Service centers: strength in steel Essay

As Business Week observed recently, we are experiencing aschizophrenic economic recovery–a boom in the service industreis whilemanufacturing continues to take its lumps.

Nowhere is that more evidentthan in the steel industry. While basic steel runs at half capacity andfights to hang on to its markets, the steel service industry stasysprofitable by being responsive and flexible–striving to meet the needsof their customers, adding more value to the product they provide, andshowing users how to reduce inventory cost with just-in-time deliveries. Value added Lawrence “Bo” Burr, president, Atlas Steel Products, isone small steel-service-center entrepreneur who would be in big troubleif he were selling either aluminum or steel coil. But he isn’t.He sells only aluminum-coated flat-rolled steel. His facility inCleveland is doing well, he’s opened a sales office this year inChicago, and expects to expand thre later with a service center. “Our market is not as large as the galvanized market, or thecold-roll and hot-roll markets,” he explains, “but within ourspecialty we’ve been servicing users all over the country for thepast 12 years and doing well. Before that we were a small full-servicecompany in cold roll and hot roll.

“The recessionary period we’ve just seen has beendifficult for those people trying to be just traditional, general-linewarehouses. It’s very tough maintaining any voluem–or margin–byoffering the samething as four other guys down the street. Ourcustomers are demanding far more quality and service than traditinalmill operations can supply in small quantities. A customer may not havethe wherewithall to place a large order six to eight weeks out, andwarehouse that truckload of material, when all he really needed was15,000 lb of material, not 40,000. “We’re in the business of selling inventorying expertise,but we’re also selling the processing of that inventory. The valueadded is significant, both in reducing the customer’s spacerequirement and investment-capital commitment to equipment to processsteel. With a coil slitter or leverling line running today between $3/4million to $2 million, a steel user cannot afford to have that equipmentsit idle, even for just a few hours each day.

Our runs most of the timeeveryday.” Unlike Atlas Steel Products, A M Castle & Co is an example of avery large service-center organization. They have 26 centers spreadacross the country, with regional centers distributing material tosatellite centers. Castle has several relatively new processes for adding value to theproducts they sell, reports Dick Mork, Castle eastern regional vicepresident. “In Chicago, we just purchased a bar-grinding operationto create special diameters and finishes; turned, ground, and polished.A new saw in Cleveland will be the first CNC bar saw in the country. Itwill have very fast cutting times and the ability to program thesequencing of jobs.

Bar stock is fed into a magazine, and the machineautomatically cuts the right pieces to the right size. Up until now,this has been a very labor-intensive operation and very inefficient.Its cost of $300,000 was justified by our potential cost savings andincreased business.

” Andy Sharkey is president of the Steel Service Center Institute,Cleveland, OH, whose members constitute 75 percent of the industry.”The key issue is that in order for the service center to besuccessful, it has to be able to provide metal processed to thecustomer’s specifications less expensively than that customer cando it himself. “What we have been working hard on is packaging and sellingthe idea of cost of possession to the customer.

It is more than justthe metal or the cost of the slitting that is being sold. That customeralso has expenses in storage, insurance, handling, and a whole lot ofother hidden cots in doing this internally. This takes a detailedanalysis and we’ve developed worksheets that members can use withtheir customers to make this argument. Granted, it’s a tough sell,but it is working well where they have a good customer relationship andgood, aggressive salesmen. This is how we expand our markets.

” Inventory specialists According to Castle’s John Jones, “Our business is reallyinventory management, processing, and distribution. With 20 or 30customers for a given product, we have much more flexibility than a userwith captive inventory who too often gets caught with it sitting aroundfor months. “Instead of a customer buying from 10-week to as much as1-year inventories, we can work with him and develop programs to allowhim to buy this week what he will be using next week. We go in, analyzewhat he’s ordering for a given period, how much inventory he’scarrying, what the most economical order quantities are, and thensuggest changes that would help him manage his inventory better and cutscosts. We call this our Total Service Concept, or TSC program. “We’re saying, ‘Mr Customer, you can reduce yourinventory by relying on ours. Why carry it when we can get it ther in24 hr?’ Yet, nine times out of ten, that customer is a creature ofhabit who will want to continue to buy the same way he has in thepast.” As Mork explains, “It all boils down to a need for a new levelof trust.

