked to name what it is that sets Fastenal apart in the marketplace, Davidson offered a layered response.
“The traditional answer you’d get from us is that we’re industry-leading in our customer service programs and what we offer. If we look at our growth drivers, we have industry-leading technology for inventory management and a wide reach of locations,” Davidson says. “Our scope, our technology, and our large geographic spread give us the edge.”
Fastenal is a company focussed on supply chain solutions. The products it physically distributes are secondary to the solutions the company provides.
“We are really built around how to drive down cost and waste for our industrial customers through all the services built around those products,” Davidson tells us.
Most of these solutions are centred on VMI programs (Vendor Managed Inventory), or as Davidson calls it, FMI (Fastenal Managed Inventory).
“Our FMI programs can involve managing thousands of individual products, and each one is critical to ensuring our customer’s business continues to run,” he says. “European customers that use our fasteners to build their OEM products – whether it’s construction equipment, trains, buses, et cetera – can be using millions of fasteners every month that we manage directly onto the production line.”
Some of Fastenal’s customers in the UK and Ireland have more than 5,000 individual Fastenal-managed bins of fasteners spread across their factories. This places Fastenal in a critical position of responsibility; if even one of those bins runs empty, the production line would grind to a halt.
“That is why we’re investing in our people and technology – to make sure that doesn’t happen,” Davidson says.
Key technology investments include Fastenal’s “FASTBin” solutions. These technologically-enhanced bins provide online visibility to the customer’s current inventory status, making Fastenal’s part management more proactive and efficient. Fastenal also offers industrial vending solutions (bringing access, visibility, and control to fast-turning safety and MRO items), a robust Onsite program (dedicated teams and inventory within customer facilities), an innovative “FAST 360°” reporting dashboard (illuminating customers’ Fastenal spend and Fastenal-managed inventory – what it is, where it’s located, and how much is on hand), as well as FAST Crib (cloud-based software that streamlines procurement, maintenance scheduling, and asset management).
It is a compelling offering, but Davidson has his own theory about Fastenal’s essential secret ingredient.
“Personally, I believe what truly makes us stand apart is the decentralised culture we’re built on,” he says. “We have the ability to make decisions for our customers all day, every day. Those 3,000 locations are 3,000 teams of entrepreneurs making good decisions for our customers. There is very little bureaucracy, which allows us to be more agile and flexible, and that makes us who we are today. We have the resources of a Fortune 500 company, which we are, yet we can make decisions like a small business each and every day.”
That flexibility has proved to be essential in the face of the twin challenges of the pandemic and Brexit, both of which cast a light on any vulnerability in supply chains around Europe.
“Looking back at Brexit, our central distribution centre is based in the Netherlands, so that was the first hurdle. What we saw was that there were going to be major supply chain issues for our products,” Davidson says.
Being able to overcome these issues is not just important, it is a matter of sink or swim for Fastenal’s customers.
“If you look at our end user, say a company manufacturing and selling construction equipment, we might sell them 3,000 individual items. If one of those items is not available, the factory shuts down,” Davidson points out. “So, we’re under enormous pressure every day. We needed to make two decisions. First, increase our inventory holdings, which means our working capital has seen an increase. That is not good for us financially, but we had to do it for our customers. We then invested in a brand-new central distribution centre in St. Helens in the first quarter of 2021 to support the UK market. As a supply chain partner for our customers, we had to make investments to get around the risks to our supply chain.”
Supply Chain Triage
As disruptive as Brexit has been, it was overshadowed by the pandemic, which gave rise to unprecedented safety and supply chain challenges.
“At the end of March, I saw that our industrial customers were slowing down, and there was a massive need to help the NHS and first responders,” Davidson says. “We sell PPE and safety products, so I sent out an email to our whole business and essentially said, we have a set of priorities: to keep our people safe, to keep our customers’ supply chains going, and to support first responders and critical industries.”
Understanding the seriousness of the situation, Fastenal switched its entire focus onto how to support the NHS, local communities, and the government with the vital supplies it could provide.
“I still don’t think people understand how big an issue this was,” Davidson insists. “Look at nitrile gloves, for example. A supply chain for masks you can set up quite quickly, but nitrile gloves require specialised equipment. Worldwide, approximately 5.5 billion are manufactured a year. Then all of a sudden, the world needed 8 to 9 billion overnight. The capacity simply does not exist for that. At the most, you are talking 6.5 billion. We had to prioritise. We couldn’t just use them ourselves or give them to non-critical workers.”
Fastenal engaged in a substantial contract with the HSC in Northern Ireland to get critical supplies into critical industries. The quality of those supplies was absolutely paramount, but there were challenges on that front as well.
“We’re invested in supply chain transparency and compliance. I personally spent hours and days viewing the certificates of masks coming into the country,” Davidson recalls. “Our team reviewed hundreds of certificates, and less than 1% of them were legitimately certified. So, we spent a lot of time getting the right certified product in, because we could not risk the end-user having a faulty product. It’s amazing how much bad counterfeit product was on the market.”
This focus on supply chain issues is a large part of what makes Fastenal an appealing partner to work with. This is why, last year, the National Hockey League signed a multi-year global partnership with the company, naming it their official Maintenance, Repair and Operations (MRO) partner through the 2023-24 season.
