Deliver on time, steel buyers tell suppliers
Buyers say they need to know that ordered mill products are available and can be delivered in support of Lean and Just-in-Time manufacturing schedules. It isn't happening, though, as mills try to offset high costs of raw materials and tight credit issues.
By Tom Stundza -- Purchasing, 11/13/2008 7:00:00 AM
"Give us what we need, when we need it!"
A year ago, it was product quality. This year, it's product availability. In a year when, according to Purchasing's latest survey, demand sagged while transaction prices spiked up, lowest price wasn't a primary criterion for choosing or rating steel suppliers anyway. But what has surprised buyers has been inconsistent availability—and erratic delivery—of needed mill products from mills or service centers. Product quality, they say, isn't the issue this year.
For two years now, various surveys have found buyers pressing their steel mill suppliers and processing distributors to upgrade inventory management systems. They felt that would insure needed steel products would be available, and they had believed their domestic suppliers had been listening. Apparently, that hasn't happened, buyers report. But it may happen soon since the manufacturing economy is in disarray and steel purchasing is in decline, warehouse inventories are accumulating, market prices are accelerating their slide and mills are reported to be begging for orders.
"Instead of on-time delivery in an overall weak market, promises for delivery of orders haven't been kept so needed stocks have been tough to materialize," complains the commodity manager of a steam turbines manufacturing plant in Chattanooga, Tenn. But he does admit that this has been isolated to certain grades—specialty plates and structurals—being used in nonresidential construction. "Several steel plate mills seem to have adopted a stubborn streak of independence regarding production output, which makes availability shaky," agrees Roger Schulz, purchasing manager for the Snow and Ice Division in Monroe, Wis., of Monroe Truck Equipment.
At present, Schulz has a lone primary supplier for most of his plate and sheet needs, and uses a handful of other qualified suppliers if needed. However, this year, he has used secondary sources more than he would have liked. So, for the balance of this year and the first half of 2009, Schulz says he is "looking towards my steel sources for assurance that they actually have the material needed—and can deliver at a competitive price." Analysts agree that the spate of North American mill-ownership and service-center-chain buyouts and consolidations have generated erratic production, processing and delivery efforts.
That has only deepened the wound of injured steel supply chain relationships between suppliers and the buyers this year. Although domestic demand has been soft and stockpiles have increased, mills have raised prices dramatically to offset higher costs of scrap, iron ore and energy. Imports have been down because the decline in the dollar has kept foreign-made steel in offshore markets.
Yet the marketplace at the start of September had the most flat-rolled steel inventoried (at 8.7 million net tons) since June of 2007. However, supply of steel sheet and other grades may get worse this fourth quarter, several other buyers note. That's because the economic issues involving the "credit freeze" and an accelerating steel-demand slowdown have caused several mills to reduce steelmaking and steel processing operations and to back off delivery promises in an attempt to keep prices from sliding even further. So, the timing of purchases and deliveries for the next several months will remain critical to manufacturers.
"Capacity manipulation by our oligopoly of U.S. mills is a concern," says Jeffrey Smith, senior buyer for BUNN Corp. in Springfield, Ill. Looking ahead, he plans to reduce the supply chain to take full advantage of falling prices for all steel purchases. Since there are substantial reductions going on now and through the end of the year on prices of stainless steel products, "it is important not get stuck with higher-cost inventory," Smith says, adding that "it's also become even more important to run inventories as light as possible for carbon steel flat-rolled products, where even more price reductions are coming."
Not only has this disrupted supply to original equipment manufacturers (OEMs) but also to service centers and fabrication shops. Paul Oscar, corporate tubular product marketing manager for Castle Metals in Northbrook, Ill., says the main concerns driving purchasing strategies are improved corporate inventory turns and on-time performance to its customers, which also require sufficient supply by mill suppliers. To get enough materials with zero-defect quality at overall competitive acquisition costs, the company prefers contract buys from global suppliers, although "sometimes spot buys are all that can be had." The buyer at a tank car production and repair plant says "some steel items have been in short supply" even though suppliers admit demand has peaked and is sliding.
