Buyers looking to reduce suppliers
Service Center Report
Staff -- Purchasing, 5/3/2001 2:00:00 AM
Pressure is intensifying on the huge metal service center supply base to consolidate, and it's not just coming from Wall Street. PURCHASING Magazine's latest survey of metals buyers finds that nearly half (48%) now plan to reduce the number of service centers they will use in the future.
In 1998 and 1999, more than 100 mergers and acquisitions changed the face of the North American metal service center industry, but the consolidation spree slowed dramatically when reduced business and low market prices changed the dynamics of metal distribution to cost control and internal restructuring. Market mavens expect pressure from investors and bankers to intensify this year. They expect 2002 to be a year when the larger service-center chains renew acquisitions. The analysts see no sound economic reason for a highly fragmented metal processing and distribution industry with as many as 3,500 participating sites.
There's a lot more to metals purchasing than buying solely on price. Purchasing managers—whether they plan to reduce service center suppliers or not—universally agree that the distributors must meet quality and on-time delivery requirements and have stocking programs suitable for their needs.
The latest survey shows that a combination of factors—the current economic slowdown, global competition, internal cost-reduction projects—all will result in longer-term alliances with a smaller, more select group of raw materials suppliers. "Buyers know that service and reliability could have a greater effect on their companies' margins in the long run," acknowledges Lou Pahountis, associate partner in global metals practice for Accenture (formerly Andersen Consulting) in Pittsburgh.
Last year, metals buyers used service centers and non-processing distributors as the source for an estimated 35.7 million tons of production, MRO (maintenance, repair and operations) and construction-grade materials. Over the past five years, various Purchasing surveys show that sourcing for production metals by OEM buyers has remained relatively unchanged—with 64% coming from service centers, 28% from mills, and the remainder split between processors and traders. Processors got about 6% of the business, the latest survey shows, while traders stayed at 1%. Third-party marketplaces (which didn't exist five years ago) now get 1%.
Sourcing activity, however, hasn't been static over the past five years. While 17% of the buyers are using mills more than in the past, 16% are using mills less. And, while 23% of the buyers are using service centers and processors more, 22% are using them less. Interestingly, only 2% of buyers polled had tested sourcing through third-party marketplaces last year.
Actual buying still is handled the "old-fashioned way" with telephone contact (57%) and facsimile releases (35%) being the most common methods, followed by face-to-face buying and Internet-based communications (both 4%). In fact, only 5% of the buying groups surveyed even had a formal e-procurement system at their company. There's no question that service centers will embrace e-commerce, the only question is when, says consultant Pahountis at Accenture. "Although this new way of buying prime metal may never fully eliminate face-to-face or phone interaction, we can be absolutely sure that these new Internet-enabled purchasing business models will offer a lot more capability and leverage ability."
Still, metals buyers remain reluctant to jump into e-procurement or any other new purchasing models. While 44% of the buyers surveyed have their service center suppliers involved in just-in-time delivery programs, only 16% are involved in distributor-managed inventory (DMI) systems and only 6% have just-in-time II programs. The results did not surprise the mavens, though, who note that both users and suppliers of metals historically have been laggards in adopting advancing technology.
Reviewing the supply base
While 95% of the buyers are satisfied with the current performance of their service centers suppliers, two-thirds (67%) of the buyers surveyed already have initiated evaluation programs to determine the service center suppliers of the future. "We are always looking to develop better partnerships with fewer suppliers," says Thomas Holmes, senior buyer for BorgWarner Cooling Systems in Cadillac, Mich. "We continue to seek those suppliers that have demonstrated the ability to perform to our expectations of quality performance," notes Craig Dyer, manager of purchasing at Amerock Corp. in Rockford, Ill., a producer of cabinet hardware. "The suppliers of the future also will have to have a philosophy of continuous improvement."
The winners, the buyers say, will be those service centers that exemplify what Pahountis calls the "three R's" of resourcefulness, relationships and reliability. The metals buyers expect the service centers supplier reduction to increase their purchasing power, improve quality of the processed materials delivered, enhance their administrative efficiency and reduce transaction prices. Interestingly, the surveys also show that buyers still perceive distributors as a physical sales channel for manufacturers and not as an extension of a customer's purchasing and procurement department.
