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Service centers: strength in steel.

As Business Week observed recently, we are experiencing a schizophrenic economic recovery--a boom in the service industreis while manufacturing continues to take its lumps. Nowhere is that more evident than in the steel industry. While basic steel runs at half capacity and fights to hang on to its markets, the steel service industry stasys profitable by being responsive and flexible--striving to meet the needs of their customers, adding more value to the product they provide, and showing users how to reduce inventory cost with just-in-time deliveries.

Value added

Lawrence "Bo" Burr, president, Atlas Steel Products, is one small steel-service-center entrepreneur who would be in big trouble if he were selling either aluminum or steel coil. But he isn't. He sells only aluminum-coated flat-rolled steel. His facility in Cleveland is doing well, he's opened a sales office this year in Chicago, and expects to expand thre later with a service center.

"Our market is not as large as the galvanized market, or the cold-roll and hot-roll markets," he explains, "but within our specialty we've been servicing users all over the country for the past 12 years and doing well. Before that we were a small full-service company in cold roll and hot roll.

"The recessionary period we've just seen has been difficult for those people trying to be just traditional, general-line warehouses. It's very tough maintaining any voluem--or margin--by offering the samething as four other guys down the street. Our customers are demanding far more quality and service than traditinal mill operations can supply in small quantities. A customer may not have the wherewithall to place a large order six to eight weeks out, and warehouse that truckload of material, when all he really needed was 15,000 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 value added is significant, both in reducing the customer's space requirement and investment-capital commitment to equipment to process steel. With a coil slitter or leverling line running today between $3/4 million to $2 million, a steel user cannot afford to have that equipment sit idle, even for just a few hours each day. Our runs most of the time everyday."

Unlike Atlas Steel Products, A M Castle & Co is an example of a very large service-center organization. They have 26 centers spread across the country, with regional centers distributing material to satellite centers.

Castle has several relatively new processes for adding value to the products they sell, reports Dick Mork, Castle eastern regional vice president. "In Chicago, we just purchased a bar-grinding operation to create special diameters and finishes; turned, ground, and polished. A new saw in Cleveland will be the first CNC bar saw in the country. It will have very fast cutting times and the ability to program the sequencing of jobs. Bar stock is fed into a magazine, and the machine automatically 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 and increased 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 be successful, it has to be able to provide metal processed to the customer's specifications less expensively than that customer can do it himself.

"What we have been working hard on is packaging and selling the idea of cost of possession to the customer. It is more than just the metal or the cost of the slitting that is being sold. That customer also has expenses in storage, insurance, handling, and a whole lot of other hidden cots in doing this internally. This takes a detailed analysis and we've developed worksheets that members can use with their customers to make this argument. Granted, it's a tough sell, but it is working well where they have a good customer relationship and good, aggressive salesmen. This is how we expand our markets."

Inventory specialists

According to Castle's John Jones, "Our business is really inventory management, processing, and distribution. With 20 or 30 customers for a given product, we have much more flexibility than a user with captive inventory who too often gets caught with it sitting around for months.

"Instead of a customer buying from 10-week to as much as 1-year inventories, we can work with him and develop programs to allow him to buy this week what he will be using next week. We go in, analyze what he's ordering for a given period, how much inventory he's carrying, what the most economical order quantities are, and then suggest changes that would help him manage his inventory better and cuts costs. We call this our Total Service Concept, or TSC program.

"We're saying, 'Mr Customer, you can reduce your inventory by relying on ours. Why carry it when we can get it ther in 24 hr?' Yet, nine times out of ten, that customer is a creature of habit who will want to continue to buy the same way he has in the past."

As Mork explains, "It all boils down to a need for a new level of trust. He had this big pile of inventory top look at, and it gave him a feeling of security. Now, that pile is gone, and he must trust that 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 us your business, and we'll guarantee the material will be there.' This gives him the confidence of a constant supply of material at a competitive price, and gives us a predetermined amount of business we can plan on.

"Today's purchasing agents are becoming much more sophisticated. Price is no longer the sole reason for making purchasing decisions. They are looking at quality, service, availability, your reputation, and lots of other things, including long-term viability--they want to feel that you are going to still be around if things get tough financially."