Overall, buyers insist that consistency of adequate supply is a key to buying in today's erratic economic environment. "Success in 2009 will be based upon the overall supply chain's ability to flow steel from the mills to the end users on a consistent basis," says Douglas Kolpak, senior purchasing agent at Campbell Hausfeld, a manufacturer of air compressors, pressure washers and power washers in Harrison, Ohio.
"Consistency in availability, quality, delivery and pricing is necessary," he says. "No surprises!" However, the majority of his purchases are a specialty grade of pressure vessel quality steel and "overall availability to us is limited by the number of mills that are able to produce the widths we require," he says.
Quality also is a must for Ron Freiberg at Reinke Manufacturing in Deshler, Neb., where his buys of carbon and stainless steel sheet and plate are delivered to become mechanized irrigation systems in a Lean manufacturing system. So, he also is concerned about keeping costs down and works to buy at prices that are competitive internationally for material that is delivered "so we can maintain no more than a week's worth of in-plant inventory."
Most of the steel buyers who report being content with their supply base are those who have ongoing partnering programs. They also suggest their purchasing colleagues "always be clear" when communicating with suppliers—whether it's an order, a compliment or a complaint. In fact, buyer-supplier partnerships were cited as opening the door for those buyers seeking more flexibility in credit arrangements—which take on new meaning in the current credit crisis.
"The simple math is that borrowing costs are increasing and the cost of credit terms are increasing as well," says Christian Stavig, chief financial officer at Myers Container in Portland, Ore. "We provide adequate trade credit to our customers, but expect to be compensated for that credit with their other financing alternatives. This is no different than if steel or utility costs increase as the cost of money is just an equal component of our overall costs."
That's why Myers Containers' chief steel buyer, CEO Kyle Stavig, says that supply concerns primarily are related to suppliers having appropriate access to working capital to support their operations. "In light of this, we're continuously evaluating alternate supply options," adds Christian Stavig.
Prices remain a volatile issue
This is not to say that steel pricing isn't a concern. The market basket of steel mill products sold in the U.S. and Canada in 2008 and tracked by Purchasingdata.com increased by 64% through August, when they peaked. And, the batch of sheet steel products tracked by Purchasingdata.com ended July costing 75% more than at their lowest levels in August 2007.
Just because monthly price indicators began to slide in August doesn't mean it has shown up yet on invoices from some mills, processors or service centers. That usually takes up to six months to occur. So, many steel-consuming companies are continuing with efforts to mitigate the damage to the bottom line from this year's spike in prices. They also are trying to protect themselves from future price fluctuations by changing suppliers and even rethinking supply chain strategies.
The Procurement Strategy Council in Washington discovered that buyers are only able to avoid 29% of price increases in commodities, including steel, through fixed price contracts and the use of hedging instruments. The problem is that many metalworking companies remain on the fence about the use of such tools despite pressure from chief executives to reduce costs of materials—either through direct cost savings, reduced consumption and/or cheaper alternatives.
Typical are the comments from Jerry Holman, vice president of supply chain management at Dormont Manufacturing in Export, Pa., and Denis McMorrow, president of D-MAC Industries in Alpharetta, Ga., who say carbon and stainless steel prices for fourth quarter deliveries are "definitely are going down." Holman says that "with residential and food service business off, our business is off," and that has caused slippage in purchases of stainless steel and other materials needed by his firm to make flexible connectors used in the production of commercial foodservice, residential and appliance original equipment. "Steel buying and prices are going down in the face of a gradual decline in steel products manufacturing," agrees McMorrow at his roof deck fabricating company.
