Buyers of production-grade metals have increased purchases from service centers since early 2004 even though the buy has cost them more cash—and generated more agitation, a general feeling of upset—than in previous years. These trends are continuing this year because of steady economic growth, stout corporate outlooks for metalworking activity and buyer aggravation about price increases and delivery problems.

Nearly three of every five buyers polled this spring (59%) plan to buy more metals from service centers this year even though only about half (52%) are satisfied with the supply performance of the processing distributors. That's an indication that while metalworking will remain active this year and companies will need more metal than in 2005, the buyers are willing to entertain offers for metals from mills, independent processors and traders.

Distributors that buy huge portions of metal to resell to end-use customers are poised for a minimum 3.5% growth rate this year. Prices for steel are returning to the high levels of mid-2005 after a wintertime lull, and springtime nonferrous prices are trading at record highs. The estimated 3,000 service center firms in the U.S. and Canada buy and resell about 30% of all the carbon, alloy, stainless and specialty steels; aluminum; copper, brass and bronze; superalloys and other specialized and proprietary alloys, and certain precious metals produced regionally each year.

Many buying groups embrace their metals-distribution suppliers. "We would be hard-pressed to survive without the service centers," says one buyer. Another purchasing manager adds: "The price could always be better but, in the long run, we get more control of our material and more for our money with the service centers than going direct to the mills." Yet another says that "our company and our distributors are committed to the success of metals supply so that we all benefit from assured supply and reduced costs."

Also, buyers and sellers alike try to downplay the issue but pricing still is a hot topic—and a source of aggravation—in the metals marketplace. And it's not just about inflation impacting base metal costs—even though buyers at original equipment manufacturing (OEM) and general construction companies say that all less-than-truckload orders for steel, aluminum and copper are costing them average prices well above those wanted by finance managers.

Still, the service centers continue to complain about low-margin operations although early 2006 average steel prices in North America are slightly more now than the full-year average in 2005 and copper has gained more than 30% in price already this year. That means they aren't passing all the mill prices and their processing costs onto buyers and are hoping to make their profit on volume. "Margins are an issue for service centers because most distribution executives have no clue, control, idea or input on the pricing arrangements between their sales force and the customers," says Michael E. Workman, president and principal consultant at Michael E. Workman Associates in College Station, Texas.

The love-hate relationship of metals buyers with service center suppliers that has been evident for the past two years of polling doesn't really center on price. The buying community's gripes center on the quality of service and timeliness of delivery—even though distribution consultants say customer satisfaction has never been as important as it is today because of the large number of metal center companies competing for business.

The 100 metals distributors say stability in pricing and equilibrium in supply and demand were among several key points mentioned. But, for buyers, prompt delivery of usable materials is of utmost importance. Atop that, more than half (56.5%) of the buyers also believe the distribution industry's current round of consolidations—although probably necessary—will have a negative short-term impact on supply and delivery.

Almost four out of five (78%) of the buyers surveyed rely on service centers—rather than independent processors and mills—for immediately usable metal shapes that have undergone preproduction processing. However, almost half of the buyers (48.5%) claim to be less than satisfied with their service-center suppliers. The most widely distributed products among the Top 100 service center companies have remained the same over the last few years—carbon and alloy steels (83%), followed by stainless steels (57%) and specialty steels (47%). The costliest metals, the superalloys, remain the least commonly distributed.

The sheet form was the most commonly sold form of most of the metals; 15% of the Top 100 companies sell carbon and alloy steel sheet exclusively. More than half of the largest service centers provide such basic services as cutting coil to length (75%), shearing (63%), cutting and sawing (60%) and slitting (53%). However, using the Top 100 service centers as a gauge, fewer distributors offer such complicated value-added processing as leveling (48%), blanking (41%), bending (27%), machining (26%) and welding (25%). So, it's common to hear complaints about "inconsistent adherence to packaging specifications" and "deteriorating on-time performance delivery" and "unexplained extended lead times."

For years, the service center industry fought nonautomotive industry efforts to implement just-in-time delivery systems. It still isn't a big time program in metals distribution. Purchasing's latest online survey found that 20% of the OEM buying groups have initiated or revamped just-in-time (JIT) delivery programs with their metals centers and only another 10% have some version of vendor-managed inventory (VMI) or JIT II stock-replenishment systems.

"Our service centers actually have personnel visit the plant weekly and look at our physical inventory levels against the targets and replenish what we need that same week," says one buyer. "Our distributor suppliers stock up to three months forecast material for us at their facility so our targeted levels remain at roughly two to four weeks of supply."

Another buyer says his firm's service center supplier processes sheet steel to the necessary size, gauge and thickness requirements and then holds the dedicated metal. "We advise when delivery is required, whether the next day or the next week and they ship it after our release through a purchase order."

Several buyers actually have scheduled daily deliveries from service centers on so-called "hot-list" tonnage while others are comfortable with consignment programs with the service center for most of their materials. "We have our own system whereby all vendors are set up to deliver metal items in not more than five working days from receipt of purchase order," says one buyer. "In most cases, our on-time delivery system is running around 99%. This allows for our in-plant metals inventory not to exceed 10 working days."

"We are doing Kanban to maintain an orderly and efficient flow of materials throughout the entire manufacturing process. We have a few Kanban-driven replenishment programs and will be doing many more in the next two years," says a buyer.

Another buyer believes the JIT and VMI programs "are quite an advantage to our cash flow. With our company's efforts to expand lean manufacturing systems, these inventory-control and metals-delivery programs from service centers mean we can give our employees gain-sharing checks."

Still, the latest online survey shows a surprising seven out of 10 metal-buying groups have no JIT or VMI systems in place with the distribution sector.

Some metalworking companies have lagged in preparing their operations for inventory-control networking with service centers. Some admit they still haven't completed internal demand-forecasting systems needed by their manufacturing units and by metals distributors for JIT or VMI systems.

Interestingly, some other buyers actually place the blame for a lack of JIT systems on the inability of the steel mills to meet promised delivery dates to the service centers. "Some mills run so late with shipments to our distributors that planned-in-advance purchases turn into JIT programs at that link of the supply chain and late-delivery at ours," says one buyer. Another buyer says "the mills continue to have the greatest—and most negative—impact on our service center suppliers due to due their inability to meet promised leadtimes."

Several metal centers have instituted e-procurement programs either as public marketplaces or as customer-only extranet sites. Interestingly, the lack of interest from the buying community has been deafening. Less than 5% of those polled this year were involved in e-procurement of metals with service centers.

"My service center suppliers have e-commerce capability, but my system does not support full utilization," says one buyer. "I can place orders but cannot share information with these suppliers."