But what about your heavy reliance on trucks? "Trucks are here to stay," replies Mork. "Rail delivery is only used for direct delivery to major users. Our mill shipments range from 10,000 to 100,000 lb. Trucks are easy to unload and are competitive with rail. Our trucks deliver to our customers during the day and transfer cross shipments between our satellite centers a night.

"And we don't feel particularly vulnerable to truck strikeS. We have alternative plans to srve our customers, and these work stoppages are not normally things that happen overnight. We can anticipate them and cover ourselves."

Electronic inventory search

Ordering by push button is coming. Companies big enough to benefit from electronic inventory access are now getting that capability with their mainframe data systems. All it takes to link buyer and seller is a special modem and appropriate software, but there are costs--thousands of dollars--so there must be on ongoing mutual need.

Explains Castle's Jones, "It's not really the hardware hurdle. The customer must be mentally prepared to communicate computer 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 customer links 15 different vendors together. Few suppliers would want that. I'm not going to spend money to set up a communications line if I know I'm competing with 15 others. You'll pick your partners carefully, and this will lead to sole-sourcing."

Adds Dick Mork, "Obviously, you will agree on certain conditions before you let people have this proprietary information. Certainly, you don't want competitors searching your inventory, so you will have much stronger vendor/supplier relationships supported by confidentiality agreements."

Atlas's Bo Burr has similar thoughts. "The electronic inventory search relationship is not for the fellow who needs five sheets, but someone who's buying much larger quantities. And it won't be a giveaway on our part. It must be mutually beneficial and protected against any misuse. It is being used already at relatively small service centers who have one or two huge accounts. If the relationship requires it, the size of the service center is irrelevant. There's no question that the smaller centers are more flexible than the larger ones."

Explains Sharkey. "Right now, the work going on is to find ways to interface or translate computer languages to permit interface so that the customer, using his own equipment, can talk directly to a steel service mainframe computer to search inventory and generate a direct purchase order. And it has to be mainframe to mainframe if you're going to allow a customer to deduct inventory out of your system.

"Right now, the process is starting with the largest and most sophisticated OEMs and gradually working its way down. A lot of the small job shops and fabricators will probably never see this fabricators will probably never see this taking place. Its the GMs and GEs that are driving this by saying that within six months, if you want to continue to be a supplier of ours, you will have this kind of data-processing capability. The progressive service centers are anticipating this and are out there right now doing the development work. And they're finding that this will really give them something to sell. It makes them much more than just a seller of a commodity."

Buick City

GM's Buick City concept is an excellent example of the ultimate in service-center relationships. It will have a Kasle Steel Corp facility built right next to it to become, essentially, Buick City's inventory, capable of delivering steel within minutes, or in increments 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 from the service-center at exactly the time it is needed by GM's stamping presses.

This one-on-one relationship does involve a lot of risk--putting all your eggs in one basket--and this idea is getting a mixed reception from suppliers.

Buick City is expected to go fully on-line in 1985. Kasle's service center is on GM property and, while dedicated to Buick now, it could be used to service others in that area if something happened to Buick.

How typical will this become? "In the last couple of years, we've seen a narrowing of sources," answers SSCI's Sharkey, "but it's still unusual to find a sole-sourcing situation like Buick City. But there's no question that our customers are seeking to deal with a smaller number of vendors on a more contractual, long-term basis for specific products. As one example, Midland Ross has gone from 24 steel vendors to three in a matter of a few years. This entails a lot closer relationship in terms of sharing production information, and ultimately could result in electronic inventory searching relationships, one-on-one, where the customer places orders by pushing buttons on a terminal on his production floor."

Quality

Is the quality of the domestic steel you handle meeting user standards? Atlas's Burr observes, "I'm aware of few customer demands that cannot be met by domestically produced steel. The demands our customers have made for foreign steel have been most often based on pricing problems rather than quality problems. I know of some people stamping extremely tough parts, and the only steel they can use is domestic drawing-quality material. What we've seen of foreign steel, the quality is exceptional, but that is not to say that domestic quality is lacking."