He had this big pile of inventory top look at, and it gavehim a feeling of security. Now, that pile is gone, and he must trustthat we can get it for him when he needs it.” “Which works out great for us,” continues Jones.”We can do our job so much better. WE can say, ‘Guarantee usyour business, and we’ll guarantee the material will bethere.

‘ This gives him the confidence of a constant supply ofmaterial at a competitive price, and gives us a predetermined amount ofbusiness we can plan on. “Today’s purchasing agents are becoming much moresophisticated. Price is no longer the sole reason for making purchasingdecisions. They are looking at quality, service, availability, yourreputation, and lots of other things, including long-termviability–they want to feel that you are going to still be around ifthings get tough financially.” But what about your heavy reliance on trucks? “Trucks arehere to stay,” replies Mork. “Rail delivery is only used fordirect delivery to major users. Our mill shipments range from 10,000 to100,000 lb.

Trucks are easy to unload and are competitive with rail.Our trucks deliver to our customers during the day and transfer crossshipments between our satellite centers a night. “And we don’t feel particularly vulnerable to truckstrikeS. We have alternative plans to srve our customers, and thesework stoppages are not normally things that happen overnight. We cananticipate them and cover ourselves.

” Electronic inventory search Ordering by push button is coming. Companies big enough to benefitfrom electronic inventory access are now getting that capability withtheir mainframe data systems. All it takes to link buyer and seller isa special modem and appropriate software, but there are costs–thousandsof dollars–so there must be on ongoing mutual need. Explains Castle’s Jones, “It’s not really thehardware hurdle. The customer must be mentally prepared to communicatecomputer to computer. He may still feel he must go out for three bids,issue a purchase order, send a copy to receiving, a copy to accounting,etc. I think this will take another five years to really catch on.Right now only larger firms are communicating this way.

“I don’t feel systems will be set up where a customerlinks 15 different vendors together. Few suppliers would want that.I’m not going to spend money to set up a communications line if Iknow I’m competing with 15 others. You’ll pick your partnerscarefully, and this will lead to sole-sourcing.” Adds Dick Mork, “Obviously, you will agree on certainconditions before you let people have this proprietary information.Certainly, you don’t want competitors searching your inventory, soyou will have much stronger vendor/supplier relationships supported byconfidentiality agreements.” Atlas’s Bo Burr has similar thoughts.

“The electronicinventory search relationship is not for the fellow who needs fivesheets, but someone who’s buying much larger quantities. And itwon’t be a giveaway on our part. It must be mutually beneficial and protected against any misuse. It is being used already atrelatively small service centers who have one or two huge accounts. Ifthe relationship requires it, the size of the service center isirrelevant. There’s no question that the smaller centers are moreflexible than the larger ones.” Explains Sharkey. “Right now, the work going on is to findways to interface or translate computer languages to permit interface sothat the customer, using his own equipment, can talk directly to a steelservice mainframe computer to search inventory and generate a directpurchase order.

And it has to be mainframe to mainframe if you’regoing to allow a customer to deduct inventory out of your system. “Right now, the process is starting with the largest and mostsophisticated OEMs and gradually working its way down. A lot of thesmall job shops and fabricators will probably never see this fabricatorswill probably never see this taking place. Its the GMs and GEs that aredriving this by saying that within six months, if you want to continueto be a supplier of ours, you will have this kind of data-processingcapability.

The progressive service centers are anticipating this andare out there right now doing the development work. And they’refinding that this will really give them something to sell. It makesthem much more than just a seller of a commodity.” Buick City GM’s Buick City concept is an excellent example of theultimate in service-center relationships. It will have a Kasle SteelCorp facility built right next to it to become, essentially, BuickCity’s inventory, capable of delivering steel within minutes, or inincrements of press time. It was a three-way partnership agreement,also involving a single mill supplier, LTV Steel.