"Improved administrative efficiency" from fewer suppliers also was cited by metals buyers Laura Malcolmson, purchasing agent at Livernois Engineering Co. in Dearborn, Mich., and Pat Bump, materials control manager at Modine Manufacturing Co. in Washington, Ind. That's because "the time required to maintain an excessive amount of suppliers reduces the time available to pursue other cost savings, notes Ron Walter, purchasing manager at Hatch Stamping Co. in Chelsea, Mich., who uses service centers to supply carbon, alloy, stainless and specialty steel, aluminum, nickel and superalloy sheet products.
"The number-one reason we are reducing the service centers we use is vendor management," says Alberto Archibal, procurement specialist at Clorox Corp. in Pleasonton, Calif. Archibal buys stainless steel, specialty steel, titanium and superalloys in sheet, plate, rod, bars, tubulars and wire grades. "We have literally taken each and every metals supplier and evaluated their performance on quality, cost, delivery and customer service. We have come up with three service centers that can supply us with 90% of our requirements." In the same vein, steel buyer Ben Slenk, procurement manager at Trans-Matic in Holland, Mich., says that "the larger the commitment we make to a specific supplier, the bigger commitment that supplier is willing to make to us."
In the latest survey, 36% of the buyers polled sourced exclusively from service centers. "Service centers have better access to excess prime carbon, alloy and specialty steel products than a company of my size does," says Herman Brown, director of purchasing at winch, jack and coupler manufacturer Shelby Industries Inc. in Shelbyville, Ky. "I can buy 10-14 tons monthly much more economically from service centers than from mills."
Distribution consultant Mike Skinner at Pembroke Consulting Inc. in Philadelphia says that supply chain management can be broken down into four primary tenets: inventory management, supplier management, customer management and financial management. Bob Carragher, vice president for governmental affairs for the Steel Service Center Institute in Chicago, says that metals inventories are a major problem right now. "Inventories remain too high, but they are improving slowly as distributors whittle down stocks to bring them in line with shipping rates." In the short term, Mark L. Parr at McDonald Investments Inc. in Cleveland agrees that "service centers are making measurable progress in purging excess inventories" that have plagued the metals marketplace since late last year.
Longer-term, analyst Michael F. Gambardella at J.P. Morgan Chase & Co. in New York expects that improved supply chain management will result, probably by 2002, because of the major corporate restructurings begun last June by many of the largest metals distribution companies. These and other market analysts suggest that buyer consolidations will hit hardest at the medium-sized and regional metals service center operations. That's because the large, mostly national chains, appear to have such natural advantages as larger purchasing power, cost-cutting synergies and the ability to service national accounts. Also, the big chains continue to do most of the business. The 15 largest conglomerates in this year's annual survey of service centers had combined sales of $21 billion, or about 30% of last year's estimated total ferrous and nonferrous distribution market of $70 billion.
Quality is the key to success
Interestingly, buyers are paying more attention to the quality of the metals coming from service centers and are relying on the distributors for more pre-production processing.
Buyers say their firms have intensified supplier certification programs and incoming inspections, "We have a new software implemented that could assist us on vendor evaluation of delivery," says procurement specialist Archibal at Clorox, the producer of household grocery, food and insecticide products, "and we also check each and every piece of material for quality control." Those vendors who fail on either of these criteria are notified immediately to resolve any discrepancies.
Jeffrey Diener, purchasing manager for metal commodities, says Benteler Automotive Corp. in Grand Rapids, Mich., has an active supplier-quality monitoring system. He buys 50% from mills and 50% from service centers, and has been working to partner in long-term relationships with fewer suppliers. "Still, all of the suppliers are measured on delivery, quality and pricing and they must be ISO and QS 9000 certified. Atop that, they must guarantee a 2% cost reduction through efficiency gains and material respecifications." Benteler Automotive manufactures components, welded assemblies, and modules used in motor vehicles.
