Many steel buyers are achieving significant cost reductions with innovative approaches to inventory management.

The most popular approach remains just-in-time (JIT) delivery, where suppliers are required to meet prearranged delivery deadlines based on steel needs dictated by end-use manufacturing schedules. However, there are also vendor-managed inventory, consignment inventory and inventory management replenishment systems in place, where suppliers hold ownership of steel until it is used.

Whatever the system, the benefits include improved cash flow, reduced warehousing costs and improved materials management on the factory floor.

Steel delivery and inventory control systems vary widely, according to a survey of buyers. Some high-tonnage metalworking operations use continuous-flow "lean manufacturing" systems that pull materials and components. Some of these use kanban workstation inventory control techniques that impact steel delivery scheduling. Many other manufacturers produce steel-based end products in smaller batches with sometimes erratic production schedules, but either lack storage facilities or have corporate cost-cutting policies that reject inhouse inventory.

Many steel buyers prefer JIT delivery. "I use the JIT delivery option for steel inventory management of high value and high volume products that are used on a fairly consistent basis," says Bob Hammond, director of purchasing and distribution at commercial fryer maker, Ultrafryer Systems, in San Antonio, Texas. "I don't like the option of having my purchased steel inventoried or maintained elsewhere."

In today's business, he explains, "OEMs must be capable of obtaining production items as needed without the burden of excess inventory." Denise Scharlach, materials buyer/planner at Schumacher Electric Corp., Mount Prospect, Ill., a producer of custom transformers for the electronics industry, says, "By using a JIT system, I can have the material I need, when I need it, without extra costs to the company."

Material Transportation Co. in Temple, Texas, produces made-to-order food processing and battery-handling equipment. Purchasing manager Lloyd Decker relies on steel suppliers who can meet the company's JIT delivery requirements without the benefit of long-range usage forecasts.

Bob Panning, a buyer at Automatic Feed Co. in Napoleon, Ohio, also requires JIT delivery from his suppliers. His firm manufactures custom-made steel coil processing equipment. "Since every line built is different from the last, purchasing often doesn't know too far in advance what our steel needs will be." Still, once an order is taken and equipment delivery and installation deadlines are set, the manufacturing schedule must be supported by purchasing and its supply base.

"Primary suppliers are determined by their quality record, delivery performance, and ability to respond, replace or cover costs when material does not perform in our applications," says Rod Batzlaff, senior purchasing agent at TCR Corp., Brooklyn Center, Minn., a manufacturer of specialty fastening devices. He believes that JIT delivery requirements "give suppliers guaranteed volumes based on our needs for steel parts and give us a relatively seamless flow of material." He adds that JIT delivery based on projected demand from production "allows the supplier to 'soft schedule' its hot-rolled steel stock needs; which, in turn, keeps its incoming material moving along and inventory turns at acceptable or better levels."

JIT delivery is handled in a myriad of ways. "We have multiple JIT steel deliveries daily and store only a maximum of two days of inventory for most of our steel," says Jay Holt, materials manager for materials handling equipment maker Raymond Corp., Greene, N.Y. "We use JIT for our bar stock and tubing where we get next day delivery," says George Ehlers, senior buyer at Warner Electric Inc. in South Beloit, Ill., which makes industrial electromagnetic clutches and brakes. "This is very key to our cellular manufacturing, which uses a pull system for components." North Hartland Tool Corp., a precision machine shop in Vermont that makes fixtures and gauges for the aerospace industry, uses JIT only on steel for nonstock items required for specific jobs, explains Sandi Johnston, purchasing manager.

A steel service center supplier custom slits and shears hot-and cold-rolled sheet for JIT deliveries to the A.O. Smith Water Products Co. plant in McBee, S.C., where residential and commercial water heaters are manufactured. Steve Gassen, purchasing manager, says immediate steel requirements for on-time deliveries are updated weekly. Meanwhile, Sauer-Danfoss, a maker of transmissions, gear pumps, valves and motors in Ames, Iowa, places orders directly into its steel supplier's computer ordering system on an almost daily or weekly basis so that deliveries happen 2-3 times per week, says Greg Knop, procurement specialist in the OEM's strategic purchasing organization.