The basic idea is the just-in-time approach–a blank is coming fromthe service-center at exactly the time it is needed by GM’sstamping presses. This one-on-one relationship does involve a lot of risk–puttingall your eggs in one basket–and this idea is getting a mixed receptionfrom suppliers. Buick City is expected to go fully on-line in 1985. Kasle’sservice center is on GM property and, while dedicated to Buick now, itcould be used to service others in that area if something happened toBuick. How typical will this become? “In the last couple of years,we’ve seen a narrowing of sources,” answers SSCI’sSharkey, “but it’s still unusual to find a sole-sourcingsituation like Buick City.

But there’s no question that ourcustomers are seeking to deal with a smaller number of vendors on a morecontractual, long-term basis for specific products. As one example,Midland Ross has gone from 24 steel vendors to three in a matter of afew years. This entails a lot closer relationship in terms of sharingproduction information, and ultimately could result in electronicinventory searching relationships, one-on-one, where the customer placesorders by pushing buttons on a terminal on his production floor.” Quality Is the quality of the domestic steel you handle meeting userstandards? Atlas’s Burr observes, “I’m aware of fewcustomer demands that cannot be met by domestically produced steel. Thedemands our customers have made for foreign steel have been most oftenbased on pricing problems rather than quality problems. I know of somepeople stamping extremely tough parts, and the only steel they can useis domestic drawing-quality material. What we’ve seen of foreignsteel, the quality is exceptional, but that is not to say that domesticquality is lacking.” But what happens to steel that’s bad? “If itdoesn’t go back to the mill,” explains sSCI’s Sharkey,”we will reapply or reprocess that material–which is the greatflexibility a service center has with 500 to 1000 accounts.

There’s a lot of steel that’s damned good steel, it justdoesn’t meet the precise qualifications of a GM, for example, interms of surfce quality, gage, or whatever. But if you’re makingmufflers, and you don’t have an exposed part, that steel may bejust fine. So, in most cases, we’re not going to scrap a wholecoil or send it back to the mill.

“This is why a lot of end users have goen to service centers.Instead of the customer having the quality problem with the mill, theservice center provides quality screening. Bad material never gets tothe end user. We can take another coil in, put it on their line, andfuss with the mill.

Meanwhile, what shows up on the end user’sline is quality material.” SQC “What this really means,” Sharkey continues, “isthat service centers are required to have quality-control programs thatwere practically unheard of just 10 years ago. You will findmetallurgists in this business now, and service centers being certified in statistical-process-control (SQC) programs.” Adds Burr, “Our industry must fully address the statisticalprocess control question. We’re doing it as a company right now.

The first SQC wave from Detroit has hit their parts suppliers, and itwill hit our industry next. “The question of what specific information we will besupplying–in addition to the product we ship–must be answered soon:tapes, printouts, charts, gage variance measurements, chemistry,pass-through mill information, etc. I feel our industry will addressthis problem and come up with standards that will meet all of ourcustomers’ demands.” Industry growth The steel service industry has seen a growth in market sharedespite the fact that total steel consumption has been caling.

“This year we’ll ship slightly over 21 million tons,”says Sharkey, “which is an all-time record. The previous peak yearwas ’74 at 20.5 million tons. Last year, 1983, we shipped 17.7million tons. With total steel usage down, the steel-service-centermarket share has gone up.

