Buyers need less tonnage: use fewer distribution sources
Tom Stundza -- Purchasing, 5/1/2003 2:00:00 AM
The slowdown in metalworking activity reduced the amount of metal purchased from service centers in 2002, and it appears that metal buyers are planning to maintain the status quo in 2003. "We see only a slight pickup in the metalworking market," says one buyer, "and that means manufacturing will need only slightly more metal from its suppliers than in past boom years."
Metal service centers supplied 28.15 million tons of steel, aluminum and brass mill products in 2002 for production, MRO (maintenance, repair and operations) and construction activities. That is almost 14% less than the year before and the lowest since 25.7 million tons in 1992. The decline is partly because of what has become a two-year decrease in metal demand from metalworking companies and partly because of resurgent marketing by mills—especially steel mini-mills.
So, while 54% of buyers polled by PURCHASING magazine sourced through service centers in 2002, this is down from 64% just two years earlier. And, while 43% of buyers plan to increase tonnage through processing distributors —"to maintain delivery integrity," as one buyer puts it—the other 47% plan to use service centers just as much or less this year. Of the metals buyers polled, 30% say they source exclusively from service centers; two years ago, it was 36%.
Sourcing activity hasn't been static over the years since PURCHASING began its biannual surveys in 1996. While 21% of the buyers polled say they are using mills more than in the past, 57% are using mills less. And, while 76% of buyers are using service centers and processors more, 37% are using them less than in past years. Interestingly, only 7% of buyers polled have tested sourcing through third-party marketplaces in the past two years—and more tried traders than online sources.
Actual buying is still handled the old fashioned way with facsimile releases (58%) and telephone contact (42%) as the most common methods, followed by face-to-face buying and Internet-based communications (both 4%). Two years ago, telephone contact (57%) and facsimile releases (35%) were the most common methods, followed by face-to-face buying and Internet-based communications (both at 4% then as well).
Today, 18% of buying groups surveyed have a formal electronic-procurement system at their company, a big increase from 5% two years ago, but proving that metals buyers remain reluctant to jump into e-procurement or any other new purchasing models. While 50% of buyers surveyed have their service center suppliers involved in just-in-time delivery programs (up from 44% two years ago), 35% are involved in distributor managed inventory systems (up from 16%), and 29% have Just-in-Time II programs (up from 6%).
Such results don't surprise market mavens, who note that both users and suppliers of metals have historically lagged in adopting advancing technology. In fact, commentary from buyers indicates that just-in-time delivery requirements or special needs usually dictate the use of service centers. Purchasing managers—whether they plan to reduce service center suppliers or not—agree universally that the distributors must meet quality and on time delivery requirements, and have stocking programs suitable to their needs. "We are ISO-registered, so we purchase material only from like suppliers," says one buyer.
As another buyer says: "Service centers are wonderful at educating about materials and can handle small-quantity buys efficiently and without any complaints." However, for every buyer who prefers distribution as a metals source, this year's survey found one who is more comfortable using producing mills. Another factor has been growth of scrap-fed market mills in such product areas as steel sheet, plate, beams and other structurals. These mills don't have the same order minimums as the blast furnace-fed integrated steel mills. Also, "we still buy mill-direct because the overall cost of purchasing is cheaper," adds one nonferrous metals buyer. "The mills will furnish me with such alternatives as distributor managed inventories when we are discussing minimum-tonnage buying situations."
"We use quarterly reviews of all our suppliers on performance, quality and cost reductions or cost-saving opportunities," says another buyer. "We only use those service centers that have strong relationships with their mill suppliers." Other buyers report monthly meetings with suppliers on delivery, quality and cost. Such supplier audits are more commonplace than ever, according to the latest survey, which also shows that a combination of factors—current economic slowdown, global competition, internal cost-reduction projects—all will result in longer-term alliances with a smaller, more select groups of materials suppliers.
More supplier cuts coming
In fact, more than 40% of buyers polled plan to reduce the number of service centers they use and already have initiated evaluation programs to determine the service center suppliers of the future.
"Our supplier-reduction program emphasizes quality and service with the hope that quality will be much better than in the past," says one buyer. Other goals are more leverage, less invoicing, and better overall control over metal stocks.
"The service centers enable us to specialize in specific types and gauges of material without our company having to stock it," says another buyer. "Since, we are a job-shop stamper, the slight increase in transaction price through a service center is offset by not having the cost of carrying inventory."
Yet another buyer suggests that "more tonnage to fewer suppliers equals lower prices, lower acquisition cost that is invoice processing, packing slips, etc. So, we reward those who perform with more business."
The suppliers of the future, buyers say, will be service centers that exemplify resourcefulness, relationships and reliability. The metals buyers expect service-center supplier reduction to increase their purchasing power, improve quality of the processed materials delivered, enhance their administrative efficiency and reduce transaction prices. The survey also shows 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.
Only 41% of the buyers are seeking more preproduction processing than in years past, although the survey finds that the average number of services ordered from metal service centers rose to four in 2002 from three in 2000. The poll also finds that length-cutting, width-slitting and leveling of ferrous and nonferrous sheet products remain the top processing services.
Service centers are losing ground against mills
(% of total metals buy)
| 2002 | 2000 | 1998 | 1996 | |
| SOURCE: PURCHASING surveys |
||||
| Producing mills | 41 | 28 | 32 | 30 |
| Service centers | 54 | 64 | 62 | 64 |
| Processors | 3 | 6 | 3 | 5 |
| Traders & merchants | 2 | 1 | 2 | 1 |
| Dot-coms | 1 | 1 | 1 | 0 |
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