Buyers ask service centers: 'What happened to JIT?'... and a few other things
By Tom Stundza -- Purchasing, 5/6/1999
Demand for metals from service centers may have peaked in this business cycle, although shipments this year will remain high by historical standards. What hasn't peaked, though, are the expectations of metals buyers, who want more from their metals distributors. And what buyers want the most is more adherence by their service-center suppliers to promised delivery dates.Sure, the buyers also want service centers to expand product availability, upgrade technical service, and provide better quality products. But, because of metalworking's growing reluctance to hold raw-material inventories, getting metals delivered when they are promised should be the number-one priority of service centers, according to this year's survey of 500 metals buyers. "What ever happened to JIT?," succinctly asks a corporate purchasing manager for a consumer products company in Pittsburgh.
Another buyer, James LaFave, PM at Trumark Inc., a metal-stamping firm in Lansing, Mich., says his biggest problem lately in dealing with the service centers is their inability to meet on-time delivery promises. "I don't care whether the order's late because the mill was late with the master coil or the blanking wasn't scheduled properly by the service center," says LaFave. He adds he is tired of excuses from his key suppliers, pointing out that he sources just about all of the carbon steel, stainless steel, and aluminum used by Trumark from service centers. "We order the metal for delivery at a certain time because we have customers who have ordered our stampings for delivery at a certain time," he says.
As analyst Aldo Mazzaferro of the Mazzaferro Investment Group in New York explains it: "Service centers primarily ship metal to buyers whose firms no longer hold inventories, so it's no wonder that on-time delivery is such a big problem these days."
David Hannah, president and CEO of the Reliance Steel & Aluminum metal service center conglomerate in Los Angeles, agrees that "there is zero tolerance among buyers for late deliveries." Hannah points out that "timeliness isn't a new requirement; it just seems to be gaining in importance among metalworking customers who are struggling to cut costs to compete in the global marketplace."
Meeting just-in-time delivery demands and other customer expectations aren't the only issues affecting the metals processing and distribution industry. The industry also is contending with a rash of mergers and acquisitions, the need for investment capital for modern automated equipment, and shrinking profit margins. Upshot: "Not a whole lot has changed in the past year, as metals distribution remains an industry searching for ways to focus on the needs of customers while improving its bottom line," says Hannah, who also is chairman of the Steel Service Center Institute's Industry Future Council.
More learning needed
A year ago, Hannah told Purchasing that "metals distributors agree they have to learn more about the needs of the customer's customer, how we have to change operations to meet those needs, and how our metals suppliers are going to help us do that." Today, he says this view hasn't changed: "Metals distributors still have to learn more about the ultimate-user expectations that are driving the demands of the metals buyers." This means that service centers have to learn how to develop the internal systems that will provide solutions to problems of their customers' customers, how to develop the systems to operate better to improve productivity, and how to measure costs better to improve profitability.
That's important, according to many service-center execs, because making a profit--and guaranteeing a long-term supplier--also still is a real challenge. Metal is in oversupply, which has lowered prices, but turning a profit doesn't just mean turning inventory over more, notes Tom Conley, president of the Steel Service Center Institute.
"The two areas that concern service-center managers the most," Conley says, "involve their continuing struggle to improve margins during a time of high demand and robust shipments and to find ways to maintain control over their inventories."
On-time delivery is a must these days, agrees Bruce Farmer, president of Farmer's Copper & Industrial Supply in Galveston, Texas. "So just-in-time delivery programs have put pressure on distributors to keep up their own inventories, but without overdoing it--and that's a real challenge," he says.
Part of the problem is that buyers believe premiums should be paid only for next-day delivery or special stock-holding of unique size. Services such as metallurgical assistance, standard preproduction processing, and stocking of products should not incur added prices. "Service centers already charge over the cost of the metal to do the things a mill can't do, such as deliver small lot sizes, guarantee metals are in stock, and provide fast delivery," says George Paul, PM at packaging machinery maker Sabel Engineering in Sonoma, Calif.
Still, there are opportunities for service centers to meet customer needs and still make some money, says Farmer, who is the current chairman of the Copper and Brass Servicenter Association. He says that "with prices depressed in many metal product lines, the probability of reduced inventory costs gives us an opportunity to bring in new product lines or expand on the products that we now stock." And, if that happens, it should please a large number of buyers. That's because availability of needed metals ranked as the No. 2 concern about service centers by buyers just polled by Purchasing Magazine.
Part of the reason buyers grouse so much about their service-center suppliers is that they greatly rely on this group for supply. North America consumed an estimated 128 million tons of steel, aluminum, copper, brass, bronze, and such other production metals as titanium and superalloys. Purchasing calculates that distributors, service centers, and processors supplied 45.5 million tons of these ferrous and nonferrous metals. Service centers shipped an estimated 32.7 million tons, or 30% of the total.
Tonnage from service centers may slip a little this year, as overall metals demand is expected to drop 2%-3% because of a slowing industrial economy. Yet, market analysts believe that buyer reliance on service centers will continue to grow. The mavens think metal service centers will grow to 40%-45% market share in a decade or so. In fact, some analysts think 50% of the supply of highly engineered materials will go through service centers early in the millennium.
Buyers want service
However, if history is a guide, it won't be easy for metals service centers to redefine themselves quickly. "The industry is dynamic and used to evolutionary, not revolutionary, changes," says industry analyst Michael Workman, a professor of industrial distribution at Texas A&M University. A case in point is that it took several decades to switch from simply stockholding to providing service. "But now," he continues, "the metal service center industry is being called upon rather quickly to become a key role player in the removal of costs in the distribution channel and a key provider of expanded metal-processing and delivery services."