This year in carbon industrial-steelproducts, the bread-and-butter items, we will take about 32 percent ofeverything that’s made in this country. About five years ago, thatwas less than 25 percent. “The challenge today is that the easy gains in market shareare already behind us. We are virtually serving 100 percent of themetal needs of the small customer and have pretty well penetrated 80 percent to 90 percent of the medium-sized OEMs and metalworking customers. “From now on, it will boil down to how successful our industryis in meeting the production requirements of OEMs that have historicallybeen big-tonnage mill buyers. What’s happened in the past year ortwo is that these OEMs are still mill buyers, but it simply hasn’tmade any sense for them to buy a quarter-year’s worth of steel,bring it in, and have it lay on the floor for most of three months, notwith the high real interest rates we have today. Or does it make sensefor an OEM that has a UAW contract and $24/hr labor rates to be runninga slitter or cut-to-length line? No more sense than for the mill to runit. “The service centers basically have taken anything that’slabor intensive out of the mill, and through the outsourcing programs,taken labor-intensive operations back out of the major OEMs.

Historically, this is because we’re about 50 percent union, andeven those union shops have wage rates that are essentially half of whatthe basic steelworkers’ contract would be. So there are tremendouscost efficiencies. “Also, most of the well-managed service centers are moving inthe direction of reducing their own costs. They’re negotiatinglower base labor rates, supplemented by incentive and profit-sharingsystems,” Sharkey observes, “and a lot of money is going intoautomation. One facility, for example, reduced their number of peoplefrom 77 to 22 while still turning over the same tonnage of product.

They did this with crane automation and more productiveprocessing.” Fabrication How far will service centers move into fabrication? RepliesCastle’s Jones, “We do forming and fabrication of large tanks;for example, shearing the plate here, and subcontracting out the rollingand welding. It’s important to remenber, though, that our primarybusiness is marketing metal, and to get too much into fabrication wouldinfringe on our fabricating customers.” Adds Sharkey, “Bringing fabrication functions in-house is agrey area where each company has to make sure that what they’redoing or would like to do does not compete with work being done by theirgood customers. One SSCI member in Chicago has a big second-stageblanking line that takes customer dies and punches out parts. The havehad a long-term effort to communicate with local stampers to make surethey understand that they are not competing with them, but only doingspecific blanking jobs requested by their customers. “There are also individual examples of forming in ourindustry, but that too is not highly developed.

” Mill relationships How are your relationships these days with the mills? AnswersCastle’s Mork, “The mills are finding more things that theycan no longer do economically, and in many instances they are no longerproducing a particular size. Our shearing and Gauer bar operation isgetting busier all the time producing nonstandard flats from plate. “there are some mills like Carpenter, US Steel, National, etc,that compete in steel service, but most mills are perfectly satisfied tohave a completely separate relationship with service centers.They’re a manufacturer, our customer is a manufacturer, andwe’re the inventory manager. I don’t think the mills couldsurvive without service centers.

They don’t want to play our role,and I don’t think they could if they wanted to.” Adds Atlas’s Burr, “The mills are moving toward sellingonly master coils. There is certainly a good marriage today between themills and service centers. I see instances where mills are selling auser by prearranging some processing from service centers somewhere elseso they don’t have to get directly involved. “As our industry evolves to more professional levels, themills perception of us is also evolving, recognizing that we’re notthe gouging middlemen they may have thought in the past, but performinga needed function in the marketplace. but, there is a kind of love/haterelationship. Because of our flexibility, we were able to make somemoney in the early ’80s when the mills clearly did not. Severe jobcutbacks and salary cuts were hard to take when we were enjoying recordyears.

” Observes SSCI’s Sharkey, “i think it is normal thatmill/service center relationships are a little strained in a market liketoday where one partner has prospered much more than the other. Thereis perhaps some feeling of disloyalty on the part of many of the millsbecause a large percentage of the foreign steel is marketed by servicecenters. But what makes me optimistic long term is the trend–becauseof the just-in-time and MRP programs–for service centers and mills towork much more closely to meet the needs of specific end users. Majorcontracts between mills and end users are now being based on specificsupplemental roles played by service centers.” Washington What’s the role of SSCI in Washington? “Our firstpriority in Washington is essentially a function of identity,”explains Sharkey. “Quite frankly, too many people there do notunderstand the distribution segment of this economy.