But what happens to steel that's bad? "If it doesn't go back to the mill," explains sSCI's Sharkey, "we will reapply or reprocess that material--which is the great flexibility a service center has with 500 to 1000 accounts. There's a lot of steel that's damned good steel, it just doesn't meet the precise qualifications of a GM, for example, in terms of surfce quality, gage, or whatever. But if you're making mufflers, and you don't have an exposed part, that steel may be just fine. So, in most cases, we're not going to scrap a whole coil 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, the service center provides quality screening. Bad material never gets to the end user. We can take another coil in, put it on their line, and fuss with the mill. Meanwhile, what shows up on the end user's line is quality material."

SQC

"What this really means," Sharkey continues, "is that service centers are required to have quality-control programs that were practically unheard of just 10 years ago. You will find metallurgists in this business now, and service centers being certified in statistical-process-control (SQC) programs."

Adds Burr, "Our industry must fully address the statistical process control question. We're doing it as a company right now. The first SQC wave from Detroit has hit their parts suppliers, and it will hit our industry next.

"The question of what specific information we will be supplying--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 address this problem and come up with standards that will meet all of our customers' demands."

Industry growth

The steel service industry has seen a growth in market share despite 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 year was '74 at 20.5 million tons. Last year, 1983, we shipped 17.7 million tons. With total steel usage down, the steel-service-center market share has gone up. This year in carbon industrial-steel products, the bread-and-butter items, we will take about 32 percent of everything that's made in this country. About five years ago, that was less than 25 percent.

"The challenge today is that the easy gains in market share are already behind us. We are virtually serving 100 percent of the metal needs of the small customer and have pretty well penetrated 80 per cent to 90 percent of the medium-sized OEMs and metalworking customers.

"From now on, it will boil down to how successful our industry is in meeting the production requirements of OEMs that have historically been big-tonnage mill buyers. What's happened in the past year or two is that these OEMs are still mill buyers, but it simply hasn't made 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, not with the high real interest rates we have today. Or does it make sense for an OEM that has a UAW contract and $24/hr labor rates to be running a slitter or cut-to-length line? No more sense than for the mill to run it.

"The service centers basically have taken anything that's labor 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, and even those union shops have wage rates that are essentially half of what the basic steelworkers' contract would be. So there are tremendous cost efficiencies.

"Also, most of the well-managed service centers are moving in the direction of reducing their own costs. They're negotiating lower base labor rates, supplemented by incentive and profit-sharing systems," Sharkey observes, "and a lot of money is going into automation. One facility, for example, reduced their number of people from 77 to 22 while still turning over the same tonnage of product. They did this with crane automation and more productive processing."

Fabrication

How far will service centers move into fabrication? Replies Castle's Jones, "We do forming and fabrication of large tanks; for example, shearing the plate here, and subcontracting out the rolling and welding. It's important to remenber, though, that our primary business is marketing metal, and to get too much into fabrication would infringe on our fabricating customers."

Adds Sharkey, "Bringing fabrication functions in-house is a grey area where each company has to make sure that what they're doing or would like to do does not compete with work being done by their good customers. One SSCI member in Chicago has a big second-stage blanking line that takes customer dies and punches out parts. The have had a long-term effort to communicate with local stampers to make sure they understand that they are not competing with them, but only doing specific blanking jobs requested by their customers.

"There are also individual examples of forming in our industry, but that too is not highly developed."

Mill relationships

How are your relationships these days with the mills? Answers Castle's Mork, "The mills are finding more things that they can no longer do economically, and in many instances they are no longer producing a particular size. Our shearing and Gauer bar operation is getting 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 to have a completely separate relationship with service centers. They're a manufacturer, our customer is a manufacturer, and we're the inventory manager. I don't think the mills could survive 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 selling only master coils. There is certainly a good marriage today between the mills and service centers. I see instances where mills are selling a user by prearranging some processing from service centers somewhere else so they don't have to get directly involved.

"As our industry evolves to more professional levels, the mills perception of us is also evolving, recognizing that we're not the gouging middlemen they may have thought in the past, but performing a needed function in the marketplace. but, there is a kind of love/hate relationship. Because of our flexibility, we were able to make some money in the early '80s when the mills clearly did not. Severe job cutbacks and salary cuts were hard to take when we were enjoying record years."

