To reach KD Sales' headquarters, turn east at England, Ark., and head towards Sherrill, population about 57. If you blink and end up in Altheimer, you've gone too far.
Why is the well-known, successful earth-moving equipment business located in rural Arkansas?
“That's where I was born and raised,” says Kevin Derden, who runs the company. “My father stopped farming in the 1980s and that's where our land and buildings were. We could easily be in California or New York. That would make shipping and distribution — our main focus — easier. But this is where we want to be. Out here, we're under the radar and that's fine.”
But just because KD Sales is in small-town Arkansas doesn't mean it's shut itself away from the world. Quite the opposite has occurred, actually.
Derden says to be successful in a large equipment manufacturing business one must build a contact list and expand it.
“You'll never make it being isolated.”
Because it's easier to control and watch product closely, Derden has always wanted to build KD equipment in-house. But that is no longer affordable.
“At the end of the day, we're locked into a price. You have to get or pay X amount for a certain part. If you're trying to sell a part for $10 that cost you $100 to make, it won't work.”
So, four or five years ago, KD Sales went to Mexico looking for business partners.
“Eventually, we bought our own company there so we can control things a bit better. The labor and products produced there are great. We've had trouble getting the steel, the raw materials, to make parts, though.”
There are places where such hindrances don't exist. Derden found that Eastern Europe — Latvia specifically — has raw materials in abundance. Latvia's educated, motivated workforce was icing on the cake.
Several years ago, Derden hooked up with Viktors Melbardis through an old fraternity brother.
“This UCA (University of Central Arkansas) fraternity brother of mine has a lot of worldwide expertise in manufacturing and has a bunch of contacts. He knew Vik and suggested he'd be a good working partner.”
When Melbardis and Derden finally got together, they explored the possibilities.
“We talked things through for a couple of years — a slow approach,” says Derden. “You don't just travel to Latvia, knock on a factory door, and say ‘Hey, man, I want to buy from you.’”
“That's true,” agrees Melbardis, director of Baltic Manufacturing Group (BMG), headquartered in Latvia's capital, Riga. “The culture calls for developing a relationship. The first time Kevin and I spoke was in 2003. That was over the phone and it was another 18 months or so before we got the first purchase order going. It took a couple of months until the first parts were shipped across the border.”
Derden eagerly awaited that first container full of equipment parts. “Getting that first container out of the country is tough. It's kind of like having a baby — nerves and difficulties. But now we're old hands at it and have the containers moving along pretty well.”
KD Sales has also invested in the Latvian company Melbardis oversees. “We don't just want to be a customer, but a partner. We want the slaps on the back along with the kicks in the butt.”
Derden describes the Latvian and Mexican plants as “yin and yang. One company does a consumer-based, sheet-metal, precision work. The other company is more of a manufacturer. KD Sales deals with earth-moving equipment. Building it isn't terribly detailed. It's not like building cars, although it is very labor intensive.
“We've found labor costs in Eastern Europe are cheaper than Mexico's. They aren't as cheap as in China, but close. Few would guess that.
Melbardis — raised in Indiana by Latvian immigrant parents who fled during WWII — says Latvia offers not only lower labor costs but lower operational costs. The country, a member of both the European Union and NATO, has “a business-friendly environment. For example, the corporate income tax rate there is set at 15 percent. That alone makes it very attractive to those wanting to set up a business. This ‘new’ part of Europe is attracting many businesses. Businessmen there want to find a good customer and stable orders. Along with that is more cash-flow and investment in more modern equipment.”
BMG represents a strategic alliance between two manufacturing companies in Latvia. One is a precision metal-working outfit with sheet-metal, laser-cutting, stainless steel welding and other things. The other company is more of a machine shop dealing with turning, lathing, milling, fabrications and so forth.
“These two companies are premier companies in Latvia,” says Melbardis. “They're absolutely comfortable in the European market and looking to grow. We've got our act together and want to get across the Atlantic Ocean to the world's largest market. We're doing that one small step at a time. But with the market being so large, that's the proper approach.”
Partnering with KD Sales “whet our hopes,” he says. “We want to find other partners to continue growth and expansion.”
Another plus of Latvian products is the quality is second to none, says Derden.
And there are few culture clashes. Latvians get along well with Americans, says Melbardis.
“There's definitely a cultural similarity between the region of Europe where I'm from and the United States. We click — there's the same values and work ethic. We understand each other and I've found Americans are very comfortable finding partners and doing business there.”
One of the things keeping many U.S. manufacturers from working overseas is “they're scared to let go. It's like holding onto a baby. They want to see something being built. I used to be the same way.”
Such fears are easier to let go of after seeing Latvian and Mexican engineers “working wonders,” says Derden.
“I think Latvian engineers make $250 a month. The expertise level in Latvia is superior. They pay attention to the details. In Mexico, they'll work for $350 and also do a fantastic job. They have technical computer skills.”
Mexico continues to build an impressive manufacturing workforce. Skills pushed from early age help.
“Look, I went to a small private college prep school. Meanwhile, Mexican guys my age were in shop class. That's what they were learning — lathes, calibration machines, all kinds of stuff. Workers in both countries are fantastic.”
When asked about his American-style English, Melbardis says he often “jokes about how good the English-language schools are in Latvia. And, in truth, the language barriers are quite low there. Most Latvians in business circles speak English.”
That's a good thing because Derden wants to continue using Latvian or eastern European companies to build components for KD Sales equipment. The Latvian-made components will be sent to Mexico for final assembly.
“The assembled equipment is so large, it's prohibitive to put it in a container and ship it,” says Derden. “It's much easier to ship it north from Mexico.
“And the business situation is working well. There's an alliance between Latvia and Mexico that's played into this. We can import duty-free and don't have to deal with a bunch of tariffs and taxes. It's been win/win.”
The Arkansas-based company has forged a long-term bond with BMG, says Melbardis. “Our relationship is more than arm's length, filling orders. BMG now has the exclusive license to build scrapers in Latvia for the European market.”
The prospect excites Derden, as well. “We're going to do that. Agriculture is the foundation for any country's growth. But folks are finding out this type of equipment can help build roads, housing, whatever. It's just a much cheaper way to move earth.”
By building partnerships in Mexico and Eastern Europe, K D Sales has been able to move beyond selling just scraper parts.
“We've successfully launched our own whole goods line in the scraper market. We've also been working with several small companies in looking at ‘contract manufacturing.’ We've built a variety of things such as: cotton picker parts, school lockers, tool boxes, and ornate security gating and fencing.
“If it's made of metal, we will look at it. We prefer to make a sample and then let the customer judge the quality…before asking for the order.”
Doing business overseas requires much trust.
“When you're wiring Euros to a foreign bank for the first time you think, ‘Man, hope this works,’” says Derden. “But if you've done your homework, you have to trust it's for the best.”
One thing Derden has learned: to work with overseas companies, you must have a reliable “on the ball” contact.
“There's a new problem every day. Whether in Mexico or Eastern Europe, you've got to have a man on the street. The Internet makes the world smaller but it isn't a substitute for a trained eye looking at a part. Vik is the best at filling that role — he wants this to work. We both want to make this a success for our families.”
The main message Melbardis wants to get out is the “need to get over the fear of looking beyond the backyard. I think small American businesses are hurt by that. To work in a global environment you don't have to be a big transnational corporation. That's no longer the case. There are plenty of opportunities available for smaller companies too.”
(For more information on KD Sales, visit www.kdsales.com)