When they think ofthe steel industry, they think only of the large integrated mills. Wemust get them to understand that the distribution segment of ourindustry is large, it’s dynamic, and it has different needs andobjectives. “On the import question, there are very few of our customerstoday that demand domestic steel. We handle about one third of all theforeign steel that enters the country.

As an industry, we’re still60 to 70 percent domestic, with some large regional variations–thewest-coast market, for example, is 50 to 60 percent imported steel. “There is tremendous concern in our industry for the long-termhealth and well being of the domestic steel producers. What weconsistantly argue for is that they be allowed to play on a levelplaying field. We have worked hard for reform of the trade laws to makefiling of a countervailing duty and antidumping cases simpler, easier toexpedite, cheaper to pursue, and faster to resolve.

“As an association,” Sharkey continues, “we havebeen opposed to arbitrary restrictions on steel imports. We are opposedto legislative quotas. That’s not the answer.

We certainlysupport the mills in their efforts to make sure that instances wheresteel is being dumped or highly subsidized are dealt with in anexpeditious way.” What will happen next? “If this latest compromise on the partof President Reagan turns out to be a lasting solution, it will be thefirst time that has happened,” observes Sharkey. “Our feelingis that the jury is still out on this one. It was a master strokepolitically, because it certainly pushed the issue past the election.That is when we will find out how serious everyone is about negotiating. “Short term, it’s our industry’s expectation that itwill have very little impact.

There’s a tremendous amount of steelalready on the water and already landed in this country, and this willimpact the marketplace well into early 1985. But long term, the jury isstill out. “Generally, you’ll find our industry supportive of anegotiated solution that brings imports into some reasonablerange,” he emphasizes. “Just about everyone agrees that thescale of import penetration we’ve seen this year is unacceptable,chaotic, and damaging to all sectors of the metal community.” What does a small independent like Bo Burr feel about this?”What do I want from Washington? For them to get out of our way!I have a lot of concerns about import restrictions.

I’m no greatdefender of anyone, but I just feel that we should have the right to buythe best product at the lowest price. I’m a consumer atheart.” Future How does Andy Sharkey see the future of his industry? “Thisis an easy-entry, easy-exit industry. The threshold is not sosevere–as long as you can find suppliers and financial backing–thereare still opportunities for somebody who’s a real crackerjack entrepreneur and willing to work hard. “There is no question that steel consumption in this countryhas been on a downward trend and that will probably continue.

But inthe near term, I would expect continuing increases in market share tooffset or negate the decline in the total pie. If we lose 5- or10-million tons over the next few years, we will probably make that upin market share and value added. After that, where we go is not totallyclear. “We as an industry have to become a lot more concerned withpromoting steel as a product, since our facilities, our equipment, andour expertise are all geared to steel.

We must also work to doeverything we can to keep the manufacturers of end-use products busy andgrowing. That is going to be tough long term. We’re fighting astrong dollar. We forget what a large percentage of the largeOEM’s output was manufactured for export in the past–farmequipment, machine tools, and many others. We must find a way to keepthese domestic manufacturers from increasingly looking overseas toproduce their products or components. “Machine tools are a prime example. We’ve seen a 40percent penetration of that market this year, and the largest singlemarket for service centers is electrical and nonelectrical machinery–43percent. We have to be concerned with what’s happening to thatcustomer base.

” So what can you do about this? “Try to be absolutely the mostefficient mechanism for moving metal from steel producer to enduser,” says Sharkey, “by providing the most cost-effective wayfor that product to be made at as low a cost as possible. Yet, eventhat won’t help much if we’ve got a 40 percent currencydifferential! We don’t kid ourselves. But you’ve got tostart somewhere.” For Bo burr, the small entrepreneur, the future is very exciting.”It’s the dynamic aspects of the present US marketplace thatfascinates me, that even in adversity there are opportunities.That’s what we as a company are banking on, and so should anycompany that expects to be around for the next few decades.”

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