The purchasing manager for a maker of oil field products wants greater focus by suppliers on their steelmaking costs. "We would appreciate clearer parameters on how pricing will be set" in the future, rather than whimsical price announcements based on uncertain raw materials prices, he says. "If we cannot manage our cost, we cannot manage our business and we do not need a great unknown when it comes to cost of goods," he notes.
"Since the steel market has been challenging on a good day in 2008, price is always a primary concern," says Peter Meriam, director of North American supply chain management at Precision Hydraulic Cylinders in Beulaville, N.C. "But we also need a very lean supply chain that can support the company's delivery performance targets and help PHC become the lowest total cost supplier to its customers."
So, he is working to adopt supply agreements mill suppliers where steel prices are tied to an index "to allow transparency to the cost structure and support our growth and cost control initiatives while positioning us as the leader in our industry." Actually, Precision Hydraulic Cylinders is using the index-based pricing to buy DOM (drawn over mandrel) mechanical tube and cold-finished chrome bar stock for use in hydraulic cylinder manufacturing.
"Assuming that we have negotiated a favorable price for the items being sourced, we can then focus our efforts on the value-added portion of the suppliers' costs," says Meriam. He explains that value add includes stocking programs, consignment programs, payment terms, technical expertise and even stocking locations. "We can determine what we pay for the added value and decide if what we receive is in line with that value," he says.
To guarantee availability, the RFQ (response for quote) response time from suppliers has been compressed by Ed Hearn, a buyer at machine tools manufacturer Peddinghaus Corp. in Bradley, Ill. He sources carbon, alloy and tool steel cold-rolled bars, flats and other shapes from as many as eight certified suppliers. Reason: After a planner identifies grades and dates needed, Hearn e-mails requisitions with availability answers and price quotes needed within two business days.
Acceptable pricing is based on cost-of-delivery quotes but delivery is equally important. There are no written contracts but Hearn has some stocking agreements for long-leadtime items. He is trying to get his manufacturing personnel to plan ahead for steel buys but manufacturing, financial and supply chain management don't want to receive a lot of material at one time. "At the same time, most suppliers will not hold pricing for any length of time, so it's a continuous battle every week quoting and ordering material as needed," Hearn notes.
Herman Graff, plant manager for steel drum maker Mauser Corp. in Woodbridge, N.J., has been purchasing Grade 1008 commercial quality cold-rolled sheet steel this year using quarterly pricing agreements for 60% of company needs and monthly agreements for the balance. Even though prices are declining, he expects to see only partial cost savings this quarter. "Purchases have to come from approved suppliers only as our quality requirements limit the sources available to us," he explains. Still, as the year-end approaches, he's looking to reduce inventory—"so reliable delivery of the steel on order will become increasingly important," he says. Longer term, Graff has joined those buyers looking for alternate suppliers to reduce cost and improve supplier quality, pricing and service.
The vice president of purchasing at an electrical enclosures manufacturing plant in Missouri buys a substantial quantity of coated flat rolled steel products, stressing strategic relationships but also benchmarking suppliers' performance against agreed-upon expectations of quality, delivery and inventory-adjustment objectives. "The rules are changing in purchasing steel and other commodity purchases," he says, "so we want to invest in learning as the best way to create any new strategies."
He says that his company "views customer/supplier/mill interaction as a key component of long-term success" so supply chain development also reviews such "value added services" from new or existing steel providers as stamping, plating, painting, assembly, offshore or low-cost country outsourcing as well as joint venture or alliance activities.
And, when it comes to cost reduction and/or continuous improvement activities, there is growing emphasis on supplier efforts in reducing costs internally and in concert with his firm and their other customers. He also has his supply chain team view such programs from existing or potential suppliers as Lean, ISO, Six Sigma and logistics that meet supply performance improvement objectives.
| '08 | '07 | |
| Source: Purchasing surveys | ||
| 1 | 3 | Availability of needed product |
| 2 | 1 | Products that meet quality specifications |
| 3 | 2 | Compliance with promised delivery times |
| 4 | 4 | Competitive pricing |
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