Supply alliances cut costs reduce in-house stocks

By BY TOM STUNDZA -- Purchasing, 9/7/2000

When consumable tools producer Ken-

nametal completely re-eningeered the manufacturing systems at its Solon, Ohio, tool holder manufacturing plant into a lean process in 1998, materials manager Bob Shepka called upon Castle Metals to develop a new delivery system for a variety of steel bar products. Working with the service center's account manager, Kim O'Mara, in suburban Cleveland, Schepka scrapped the existing materials-requirement planning system and revamped the plant's supply delivery system to accept daily deliveries.

Upshot: The partnership has found a way to eliminate 20% of the steps involved in reorder and delivery, increased on-time delivery from 87% to 98%, decreased Kennametal's raw material costs by 21% in the first year, increased the firm's production turns tenfold, and reduced work-in-process material by 70%. In fact, Shepka says in-plant raw materials inventory for the pricey grades he buys has dropped $4 million in two years.

Atop all that, Castle Metals now is supplying material already quenched and tempered, which has eliminated heat treating by Kennametal. Castle also uses a color-coding system on the in-plant supply bins, which allows for easy access and more precise processing by the Kennametal manufacturing cells. The grouping of orders for daily deliveries also allows Castle to reduce its own set-up time, so all the orders for two-inch bar, for example, can be pulled once from stock and cut at one time.

According to various buyer surveys, such supply partnerships permeate the country's metalworking economy. For metals buyers, supply partnerships with metals service centers are driven by efforts to reduce costs by controlling inventories and reducing or avoiding processing costs. For distributors, supply partnerships with OEM firms are being driven by efforts to improve margins and deflect business cyclicality in an era of industry consolidation. "Industrial customers are increasingly emphasizing cost containment and greater efficiencies in the supply chain," says Adam Fein, president of Pembroke Consulting Inc. in Philadelphia.

One highly publicized manifestation of this trend has been the consolidation of supply contracts, such as Boeing Commercial Airplane Group's move to use the TMX Division of Thyssen Inc. N.A as the single long-term supplier of preproduction-processed aluminum to its external suppliers and internal parts shops. Lloyd O'Carroll, chief economist at Scott & Stringfellow Inc. in Richmond, Va., says this supply chain restructuring is part of an ongoing trend. "Boeing was looking to take inventory out of the system, which means you have to simplify the supply chain." However, it's not just the huge metalworking firms that are using such alliances. W.T. Pettit & Sons, Liberty Township, Ohio, a manufacturer of specialty products for the construction industry, gets slit and coated steel from Wheatland Steel Processing in Hermitage, Pa., for processing into mortar boxes, posts for construction blocks, fence posts, barbecue grills and even newspaper box posts.

"For the customer, the attraction of these alliances lies in lowered procurement costs as well as simplifying cycles of raw material surpluses and shortages," says Fein. However, almost all of the alliances appear to be driven by the purchasing community. Service centers, by and large, tend to be reactive and unwilling to discuss the alliances in any detail. Economist O'Carroll believes that's because many distribution firms have not yet made commitments toward becoming supplier partners to smaller group of customers. It still is commonplace to find the larger service center chains citing buyers' lists with several thousand end-use customers.

"Metal users are improving their cost structures by outsourcing metal shaping, first-stage manufacturing and even supply chain management," says O'Carroll. "While some of these moves aren't yet common, the trend is accelerating and will become a much more important link in the metals supply chain in the next few years."

Reason: Metalworking companies have seriously cut costs, improved productivity and implemented the best technologies, notes Paul Ballew, executive director of the Industry and Market Analysis Group at General Motors Corp., Detroit. "The U.S. manufacturing sector has become world-class once again, bolstered in part through a more efficient use of material resources. "We're more dynamic and more flexible," he says, "but we have to be vigilant still." Ballew says price and margin compression is intense even during good times. "These pressures also necessitate process and product improvement by OEMs and their metals suppliers, especially the metals service center partners who have become the auto industry's pre-production processors."

