Buyers want more than what is being offered

Service centers offer metal processing, on-time deliveries; buyers want market research, customer analysis

Tom Stundza, Executive Editor -- Purchasing, 11/3/2005

Back in 1995, PURCHASING published that "distributors are being called upon to process more and more of the metal that's going right from dock to metalworking machines." The magazine also said that metals distributors were "being pushed to become the front-line soldiers providing buyers with market information, technology updates, new product data, and technical services." Today, buyer surveys still find that distributors/service centers are doing pretty much what they've been doing for years—the same blanking, cutting to length, sawing, shearing, and slitting; identification marking, bar coding, skid-packing, interleaving, and exterior bundle protection. The question: "Is there, in 2005, anything evident about value-added distribution in metals?" The sheepish answer from a well-known distribution management consultant: "There's nothing new to add on this subject at this time."

Value-added distribution is commonplace in the electronics sector by means of integrated circuit programming, cable and connector assembly, components kitting and special labeling to facilitate fabrication—all done by distributors of basic components. They also provide buyers with cost-reduction improvement processes, supply chain information systems, cost-analysis programs and materials management services.

Value-added distribution is comparatively rare in the metals sector with activities beyond sorting and pre-production processing of mill products by service centers limited to labeling, bar coding, packaging, storage and, occasionally, repair and modifications.

A decade ago, a PURCHASING survey of buyers found them wanting improved order-intake and billing procedures from their metals distributors, along with expanded metals market information, new product usage data, upgraded purchasing software systems, on-time delivery technology updates, and an array of new technical services. Back in 2002, an industry publication said that distributors were being pushed by customers for more accountability of the value that the service center allegedly provided. That has yet to happen since what the distributors claim is value-added-processing services are expected by the purchasing community and the fees are always "subject to negotiation" with the buying community.

Importantly, yet another survey of buyers this spring found more lip service than actual use being given in the metals marketplace for such value-added tools as integrated cost reduction, creative customer analysis, consolidation of the purchasing function, value analysis and on-time delivery techniques to support lean manufacturing systems.

"We need our service-center suppliers not just to supply material, but also to partner with us, understand our business to assist with competitive pricing and just-in-time delivery," the purchasing manager for an Illinois machining company said at that time. He also asserted it wasn't happening. Also, other surveys of buyers have shown that such conventional tools as reverse auctions and data-mining techniques often are under-applied or ignored totally by metals service centers. An Aberdeen Group study this summer also found that buyers want their metals distributors to be more responsive to supply changes necessitated by customer demand and shifts in market dynamics.

Metals service centers function as key intermediaries between the metals producers that desire to sell large volumes to few customers and the end-users that need specific products in smaller quantities. The metals distribution industry is fragmented, with approximately 1,300 participants throughout North America, the largest of which represented less than 4% of estimated industry sales of $85 billion in 2004. The industry includes both general-line distributors that handle a wide range of metal products and specialty distributors that specialize in particular categories of metal products.

Latest calculations show that service centers supplied almost 64 million net tons of steel and nonferrous metals for use by the U.S. manufacturing economy in 2004. Metals end-users are increasingly moving to lean manufacturing models that require metal products to be delivered to them on an as-needed basis. This has increased the need for service centers that can meet end-users' delivery requirements by maintaining an extensive inventory of available metal products.

Some of the larger metal service center companies have e-commerce websites available for active customers. Most of these sites highlight available metals and processing services, and have some form of order-entry system. Some of them have advanced electronic data interchange (EDI) options for obtaining quotes, placing orders and viewing shipments. However, a number of these systems haven't been updated since 2002 or earlier. "There is definitely room for improvement in so-called supply partnerships with distributors," says the purchasing director for an Ontario-based container manufacturing firm. "Too often, steel service centers have not yet learned partnering is a two-way street that provides the buyer with more than metal."

And, when distribution guru Mike Workman was asked if there's value-added in metals distribution, the head of Michael E. Workman Associates in College Station, Texas, responded: "Not really, it's pretty much the same stuff. A few (metals service centers) are managing inventories and consigning processed parts for customers, but very little has changed in the past 10 years."

Workman's curt synopsis of distribution activities for metals: "It seems there is an attempt to hold firmly to the past and watch the future slip by." With steel prices spiking and then collapsing, and nonferrous prices erratic, profit margins have been a major problem for service centers for the past two years. "Pricing is the hottest issue today," says Workman. "Most distributors have no clue, control, idea, or input on the pricing arrangements between their sales force and the customer."

Also note that the Aberdeen Group study of 170 companies this summer found almost all (91%) were pressured to make changes to their sources, including service centers, when expected savings are eroded by unanticipated events such as price spikes that aren't ameliorated by the middlemen. This was especially true in 2005 when steel prices exploded and end-use buyers were just as angry at distributors as the mills.

The challenges facing industrial distributors, and their suppliers, are appearing more frequently and are becoming more complex, says Barry Lawrence, associate professor at Texas A&M University in College Station, Texas. Finding ways to meet those challenges requires distributors to look for new ways to manage their business to return more net profit, lead the sales teams to find growth opportunities, and to better manage their inventory assets.

This is not to say that not all service centers ignore value-added programs. Central Steel & Wire of Chicago has a "value analysis team," a group of staffers who go into a customer's plant and does a complete audit of raw materials, purchasing and fabricating practices to discover best practices and raw material opinions that will reduce costs. Marmon/Keystone in Butler, Pa., communicates very closely with top customers in regards to steel requirements. Staffers also work closely with end-user plant personnel to identify areas where they can substitute alternate, less expensive grades of steel or help by adding value through processing to the products they buy.

Almetals in Wixom, Mich., offers a variety of metals that meet customers' need for a particular part or application. The sales staff and engineers work with buyers to find the performance needs of a part or metal. The mechanical properties, corrosion requirements, physical properties are all taken into consideration. The team then seeks out the metals which are suitable, and analyze the total cost of each material.

In 2003, Precision Steel Warehouse launched a technology-based program designed to provide our customers accurate, up-to-the minute and useful information on every open order. This "order acknowledgement program" makes available to buyers detailed information on each item ordered with specific delivery schedules within the next thirty days. Three D Metals in Valley City, Ohio services customers on a personalized level with a VMI (vendor maintained inventory) program. The distribution company's inside/outside sales team members work closely with customers and internal purchasing personnel to forecast, source, slit, ship and maintain on-demand inventories.