There are also numerous proponents of vendor-managed inventory (VMI) or consignment inventory systems, where suppliers "own" the steel until it is used. There is some controversy about the viability of this approach, so several JIT-VMI hybrids have come into use throughout metalworking. Melissa Gerber, senior strategic buyer at George Koch Sons in Evansville, Ind., says the manufacturer of finishing, heating and drying systems uses both JIT and VMI. "They both incorporate a cost-cutting philosophy by reducing inventory levels and increasing manufacturing workspace versus warehousing," she says, "so, ultimately, both programs help improve our bottom line."

Originally, VMI was set up as a supply chain system between producers and distributors. The mill receives information via electronic data interchange (EDI)—or, now, via the Internet—that details the distributor's sales and stock levels. The mill views recent sales data for all of its items at the distributor then creates and maintains an inventory plan for the distributor. The mill—not the distributor—generates the order and shipment delivery program. The latest twist is that VMI is being carried to the next level—between the distributor and the end-buyer—so the distributor takes on ordering and delivery scheduling roles.

Richard McKusick, purchasing manager of Millerbernd Manufacturing Co. in Winsted, Minn., a producer of outside steel lighting poles, says purchasing people are reluctant to use VMI because there is a lack of control over inventory and a vulnerability about a possible shortage in tight-supply markets. "I prefer to manage inventory myself," says Barb Nevius, purchasing manager for M&S Industrial Metal Fabricators in Huntington, Ind. "It's better to have it delivered JIT when I expect it."

"Intelligent information exchange rather than pure forecasting has replaced VMI," says Vic Venettozzi, vice president of purchasing & real estate for Schneider Electric North America in Nashville, Tenn. "Mapping supply chain requirements, then employing full pull, kanban or order-only technologies are now the rule." (Kanban is a production-line inventory control technique within JIT manufacturing where workstations send signals—usually in the form of a card—that it needs more materials, parts or components.)

Venettozzi adds: "True, some suppliers may not have the internal sophistication to serve customers without inventory, and it is likely in these cases they will seek an over-riding VMI agreement to 'protect' on-hand inventory produced due to capacity or flexibility shortcomings. This isn't to say that select stock, a release or two of kanban quantities, for example, isn't efficient. But, overall, we find a well-designed supply chain eliminates the need for inventory-intensive VMI arrangements."

Jeff Diener, steel purchasing manager for Benteler Automotive, an auto parts maker in Grand Rapids, Mich., says "Probably 50% of our steel service center tons technically are VMI." The supplier holds about two weeks of typical Benteler usage fully processed and ready to ship. "This only works well when production schedules are fairly constant. When auto schedules jump up and down, like the market we are now in, VMI is difficult because some items may not ship for months and have already been processed," Diener admits. "This creates cost and neither we nor our suppliers want that."

Problems such as this have led to VMI adaptations within JIT environments. The current system for steel purchasing at Maxcess Technologies Inc. in Summerville, S.C., incorporates both JIT and VMI. "After qualifying one supplier who had the means to supply defect-free material at very competitive prices, I took the next obvious step of having them manage our steel inventory," says Lance Norris, purchasing manager, manufacturer of raised access floor systems. The supplier is updated quarterly with Maxcess' monthly requirements for all steel part numbers. "Weekly releases are made against our production schedule via e-mail, and we have only one day of steel inventory on our floor at any given time." Norris says this approach "also has reduced leadtime to next day, reduced scrap loss to less than 0.5% and allows equipment to run without any downtime."

Endress+Hauser USA has a program called VSP (vendor stocking program), which combines JIT and VMI. "We give our source one purchase order number each month and all materials we consume are applied as we progress through the month," explains Jerry Espin, purchasing manager for the Greenwood, Ind., firm that makes liquid level and pressure transmitters for sanitary applications. "Our source maintains inventory at their site and delivers to us next day when we release the material via e-mail. We pay only for the material that we consume."