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U.S. service center economies

Jul 31, 2014 | 08:00 PM | Bill Beck

Tags  Reliance Steel & Aluminum, Kloeckner Metals, Berlin Metals, service center

Unlike other segments of the metals sector, the service center industry by and large is not dominated by a few major players. There are still hundreds of family owned metal service centers scattered around the country, serving longtime customers from one or more sites.

Service centers of all sizes routinely use a combination of strategies, from mergers and acquisitions to customer service to quality assurance, to help their businesses retain market share and financial health. However, distributors such as Reliance Steel & Aluminum Co.Ñby far the largest publicly owned company in the industryÑdo set the pace when it comes to developing strategies that can help service centers remain flexible, nimble and profitable.

Reliance is representative of a corporate approach to growth in the industry. Founded in Los Angeles in 1939 and dating its modern history to a 1994 initial public offering, the Fortune 500 company had 2013 net sales of more than $9.22 billion. It operates from more than 300 locations in 12 countries and distributes a full line of more than 100,000 products to more that 125,000 customers, none of whom account for more than 1.1 percent of its sales.

Reliance has relied on several strategies in recent years to meet the challenges and opportunities facing the industry. The company focuses on a diversification of products, customers and geography to reduce volatility in operating performance. Its end-market diversification strategy positions the company to serve customers in aerospace, automotive and energy segments of the economy, all of which are currently experiencing strong growth.

Reliance’s organic growth target calls for $220 million in capital expenditures in 2014 to open facilities in new markets, expand existing operations, add or upgrade processing equipment and extend capabilities to local markets. The company prides itself on its ability to identify and make additions, and to effectively run those acquired businesses when they come into the Reliance fold. The company has grown through the acquisition of more than 55 service center companies in the two decades since its initial public offering; Metals USA Holdings Corp. was its largest acquisition to date in April 2013.

Reliance outlined its acquisitions strategy at a Bank of America Merrill Lynch metals, mining and steel conference in May. The company said it wants to “continue to be a consolidator in a highly fragmented market by making strategic acquisitions of well-managed metal service centers and processors with end-market exposure to our targeted industries.”

The company noted that the Metals USA acquisition has brought Reliance meaningful synergies of $15 million to $20 million per year, and Fort Lauderdale, Fla.-based Metals USA’s gross margin improved to 23.9 percent in the first quarter of this year from 22.3 percent in the same period in 2013. There also has been a significant reduction in inventory, allowing Metals USA to convert $84 million worth of inventory to cash, and Metals USA centers have improved their inventory turns to 4.5 times from 3.4 times. That’s important at a time when imports of finished product are once again bedeviling the steel industry. One Midwest steel industry executive said recently that “the greatest single threat to the steel and steel service center industry is global overcapacity of steelmaking. For the service center, every time there’s a boatload of steel arriving at the docks, it devalues inventory. They’re going to end up selling that steel in the warehouse for less than they paid for it.”

Roswell, Ga.-based Kloeckner Metals Corp. has embarked on an initiative to gain, retain and revive customers through training, tracking and monitoring of its sales and operations efforts. Kloeckner monitors everything from delivery performance, claims and back orders, to customer retention and new account penetration, all through system-generated reports that are reviewed and acted on weekly. The first group of metrics is delivered via e-mail as a spreadsheet attachment through Kloeckner’s measure of customer satisfaction (MCS) report. These can be shared internally or with a customer to show the complete picture of the relationship, from shipment to claims, over any specified accounting period. The report can be generated for shipments to a particular customer or simply run to measure the performance of a branch, a region or the company as a whole. The MCS report indicates that last year Kloeckner issued 4 percent fewer claims than in 2012 and delivered 4 percent more shipments on time.

Kloeckner Metals, which achieved ISO/TS 16949 automotive certification for two locations in the United States, complementing the company’s continued expansion and growth in the automotive market, is realizing dramatic improvements in shipping, reduced production lead times, improved safety, increased manpower utilization, increased machine uptime, less scrap, lower transportation costs and an overall ability to execute business plans. The overriding concepts are simply that a cleaner, organized and controlled process is highly efficient and more profitable.

Mill Steel Co., Grand Rapids, Mich., has developed several fulfillment strategies to improve customer satisfaction. For instance, a rapid response team is in place to address customers’ urgent requests for quotations, guaranteeing a response within five minutes. Customers have said that the rapid response team is a reliable resource for meeting urgent needs.

Mill Steel executives said that delivering a high-quality product is an integral part of providing excellent customer service. Its A2LA-certified labs test every coil at all company facilities. In recent years, a renewed focus was placed on improving product quality, allowing Mill Steel to generate and complete corrective and preventative action plans at 1.4 times the previous rate. Mill Steel saw a 53-percent reduction in customer claims by 2013, all while overcoming the operational challenges that came with production volumes increasing 58 percent compared with 2010.

