Early in 2001, John Cotter adopted a new measurement for the competitive performance of his steel suppliers and processors. Using an "economic value added" (EVA) analysis, the metals sourcing and inventory manager for Generac Power Systems found his costs—in the millions of dollars—were far too high for existing business conditions.

The EVA analysis enabled him to identify waste in sourcing, initiate new supply strategies and start buying online. Today, Cotter buys his steel as processed blanks ready for final fabrication. He uses Straightline Source, an online steel distribution firm now operating in 34 states in partnership with a group of 25 metals processors. The result: Generac has reduced steel-sourcing costs by 10%, reduced leadtimes by 15% and guaranteed in-house supply of necessary production materials.

Many businesses are developing supply management metrics that have direct linkages to their business strategies. Their efforts are being directed at linking the supply-purchasing-sourcing process into the corporate EVA model. These purchasing-performance measures aren't linked to price reductions and/or cost-avoidance schemes. Using strategic sourcing solutions such as EVA, buyers can gauge the actual costs—and waste of capital—from systems in place for buying, processing and fabricating materials, Cotter says.

Knowing costs is important to Generac, which makes industrial, commercial and institutional power generation systems: generator sets, controls, transfer switches, paralleling switchgear, fuel tanks, enclosures and controlling software. The firm is the largest independent manufacturer in a competitive marketplace where margins are under attack during this period of reduced capital investment.

Cotter is the manager of production and inventory control at Generac's metal fabrication facility in Eagle, Wis. That plant turns out the entire annual steel sheet requirements for water-cooled generator sets made at the headquarters site in Waukesha, Wis.; air-cooled engines, motor home generators and home standby generator sets assembled at Whitewater, Wis., and high-end generator sets manufactured at Maquoketa, Iowa.

Up until early last year, Cotter bought hot-rolled, cold-rolled and galvanized sheet steel in coils from two Midwest service center chains, and then had the metal worked by a pair of independent processors. "We knew that we didn't have sufficient tonnage for a direct buy from a mill and, besides, we needed the sheets to be cut and blanked," says Cotter. Because he didn't want any more than five days' worth of metal warehoused at any time, Cotter also had suppliers making almost daily deliveries of some of the processed steel.

"The power generation business wasn't standing still," says Cotter, "and neither were we. We went into just-in-time mode to support manufacturing and even got involved in new-product development teams."

Generac has engineering groups designing advanced power generation products. And that's why purchasing has developed global sources for some parts.

However, all major product components—stators, rotors, controls, transfer switches, base tanks, and enclosures—are home built, so steel and nonferrous metals are sourced as locally as possible. "Purchasing works closely with the production groups at the assembly plants; in fact, they are the trigger for what we buy, when we reorder and when we have it delivered," says Cotter. However, "What we didn't know was how much other costs had been built into the system in trying to keep deliveries constant and inventories low."

In fact, he says there was recognition of the need to take more inventories out of the entire sourcing process. "It is absolutely important that we have as little steel on the floor as possible, yet we have to have enough to keep assembly lines from ever shutting down," says Cotter. His EVA analysis suggested that he could drive costs out of the system, reduce external delivery leadtimes, improve internal delivery times, and reduce the internal investment in supply management activities. "The real need was to reduce on-hand inventory levels and eliminate the potential for stock outages without incurring extra costs," he says.

Historically, companies have managed to make inventory numbers look good by shifting inventory to suppliers. Under EVA analysis, such number manipulation won't work since its metrics measure the elimination of unneeded inventory—both internally and at suppliers' facilities. "We're not the kind of company that can have a lot of steel warehoused," says Cotter, "but it is essential that we always have enough processed steel available to keep the plants running." That, and the knowledge that he wanted to expand Generac's electronic procurement activities, led him to Straightline Source, the virtual steel service center creation of U.S. Steel Corp., Pittsburgh.

"The market has been demanding greater efficiency and effectiveness in fulfilling orders for steel for some time," says Bob Dryburgh. "Since we went into operation in late 2001, we believe Straightline's quoting, ordering and inventory management tools have put customers like Generac in greater control of price and delivery, giving them the flexibility to consider how the options we present match against their production schedules, cash flows and other factors relevant to the procurement decision-making process."

The middleman is a long-standing player in the history of metals commerce and his role has been fairly simple: buy from one, sell to another. Straightline operates through the Web site www.straightline.com. Dryburgh says the online steel source has 5,400 registered potential customers and lately has been handling 400 requests for quotes (RFQs) daily for hot-rolled, cold-rolled, hot-dip galvanized and coiled plate. Not all of those quotes become sales, "but it shows the level of interest in what we're doing," says Bob Trotter, director of commercial activities. He projects that as many as 13% of the RFQs become sales—which, is estimated to be the industry average for purchases that follow online RFQs.

Most spot orders have been handled electronically because "we're not constrained by bricks and mortar," says Dryburgh, because Straightline only buys steel when it has been ordered—from more mill sources than just its parent—and has the metal shipped to partner processors who handle delivery to end-use buyers. Processing partners are selected based on rigorous criteria, including ISO certification. By partnering with Straightline, processors benefit by increasing utilization of their equipment and facilities without the added costs of sales, marketing or inventory.

Prices from the online service center are somewhat below PURCHASING magazine's spot-market quotes for flat-rolled products. Dryburgh has acknowledged that salestags "always were meant to be sufficiently low enough to break into the business, attract orders and continue to grow." However, he insists "Straightline's real challenge is to establish long-term relationships with customers."

A new service, known as StraightEdge, was rolled out last month in an attempt to lower the overall cost of materials procurement. StraightEdge was developed in collaboration with such customers as Generac to make it easier for buyers to forecast their steel needs and manage the flow of steel into their operations to meet their production requirements on a just-in-time basis. Pavlick says "the new software will facilitate the exchange of information, assuring the customer a reliable source of supply and providing confidence that steel purchases will be managed in accordance with their production requirements."

Cotter says that beta testing with StraightEdge systems allowed Generac to receive real-time inventory management information that it couldn't acquire from its own systems or from other steel suppliers. "The system allows us to see everything online—part files, orders and inventory," says Cotter, "and, by reporting everything online, we've cut communication time by 90%."