Observes SSCI's Sharkey, "i think it is normal that mill/service center relationships are a little strained in a market like today where one partner has prospered much more than the other. There is perhaps some feeling of disloyalty on the part of many of the mills because a large percentage of the foreign steel is marketed by service centers. But what makes me optimistic long term is the trend--because of the just-in-time and MRP programs--for service centers and mills to work much more closely to meet the needs of specific end users. Major contracts between mills and end users are now being based on specific supplemental roles played by service centers."

Washington

What's the role of SSCI in Washington? "Our first priority in Washington is essentially a function of identity," explains Sharkey. "Quite frankly, too many people there do not understand the distribution segment of this economy. When they think of the steel industry, they think only of the large integrated mills. We must get them to understand that the distribution segment of our industry is large, it's dynamic, and it has different needs and objectives.

"On the import question, there are very few of our customers today that demand domestic steel. We handle about one third of all the foreign steel that enters the country. As an industry, we're still 60 to 70 percent domestic, with some large regional variations--the west-coast market, for example, is 50 to 60 percent imported steel.

"There is tremendous concern in our industry for the long-term health and well being of the domestic steel producers. What we consistantly argue for is that they be allowed to play on a level playing field. We have worked hard for reform of the trade laws to make filing of a countervailing duty and antidumping cases simpler, easier to expedite, cheaper to pursue, and faster to resolve.

"As an association," Sharkey continues, "we have been opposed to arbitrary restrictions on steel imports. We are opposed to legislative quotas. That's not the answer. We certainly support the mills in their efforts to make sure that instances where steel is being dumped or highly subsidized are dealt with in an expeditious way."

What will happen next? "If this latest compromise on the part of President Reagan turns out to be a lasting solution, it will be the first time that has happened," observes Sharkey. "Our feeling is that the jury is still out on this one. It was a master stroke politically, 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 it will have very little impact. There's a tremendous amount of steel already on the water and already landed in this country, and this will impact the marketplace well into early 1985. But long term, the jury is still out.

"Generally, you'll find our industry supportive of a negotiated solution that brings imports into some reasonable range," he emphasizes. "Just about everyone agrees that the scale 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 great defender of anyone, but I just feel that we should have the right to buy the best product at the lowest price. I'm a consumer at heart."

Future

How does Andy Sharkey see the future of his industry? "This is an easy-entry, easy-exit industry. The threshold is not so severe--as long as you can find suppliers and financial backing--there are still opportunities for somebody who's a real crackerjack entrepreneur and willing to work hard.

"There is no question that steel consumption in this country has been on a downward trend and that will probably continue. But in the near term, I would expect continuing increases in market share to offset or negate the decline in the total pie. If we lose 5- or 10-million tons over the next few years, we will probably make that up in market share and value added. After that, where we go is not totally clear.

"We as an industry have to become a lot more concerned with promoting steel as a product, since our facilities, our equipment, and our expertise are all geared to steel. We must also work to do everything we can to keep the manufacturers of end-use products busy and growing. That is going to be tough long term. We're fighting a strong dollar. We forget what a large percentage of the large OEM's output was manufactured for export in the past--farm equipment, machine tools, and many others. We must find a way to keep these domestic manufacturers from increasingly looking overseas to produce their products or components.

"Machine tools are a prime example. We've seen a 40 percent penetration of that market this year, and the largest single market for service centers is electrical and nonelectrical machinery--43 percent. We have to be concerned with what's happening to that customer base."

So what can you do about this? "Try to be absolutely the most efficient mechanism for moving metal from steel producer to end user," says Sharkey, "by providing the most cost-effective way for that product to be made at as low a cost as possible. Yet, even that won't help much if we've got a 40 percent currency differential! We don't kid ourselves. But you've got to start somewhere."

For Bo burr, the small entrepreneur, the future is very exciting. "It's the dynamic aspects of the present US marketplace that fascinates me, that even in adversity there are opportunities. That's what we as a company are banking on, and so should any company that expects to be around for the next few decades."
COPYRIGHT 1984 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Sprow, Eugene E.
Publication:Tooling & Production
Date:Dec 1, 1984
Words:4094
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