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May 1, 2006

Believe It—The Computer Age Has Arrived

Service centers are reluctant spenders on information technology. But increasing IT investment could yield benefits without giving up the personal touch.

At aluminum distributor Basic Metals Inc. in Germantown, Wisconsin, the information technology department mostly oversees a software network more than a decade old. There’s a promotional Web site and a barcoding system that isn’t fully functioning. Alcoa Inc., a major supplier, is pushing the company to accept electronic information, but Basic has resisted.

“Quite honestly, this is a low-technology business. We’re pretty old-fashioned around here,” says Todd Fogel, the owner and president of Basic Metals, which has 30 employees between its main office in Germantown and a satellite warehouse in Phoenix. Fogel figures he invests perhaps one-tenth of 1% of hisrevenues in information technology (IT) and is unapologetic: “This is still a people business. Most of our customers still want to talk to a salesperson here, not a machine.”

By all indications, metals service centers stubbornly have resisted cutting-edge technology, barcoded inventory tracking and business-to-business commerce at online extranets that have become commonplace in the efficiency-driven U.S. economy.

A 2005 survey by MSCI found that more than half its members were investing less than one-half of 1% of revenues in IT. (See chart p. 66) The typical American corporation, meanwhile, invests 3.5% of sales on IT, reports technology researcher Gartner Inc. in Stamford, Connecticut. Banking and financial services companies routinely pour more than 5% of their revenues back into building and supporting their IT infrastructures.

Gartner recently surveyed 20 industries and found that the metals industry spent less than any other on IT. In fact, the research firm found that metals IT spending rose 0.8% in 2005 while operating expenses were up 2%. In 2006, the forecast is for flat IT spending, although operating expenses are expected to rise 5%.

Jed Rubin, an associate director at Gartner who heads the company’s Worldwide IT Benchmark Service, says that operating expenses continue to rise at metals companies in line with revenues. “That suggests that companies are spending on other things—transportation or energy or salaries,” he says.

Metals companies may need to reorient their priorities, Rubin says. “The industry appears to be underinvesting, and in the process, they’re missing opportunities to improve their margins and efficiencies over the long term and even streamline operations,” he says.

Norman Roller, an accountant and partner with Suby Von Haden & Associates in Brookfield, Wisconsin, who works with metals distributors around the Midwest, calls this lack of investment, “ubiquitous negligence.”

“Companies are quick to purchase a new piece of equipment for their shop without going through a return on investment analysis, but often hesitate in making any IT purchase,” says Roller. “Some companies see computer software as little more than an accounting program to manage their receivables and payables. They refuse to consider the possibilities of inventory management or production scheduling. If they need to know the status of an order, they still expect their key man in the shop to know the answer off the top of his head.”

Why the go-slow attitude? Many of today’s metals executives are in their 50s and are far more comfortable walking around a shop and talking with machinists than sitting in front of a computer terminal. But as this generation retires in the next decade, it will be replaced by a younger group that, in many cases, has relied on computers since grade school.

There also is the matter of thin profit margins. Metals are commodity products where pennies win and lose orders. “We recognize that this is an industry that operates on thin margins, but we also know that when a company is ready to launch a new software program, it often is willing to expand the IT budget from a half percent of sales to 2% and more for at least a period of time,” says Todd Ouellette, industry manager of the metals practice at Tampa, Florida-based Verticent, a software provider for manufacturers and distributors, and a division of ASA International with two dozen metals company clients. Ouellette estimates that the typical metals company holds its software for at least 10 years, 50% longer than most American companies.

LESS STANDING AROUND

Metals distributors mostly are so small that software giants such as SAP AG of Germany and PeopleSoft, a unit of California-based Oracle Corp., don’t bother to market to them. As a result, many metals companies turn to standardized off-the-shelf products that don’t work as well as they would with some customization. (See “Custom-Made,” Forward, July/Aug. 2005.) This further fuels the impression that IT is a bad investment unsuited to the needs of the metals industry.

Oullette has plenty of examples to recite. He sold software to a metals company that had 12,000 stock-keeping units (SKUs) in inventory. When it came time to change prices, the company’s existing program demanded a single person spend a full week manually revising the numbers on all 12,000 SKUs. The new software reduced that to two hours. If the market price for copper goes up 3%, an employee can order a 3% price increase on all inventories containing copper as an alloy. Or, the software can be programmed to order a 3-cent- per-pound increase instead of a percentage change.

 

The potential advantages of automated software on the production side can be impressive. A company that cuts steel plate for a dozen different customers might, in an extreme example, ask an employee to use magic markers on a large piece of paper to calculate the cutting formula. Today’s management and production software allows the company to “look up every piece of steel plate in your inventory, and then add in all sales orders with dimensions required. The computer will tell you which pieces in your inventory to use and in what order the cutting ought to occur to yield the least amount of scrap,” Oullette says. “Your efficiencies are maximized.”