Mill Steel also developed a system that embeds data from a state-of-the-art imaging system directly into the company’s business systems, allowing for surface maps of coils to be automatically and effortlessly reviewed against customer requirements during the application process.

Metal service centers are an important part of the national landscape and economy, accounting for more than 547,000 jobs in the United States, according to the Metals Service Center Institute (MSCI). Direct wages for the industry topped $45 billion in 2013, with jobs paying an average of $60,900 per year in wages and benefits. The industry also pays its fair share of taxes: $64.5 billion in business taxes to federal, state and local governments in 2013.

MSCI has more than 400 member companies operating from about 1,200 locations, which together constitute the largest single group of metal purchasers in North America, buying more than 75 million tons of steel, aluminum and other metals annually, with about 300,000 manufacturers and fabricators as customers.

But it’s not just the big boys who make all of that happen. Berlin Metals LLC is at the other end of the metal service center spectrum from Reliance. Founded in 1967 by the Berlin family, the company employs 22 people in the office and 43 people in the plant in Hammond, Ind., a stone’s throw from the Illinois state line at the south end of Wolf Lake. Berlin Metals prides itself on the longevity and productivity of its work force. “Probably a quarter of our employees have been with us for 20 years or longer,” said president and chief executive officer Roy Berlin. “I’ve been answering this phone for the last 25 years, and my father was answering it long before me.”

Berlin has built family owned Berlin Metals on attention to such detail as inventory turns. The service center typically works with 90 to 110 days’ of supply, which equates to a range of 3.25 to 4 times inventory turns. The company has been in that range consistently for the past decade and pursues a goal of making sure the company provides its customers with the inventory they need for their production requirements. At the same time, Berlin Metals works hard to maintain a fair return on the capital it employs.

Berlin Metals is focused on quality and customer service. The company uses an annual, formal customer satisfaction survey as the basis for setting improvement objectives. The 2013 survey showed that 98 percent of respondents would strongly recommend the company, with 95 percent saying it had earned their support.

“Customer service representatives are engaged in a continuous education process in quality procedures and systems, steel production, and steel market news and economics so they can be better resources for customers,” Roy Berlin said. “Berlin Metals provides customization of service options for each account to meet each customer’s unique needs. Areas considered include inventory levels, mill sourcing, information technology, packaging, invoicing and lead times.”

Although located in the heart of one of the nation’s primary steelmaking districts, Berlin Metals sells to customers all across the United States, Canada and Mexico, and some of the company’s biggest customers are in New York and California. The company, which ships about 1,000 line items each month, boasted 99.61-percent on-time delivery last year, with two months when it achieved 100 percent on-time delivery, as measured by its customers.

Rochester, N.Y.-based Klein Steel Service Inc. provides in-house account managers who oversee and manage all material spending and help strategic partners improve cash flow and working capital, increase efficiencies, decrease lead times, improve product designs and save money. The account managers are industry experts who understand materials, processing, procurement, design and manufacturing, and who use that information to guide customers on a daily basis and through ongoing continuous process improvement (CPI) initiatives. Over the past year, these initiatives have saved Klein Steel’s largest customer alone more than $400,000. Over the past year and more, Klein Steel has developed customized automated order processing systems for a number of key accounts. CPI also provides a number of dashboards to measure operational performance, includingÑbut not limited toÑon-time delivery, quality, safety and equipment utilization. These measures, along with team member feedback, enable the company to determine where to direct its CPI initiatives.

MidWest Materials Inc. celebrated its 60th anniversary in 2012 with the completion of a multimillion-dollar expansion at its warehousing and processing facility in Perry, Ohio. MidWest Materials executives said the company’s size allows them to be involved with every customer, learning about each customer’s business and specific needs, consulting with mills to determine the best materials to meet requirements and determining the best in-house processes. Investments have included upgrades to existing processing equipment; new green, energy-efficient lighting throughout the 240,000-square-foot facility and offices; new cranes to decrease loading and unloading time on production lines, rail cars and trucks; upgrades to the in-house testing lab; a new fleet of Peterbilt Motors Co. trucks and East Manufacturing Corp. trailers outfitted with upgraded Tarpstop LLC Fastrak II pullback tarp systems; a new website and upgrades to the company’s information technology system; and office renovations.

Parker Steel Co. attributes its success to its special niche in the steel supply industry: it stocks steel only in metric sizes. The Toledo, Ohio-based company, which said it is by far the largest distributor of metric-size metals in America, stocks a large variety of metal types, grades and sizes, with an inventory of more than 5,400 products in the United States. Parker’s products are tailored for customers that require pre-sized metric stock in order to eliminate further machining. With warehouses on both the West Coast (Fresno, Calif.) and in the Midwest (Toledo), Parker is able to quickly meet customer needs, and had a delivery performance rate of 99.8 percent overall in 2012 and 2013. Should the service center not have a particular size or grade of metal in stock, it makes efforts to find it immediately.

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