This change in focus won't be easy because metals distribution traditionally has acted as a holder of inventory and a buffer between the mills and end-use customers. This materials distribution sector began with the "stockholders," the firms who maintained basic mill shapes for small-volume buyers. Later, as the mills began to focus on key customer segments that bought in huge volumes, distribution expanded the mill products it held in inventory for small and medium-size users. Then, as the mills abandoned in-house processing, it fell upon the distributors to become service centers, both holding stocks and also producing first-stage fabrications.
"Metals distribution has been built upon a foundation of holding inventory and some basic metals-processing services," says Workman. "But now, the industry is being dragged into new areas of customer service. Metals service centers are being pressured to act as spokesmen for buyers with the producing mills, to act as processors of production-ready parts for end-use fabrication and assembly, and to act as the logistics managers ensuring on-time delivery." In fact, some industry insiders say that growing demands on distributors for processed metal parts are erasing the distinction between a "service center" and an "independent processor."
What the service centers also are learning, according to Michael Lerman, president of the Steel Warehouse chain based in South Bend, is that "the purchasing community is not monolithic. Different companies are attacking cost control is a variety of ways." Some buyers are reducing their supplier base, some are outsourcing value-added processing, and some are seeking to reduce in-plant inventories. So, "the success of cost-reduction efforts requires open, honest, and candid assessments of needs by one group and the ability to meet these demands by the other," says Lerman.
Purchasing's new survey of 500 buyers of production metals found 28% rated their distributor supplies as "excellent" and 62% judged them as "good" suppliers. But 10% rated their service center suppliers as only "fair." Buyers based these performance judgements on an easy-to-understand formula: Did the metal service center supplier consistently deliver high-quality and competitively priced materials on time and provide all of the proper mill certifications, invoices, and other paperwork.
Overall, the problems that buyers have with service centers is familiar. Topping the list again this year are complaints about on-time deliveries, followed by availability of adequate metal stocks, a lack of presale technical assistance and post-sale customer service support, inconsistent metals quality, and noncompetitive price quotes. Availability, though, is a big complaint.
"The metal distributors generally provide good service, but stockouts--i.e., the lack of needed inventory--sometimes create problems for us," says Frank Swica, PM at Ling Engineering in Plymouth, Mich. "Sometimes, the service centers don't have the products we need in stock" is also the biggest gripe from Donna Sims, senior buyer at Trilecron Industries in Palmetto, Fla. Mike Bullock, PM at Phoenix Products in Jacksonville, Fla, says: "Too often, they do not have what I need when I need it."
Interestingly, buyers are less interested in what the service centers are doing in expanding metal-processing capabilities, in offering inventory management assistance, or in expanding electronic communication. In a separate survey, distributors report they are spending a lot of time and money in these areas, but buyers appear unimpressed. "I would be happier if the service centers got the order right the first time, and every time, instead of telling me about what they're going to do in the future to be better suppliers," says Bill Wolf, PM at exhaust systems maker SuperTrapp Industries in Cleveland.
To resolve such issues, buyers are supplying long-term metal-needs forecasts, intensifying buyer-supplier face-to-face meetings, and shopping around for new service-center suppliers. "To improve processed metal quality, delivery, and service, I buy elsewhere," says Jack Burford, PM at Pittsburgh Tubular Shafting in Rochester, Pa. That's easy to do with metals distributors, too, because there are so many. Purchasing's database of metals distributors contains nearly 1,000 companies.
Outsourcing is an issue
A basic semi-finished metal product may cost two to three times as much per pound after processing and delivery by the metal centers. That's why buyers cite special cutting, burning, bending, and blanking as true value-added services that justify a price premium. Computerized order entry, order tracking, metal chemistry certification, leveling, cutting-to-length, slitting-to-size, packaging, and palletizing are cited most as the services that buyers consider part of the basic order.
Dr. Workman tells Purchasing that "the revolution in purchasing and materials management has resulted in a bias toward outsourcing semi-finished production materials and next-generation parts and components." He also says that buyers want a leaner supply base and inventory-reduction and material delivery options.
However, expanded outsourcing by metalworking firms seems to be pushing the entire metals distribution industry into a corner, where participants are being forced to juggle buyer demands for new supply chain management strategies and enhanced value-added processing services during a period of metal-center consolidation. Service-center executives such as Michael Siegel, chairman and CEO of Olympic Steel in Cleveland, notes that "the service center industry has spent years developing a cost-of-possession inventory model with its customers, and should be able to take this balance-sheet selling philosophy further down to include value-added materials."
Metal market researchers say metals customers have three things in common: They assume product quality is a given, they expect their suppliers to be competitive in price, and they change suppliers on the basis of relative supplier service performance. But, "quality in metals," according to several Purchasing surveys, now encompasses more than the functionality of the metal product. Quality also is the consistency of the metal product's usability, the total cost of that material, and the supplier's breadth of service--meaning short leadtimes, technical knowledge, and efficient order processing.
That's why quality programs continue to evolve at the processing and distribution rungs of the metal supply chain. Newer yet are the efforts to bring marketing, order-taking, delivery service, and post-delivery customer service into the continuous quality-improvement loop. To accomplish all that, however, can be costly.
Still, most buyers are pressing their existing metal-center suppliers to develop more meaningful supply partnerships to both improve the quality of the metals delivered and reduce the total cost of these materials. "All we want is for our metal-center suppliers to pay more attention to meeting material requirements, on-time delivery promises, and providing accurate mill certification paperwork," says John Aerts, PM at the components factory of Sulzer Bingham Pumps Inc., Portland, Ore.
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