Slenk at Trans-Matic says his firm's deep-drawn stamping operations in Michigan, North Carolina and Michigan "are generating vendor release schedules more often and requiring more frequent shipments, which allow us to review quality more often, thus ensuring consistency." Trans-Matic has an active value analysis/value engineering (VA/VE) program under way to achieve customers' cost-reduction objectives. He explains that the metals suppliers' involvement is important because Trans-Matic's VA/VE are focused on the redesign of costly screw machine parts into lower-cost drawn stampings, the re-engineering of multiple piece assemblies into one-piece drawn stampings, and reverse engineering efforts aimed at reducing or eliminating components within an assembly to be replaced with lower-cost drawn metal stamped components.
A majority (55%) of the buyers surveyed is requiring the same or more pre-production processing from service centers than in past years. "We have less time to go from concept to production of new products, so we need to have the processing support of our service center suppliers," says purchasing manager Walter at Hatch Stamping. "Leadtimes are continuing to decrease from customers," says procurement manager Slenk at Trans-Matic. "So, our service center metals suppliers are being required to do more processing ahead of time to accommodate our customers' demands."
Purchasing agent Malcolmson at Livernois Engineering says that "buying cut-to-size and ground-to-size material eliminates extra processing on our floor and is more cost-effective than doing it ourselves because it extends the life of our machinery, minimizes inventory on hand, eliminates assorted process tooling, reduces waste disposal, and opens machinery capacity for end-product processing."
However, there is a disparity between what service centers provide and what buyers want in the way of value-added processing. The Top100 service centers have more capacity than requested for cutting to length, slitting, blanking, leveling, roll forming and polishing of sheet coils and sawing, cutting and shearing of plate products. On the other hand, more buyers want more coating and plating, heat-treating, perforating and hydroforming than the service centers have available.
Where buyers source metals/(% of total metals buy)
| 2000 | 1995 | |
| Producing mills | 28 | 29 |
| Service centers | 64 | 64 |
| Processors | 6 | 5 |
| Traders merchants | 1 | 1 |
| Dot.coms | 1 | 0 |
| SOURCE: PURCHASING |
Metal products from service centers/(% of total buy by product)
| Sheet | Plate | Rods | Bars | Structurals | Tubulars | Wire | |
| Carbon Alloy Steel | 58 | 42 | 46 | 56 | 25 | 46 | 23 |
| Stainless Steels | 48 | 25 | 30 | 45 | 14 | 32 | 20 |
| Specialty Steels | 52 | 36 | 28 | 44 | 12 | 24 | 16 |
| Aluminum | 49 | 37 | 23 | 47 | 12 | 28 | 16 |
| Copper Copper Alloys | 52 | 13 | 17 | 39 | 0 | 13 | 35 |
| Titanium | 60 | 80 | 60 | 60 | 0 | 40 | 40 |
| Superalloys | 38 | 12 | 25 | 38 | 0 | 25 | 12 |
| Nickel | 57 | 43 | 29 | 29 | 0 | 14 | 29 |
| SOURCE: PURCHASING |
Carbon and alloy steel products are purchased from service centers by 87% of the metals buyers polled by Purchasing Magazine, followed by stainless steels (72%) and specialty steels (42%). Interestingly, buyers relied on service centers for only 38% of their needs, and also used distributors less for the specialty high-priced metals—nickel (12%) and superalloys (13%). Sheet products remain the top processed metal sourced by buyers from service centers at 52%, followed by bars (45%), plate (36%), rods (32%), tubulars (28%) and wire (24%). Buyers only sourced 8% of their structural needs from service centers.
Pre-production processing/ (% sought, available)
| Sought by buyers | Available from Top 100 | |
| Cut-to-Length | 61 | 83 |
| Cutting and Sawing | 54 | 58 |
| Slitting | 37 | 64 |
| Shearing | 28 | 71 |
| Coating and Plating | 24 | 16 |
| Heat Treating | 24 | 20 |
| Machining | 22 | 23 |
| Blanking | 22 | 49 |
| Leveling | 13 | 53 |
| Bending | 11 | 27 |
| Roll Forming | 9 | 16 |
| Welding | 9 | 20 |
| Polishing | 7 | 16 |
| Perforating | 7 | N/A |
| Hydroforming | 6 | 3 |
| SOURCE: PURCHASING |
Most metal-processing services center on flat-rolled products. A new Purchasing Magazine survey finds that the average number of services ordered from metal service centers in 2000 was three, while the average provided by the Top 100 distributors was five, an increase from the average of four in 1999.
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