Processing is expanding

"In order to successfully adapt to change, service centers must reinvent themselves and develop fresh business strategies to meet current business conditions and customer demands," agrees Arnold Bradburd, chairman of the Metals USA distribution giant based in Houston. That's because the metals distribution industry is highly fragmented and competitive. In fact, Purchasing Magazine estimates there are more than 3,500 metals distribution facilities in the U.S. alone.

Competition in metals distribution is based on price, service, quality and availability of products. Metals service centers perform a variety of functions, including the warehousing of metal for distribution and delivery to customers. However, the vast majority of the members of the Steel Service Center Institute, Association of Steel Distributors, National Association of Aluminum Distributors and the Copper and Brass Servicenter Association perform such value-added services as processing, fabricating and finishing.

"In the past, service centers could keep customers as long as they had one of three strategic advantages: low prices, high quality or outstanding service," says Bradburd. "Today, all three are minimum requirements for staying in the game. Today's buyers also want national contracts with fewer vendors to better leverage purchasing power and lower overall costs, as well as access to improved decision-making technology and integrated supply chain management."

And that's also why buyer-supplier alliances centering on metals service centers remain popular, says distribution guru Fein.

According to Bradburd, "the most important challenge for service centers is creating supply chain efficiency for customers. Paramount to achieving this goal is taking cost out of the distribution channel. Metals prices and end-users' prices do not change significantly over time, so the only way to lower cost is to drive it out of the channel between the two. To accomplish this, metals-processing distributors need to be efficient and have the ability to deliver customer solutions."

Some 85% of metals buyers for original equipment manufacturing (OEM) firms surveyed last year by Purchasing Magazine now outsource at least some percentage of production-ready processed material. The survey of magazine readers found that more than half of the metals buyers surveyed have increased processed-metal outsourcing activity in just the past two to three years. In response, "the metals distribution and processing industry is being pushed into more sophisticated value-added services," says a report by the Robert W. Baird & Co. distribution consultancy in Milwaukee, Wis. "In turn, the processing and distributing firms are re-examining their sales and service structures to find ways to provide more value-added services to existing and new customers." Indeed, metal processing has become big business for stockholding distributors and a smaller group of suppliers known as independent processors.

What kind of processing are we talking about? The survey shows slitting, cutting to length and leveling, blanking, coating and plating, and shearing as the most commonly outsourced processes. Stamping, heat-treating, laser cutting, plasma cutting, sawing, burning, drilling, edging, grinding and polishing follow this group. In addition, steel sheet processing centers increasingly are getting involved in first-operation press blanking; some are starting to explore coil coating and galvanizing lines. Light-gauge tension leveling is getting more popular, and temper mills are likely to become more common.

Still, it is possible for the service centers to adjust to this changing model, says the president of the Copper and Brass Servicenter Association. "American copper and brass service centers have bridged the gap between the mills and manufacturing for many years and assure the OEM industry with a constant and ready supply of needed quality materials of every conceivable alloy and shape," says Bruce J. Farmer, president of Farmer's Copper & Industrial Supply Inc., Galveston, Texas. "In these past few years, this role has changed service centers into pre-manufacturers. We supply precision-cut materials to any shape and in some instances finished sub-assemblies, which add value to our materials," says Farmer. "This has been achieved mostly because we, the service centers, have gone 'high-tech' with such things as computerized shearing, sawing, slitting and abrasive water-jet cutting. Also, we are willing and eager to update to newer and better methods as they become available."

Reducing inventory is key

The metals buyer at a major power-generation turbine manufacturer found his firm routinely holding $5 million in inventory to maintain and warehouse 'just-in-case' inventory. After teaming with a Denman & Davis service center for daily deliveries, in-house inventory has disappeared. Discussing this partnership, David N. Deinzer, CEO of the Clifton, N.J.-based service center chain, notes that "ours is a critical service link because a missed delivery can mean production downtime and, therefore, increased costs for our customer."

