Service centers: strength in steel Essay

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.”