“We are thrilled to welcome Fastenal to the NHL family. Our facility operators, equipment managers and trainers can immediately benefit from Fastenal’s wide assortment of MRO products for all their specialized needs,” says Max Paulsen, NHL Director, Business Development. “This partnership reinforces the League’s commitment to community rinks via Fastenal’s industry-leading expertise, product inventory, and competitive preferred pricing, which will ultimately ensure the continued growth of hockey at all levels.”
From the start, Fastenal’s supply chain capabilities were clearly an invaluable tool.
“As we discussed a possible partnership with the NHL, it became clear the supply chain strengths of Fastenal, coupled with our steadfast commitment to providing safety solutions during this current environment, could make a positive impact on the League and on hockey facilities throughout North America,” said Fastenal President and CEO Dan Florness. “We’re excited to connect with the NHL’s avid fan base, and to deepen our connection with a sport that is already loved by many of our employees and customers.”
Recruiting Leadership from the Ground Up
Fastenal has been able to support these partnerships and navigate 21st Century challenges thanks to its decentralised structure and the initiative that is bred into its staff at every level.
“Our whole business is built on investing in people from the ground up. Nearly all of our senior management team, and about 90% of our general managers, started out in entry-level positions,” Davidson tells us. “When we are hiring we’re looking for someone who has certain core attributes. They do not need a giant CV, but they need ambition, innovation, integrity, and a commitment to teamwork. When we are hiring new employees, we are thinking about whether they can get to at least a management level. It’s critical that all our employees get that advancement and development.”
Fastenal invests in these recruits through its Fastenal School of Business, teaching online and in-person courses on the basics of how a business operates, how the company sells, how its operations work, how to lead a team, and everything in between. The director of the school has been running the program for 20 years, and last year Fastenal employees completed 816,000 courses, 18 hours of training per employee on average.
“We take internal education very seriously, at all levels,” Davidson says. “I myself was in a class for the last two days on leadership and resilience, and all of us, at all levels, are learning as part of our culture.”
Culture is a word that keeps coming up during our conversation with Davidson, and it is clear this is a huge priority for him.
“When I look at culture as a whole and talk to our teams, I always compare our business to a human body,” Davidson says. “At a high level, our business needs three things to function successfully. The first is the culture, which is the heart of the business. You also need a strategy, which is the brain. Then you need your arms and legs to execute that strategy. Similar to how the first organ to develop in a human body is the heart, everything starts with culture. It’s around our core values, that decentralised, innovative approach to everything we do.”
Fastenal’s recruitment processes are a key tool to preserving that culture.
“Because we hire from within, we’re built on ambitious people. Innovation is really about how you can take an entrepreneurial mindset and make decisions,” Davidson explains. “If your customer has a problem, here’s the Fastenal toolbox – how can you solve that? We’re big on doing the right thing. We give our people freedom, we trust them; integrity and teamwork are critical because we are so decentralised. It’s why we haven’t done a lot of acquisitions, because we have that ‘one team’ mindset, which has proven successful over time.”
That focus on doing the right thing is reflected in Fastenal’s corporate social responsibility (CSR) practices.
“We invest in CSR programs that include sustainability, supply chain transparency, and diversity and inclusion,” Davidson says. “We’ve just built an expanded compliance team in Merseyside. It is focused on making sure everything we are buying comes from reputable places, making sure the people we do business with are people our customers could audit and feel good about. We invest a lot in supply chain compliance and transparency.”
Last year Investor’s Business Daily named Fastenal one of the 50 top stocks for ESG (environmental, social, and governance) values. Davidson tells us his personal goal is to lead the industry as the most sustainable industrial distribution company in Europe.
“We’re working with suppliers to ask what sustainability initiatives they can bring to the table that we can work together on,” he says. “Everything we’re doing now, everything we invest in, we’re thinking, ‘How does this affect the sustainability of the world around us?’”
That mindset extends to Fastenal’s trucking fleet.
As part of Fastenal’s sustainable distribution effort, last year the company began running a battery-electric Freightliner eM2 straight truck to service branches in the Los Angeles metro area.
The eM2 began service in the Fastenal fleet in January last year, when it made deliveries of wide-ranging products to 28 Fastenal branches and customer-specific Onsite locations from Los Angeles to coastal Orange County and the Inland Empire. It is an exciting opportunity to learn about the technology and provide real-world feedback to help the manufacturer make improvements.
The Big Goal
All of this – the culture, the CSR, the recruitment process, the decentralised leadership – fits into a master plan for Davidson.
“We have a shared goal within my teams that I call ‘The BIG Goal,’” he says. “And that is to be the biggest and best distributor in the market. Being big is one thing, being the best is another. We want to be the most agile, the most sustainable, the most innovative in providing technology, data, and savings for our customers. We believe growth will continue to stem from that.”
Partly this is through technology, including rolling out FASTBin technology across Europe and the UK and equipping their customer-facing staff with mobility devices to take account management to the next level. It also means making the most of proven technology.
“One of our most proven technologies is industrial vending, but in Europe, it’s still relatively new,” Davidson says. “We have a few thousand machines in Europe, but we have well over 100,000 machines in North America. I want to see us scale that up. We’re working hard to keep growing our people, our footprint, and our offering.”