Roller, the accountant, says that where clients are investing in IT, software increasingly is employed to route orders through a shop. An order entered into a computer system will trigger an automatic request for material and schedule employees to work to meet the shipment deadline. It also can calculate truck routes, and schedule pickups and deliveries.

“This is an example of how software can help a company lower its inventory levels by not bringing in any more material than it needs,” he says. “Less labor will be required to manage inventory and production because people will do less standing around wondering what is coming next. That may mean freeing up a person for an extra five or 10 hours a week to concentrate on other things. Ultimately, the business may have to hire fewer people in its warehouse. As it is, too many people spend too much time sweating over chores that a computer could do for them.”

NO MORE STALE INFORMATION

Many companies acknowledge as much. Stephen Powers, president and chief operating officer of American Douglas Metals Inc. in Orlando, invested $2,500 two years ago to revamp the company’s Web site and has reaped several hundred thousand dollars in new sales as a result.

“Those are sales we otherwise would have missed,” he says. “The Internet investment has been a good thing for us.” At the same time, though, the company has resisted barcoding products in the warehouse. “We do flat- rolled slitting and cutting to length here, and barcoding would be very difficult to adapt to those processes,” Powers says.

Other companies are making much larger investments. Howard Precision Metals Inc. in Milwaukee, an aluminum distributor with 62 employees and $30 million in sales, plans to spend nearly $400,000 to install new ERP software from Verticent. Lori Masset, the company’s manager of information systems, explains that the upgrade was ordered after employees complained that the old Unix-based software was cumbersome and riddled with stale information.

The main point of the upgrade, Masset says, is to see planned production and inventory levels and sell the metal on a timely basis. She forecasts that this will save at least eight hours a week on time otherwise spent on a computer. There also will be a payoff on material optimization—generating as little scrap as possible—in-process return to stock and production scheduling. Howard expects to see a 50% return on investment within 12 months. “Before, we could only change our prices once a month, and it was a painstaking process. Now, we’ll be able to change prices daily and become more profitable as a result,” Masset says. Howard won’t do away with its inside sales force working the phones, but by next October, the company expects to have an extranet ready to field electronic orders for customers who prefer it that way.

“Personal contact still carries value,” Masset says, “but simple things like acknowledging a purchase order should be done electronically, without tying up people’s valuable time.” In fact, electronic commerce is no substitute for a face-to- face relationship. At Earle M. Jorgensen Co. in Lynwood, California, which has 36 locations and 1,700 employees turning out a variety of bar, tube and plate, senior IT manager Tammy Ray accompanies salespeople on their interviews with customers. “When a sale is made, we encourage that customer to look for ways to automate the ordering process,” Ray says.

EMJ’s technology—it has an IT staff of 42—enables it to respond quickly to customer preferences, down to positioning numeric fields on a packaging label. “We’re finding that some customers are ready—they don’t want to call or fax us anymore. They’d rather have computers talking to each other.” (EMJ in January agreed to be acquired by Reliance Steel & Aluminum Co.)

Many more aren’t ready, however. Only about 4% of all orders at Jorgensen now arrive electronically, up from 3% two years ago. Ray acknowledges the limits in automating facets of her company’s business. Pricing is one example. Like others, Jorgensen posts prices on its Internet site for many commodities, but also invites follow-up calls.

“If somebody goes to our site and sees a metal at one price and a competitor happens to be at a lower price at that moment, we don’t want to lose that business,” Ray says. “We want the customer to call us and give us a chance to negotiate a lower price.” But for a Web site to be truly useful, those prices should be one and the same, she adds.

It’s difficult to automate such give-and-take. Robert Trotter, chief information officer for ThyssenKrupp Materials NA in Southfield, Michigan, sees a challenge in integrating technology in the metals industry.

“Technology becomes cheap when you can scale it up and spread the investment over a large infrastructure,” Trotter says. ThyssenKrupp has 70 U.S. locations, 2,000 employees and U.S. revenues of about $2 billion. “But in the metals industry, even a national player like us is operating in a lot of local markets. Those markets can require a higher degree of flexibility than allowed for in standardized software, and supporting that flexibility comes at a higher cost.”

Trotter warns that the Internet isn’t likely to permit many metals companies to reduce their staffing significantly right away. “There was a theory that by quoting prices online, companies could reduce their inside sales forces. But that hasn’t happened. The complexity of many metals orders can’t be communicated electronically.”

As a result, Trotter doesn’t expect an IT revolution in metals anytime soon. “This remains very much a people business. Raw materials buyers are still more comfortable doing business face to face or over the phone,” he says. “The industry is going to migrate to doing significantly more transactions online eventually. But it will take time. Information technology is going to be integrated in more metals companies, but it will happen in a steady, evolutionary way. It won’t happen overnight, which is why investment is likely to stay low.”