Metals used in manufacturing are sold by producers or their agents, distributors or service centers, independent merchants (i.e., traders) or processors and through Web-based marketplaces. The market gurus such as Fein say the actual source matters little nowadays as long as the sale provides a positive buyer experience and, lately, high level of customer services. "That's why, in metals, while many elements of the selling process can be adapted for e-commerce, the most critical and complicated aspects of supply chain management required by OEMs continue to be executed through more traditional means," Fein says.

Since metals are highly freight- and time-to-receipt-sensitive products, there is a need for local stocking-either by the OEM or a supplier. "Inventory transparency leads to ownership postponement by downstream customers," says Fein. "In many cases, a customer does not even own its inventory until the time of consumption. Instead, the distributor owns the inventory at the customer's location. The distributor goes on-site to manage a customer's inventory with distribution personnel and computer systems.

"As a result of inventory transparency, metals service centers will evolve into extensions of a customer's purchasing and procurement department rather than acting as a physical distribution sales channel for manufacturers," Fein says. "This transformation is just getting started in the metals marketplace." That's because service centers have always marketed their inventory stocking capabilities. These services are one reason that distributors capture sizable market shares in the plate, rod, bar and wire product markets, but ship very little sheet products, extruded shapes, or pipe and tube in relation to the overall markets for those products.

Still, there is a growing trend toward a variety of value-added, customer-specific processing functions so there are more supply alliances centering on processed and delivered sheet products for automotive parts fabrication. Numerous joint ventures between mills and service centers have been created in recent years to cut or slit and then blank (i.e., stamp) sheet steel and aluminum.

For example, Fred Long, director of purchasing at stamping house Pridgeon & Clay, Grand Rapids, Mich., uses service centers exclusively for the metal that is pressed into parts to make automotive exhaust components. "Partnering is a real key issue. Pridgeon & Clay has myriad-probably more than 2,000-active parts. The quality of the products we get from service centers is good and dealing with service centers saves us from having to store a lot of inventory," he says. "And, although just-in-time is becoming a way of life, JIT programs on finished goods can be hard to put together unless there is a solid partnership on the raw material start of the chain."

Olson International Ltd.'s metals supply philosophy also is to heavily rely on distribution, notes Edward C. Farrer, C.P.M., manager of purchases for the stamping company in Chicago that serves the automotive, appliance and electronics industries. "We can devote more of our square footage to equipment and revenue-generating machines if we do not have to store a lot of coil stock."

He also believes the mills have come a long way in the product they are producing. At the same time, the processor and the final end users have become more sophisticated in their material selection. "In addition, the service centers are doing a better job of buying," Farrer says. "They are realizing the strengths of various producers and are trying to steer business to the types of products that certain mills are strong at, which may permit them to get even stronger in supplying us."

Distribution channels are changing

And there is a business shift of many service centers from the old distribution model of buy-hold-sell to sell-source-ship. This model, developed by AMR Research in Boston, suggests that the buyer no longer is interested in the amount of product available for sale (or from what source) but in what processed product is available now to best serve specific needs.

However, this new supply channel management system requires buyer-supplier alliances at a new level because it requires that the information processing, data warehousing and analysis services of the OEM's marketing, sales, manufacturing, purchasing and materials management departments are linked closely to the chosen distributor.

With so many distributors, not all are willing to switch business models or join alliances. The gurus say that's because some are more efficient at selling commodity products than others and are staying in that sales segment. Still, many are moving toward engineered, value-added solutions, which take more time, people and technical expertise. The mavens and some service center execs note that while Internet-based sales of commodity products are working at becoming efficient, this may not happen for processed material for some time.

"Still, the goal is customer satisfaction," says Farmer of Farmer's Copper & Industrial Supply. "Business applications are now being written around Web access, further tightening the gap between the mill supplier, the service center and the customer. We will always have the smart saws, shears and delivery trucks. It is the well-informed salesman with information at his fingertips who is getting the products a split second faster and who is changing our business. What three individuals previously had done in the past, one person can do today with technology. Yesterday, just having the knowledge was powerful. Today, it is sharing that knowledge through a powerful database."

Dan Ronchetto, manager of strategic sourcing for Emerson Electric Co. in St. Louis, Mo., expects e-commerce technology to drive efficiencies in order scheduling, inventory control and real-time communication. He thinks that increased information in the hands of more buyers will also raise the level of competition throughout the supply chain.

However, the buyer of more than $500 million worth of steel annually sees limitations in e-procurement. Beyond quality and performance, which are givens, he says, Emerson still seeks service centers for alliances that offer a broad array of processing capabilities, reduced leadtimes, technical support, access to world sources of supply and cost control. "We look for suppliers that develop long-term relationships with the mills so that they can help us stabilize our material costs," he says. "One key attribute of supplier winners in this new economy will be the speed in which they can change their organizations and systems to meet buyers needs."

New ideas slow to catch on

However, according to some distribution gurus, the service center industry is having trouble adjusting to the "high-tech" needs of buyers seeking alliances. Service centers strive to buy enough material from the steel, aluminum, copper and brass mills so they always have product in stock to satisfy customer orders, yet without being overstocked. This is especially important to buyers during the supply-alliance development process. However, many service center locations still have not implemented the newest technologies in inventory control. A recent survey of metal distributors by sister publication Metal Center News found that relatively few independent (i.e., smaller) service centers are taking advantage of such high-tech tools as electronic data interchange (EDI), vendor-managed inventory (VMI) or the Internet as ways to handle their own inventory management and reduce their in-house stockpiles.

Dave Lerman, CEO for Steel Warehouse Co. Inc. of South Bend, Ind., acknowledges that "inventory control is a challenge in a value-added metals distribution operation." That's because the most common gauge of the distribution industry's inventory efficiency is "inventory turns" as measured by the average number of months worth of stocks on hand. As a rule of thumb, most service centers shoot for no more than three months' inventory on hand in their warehouses, which means they sell and replenish their stock at least four times during the course of the year. However, the steel service centers and the aluminum distributors at midyear had closer to four months' supply of all products, despite a near boom year in shipments.

Perhaps the ultimate in electronic partnering is the vendor-managed inventory system, in which a supplier has electronic access to the customer's inventory and automatically replenishes products when they hit a certain reorder point. However, despite efforts by service centers such as Marmon Keystone in Butler, Pa., to popularize the system, VMI still is not used commonly in the service-center industry. And there appears to be more EDI between buyers and service centers than between service centers and their mill suppliers.

This is a problem for buyers seeking supplier partners among the smaller service centers since both VMI and EDI "were revolutionary concepts in manufacturing a decade ago," notes consultant Rick Bushnell at Quad II, Chalfont, Pa. EDI reduces or eliminates paper transactions, speeds transaction times, decreases errors from rekeying information, reduces clerical staff needs, and improves record keeping and reporting. VMI allows suppliers to gain a true sense of what is selling so only those items are replenished. The continuous-replenishment aspect of supply alliances is a little trickier for the metals industry to pull off, Bushnell notes. On commodity items such as pipe, tube, beams and channels, it can work well for suppliers to replenish service-center warehouses automatically. But such a system is less effective for specialty items ordered in small quantities on an irregular basis. "When you get to high-alloy steel or special metallurgy, VMI doesn't work," Bushnell says.

Still, an important way to cut inventory is to make better use of technology to streamline the order process, notes distribution consultant Fein. The quicker that service centers can place orders and receive goods, the less material they need to keep on hand. However, while the methods used to send and receive orders are definitely shifting from phone and fax toward greater use of EDI and the Internet, it appears the transition may be a gradual one, especially among smaller service centers with fewer resources to invest in new systems. Evidence: The Metals Center News survey found that most service centers still rely primarily on the telephone and conventional fax machines to place orders with suppliers. Only about 40% fax orders directly from their computers. About 30% still place orders by mail. Reason: While EDI sounds good in concept, it's not always easy-or inexpensive-to implement, Bushnell says.

Kennametal, Castle Metals simplify bar stock delivery