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January 1, 2005

Sometimes You’re the Chain, Sometimes You’re the Link

Today's supply chain issues require a range of solutions to seal long-term customer relationships.

Troubled by market volatility, the buyer-distributor relationship is perhaps best described as tense. Metals buyers struggle with excess supply and inventory one quarter and tight demand and the accompanying price headaches the next. Service center customers pressured by global competition expect more from their suppliers than ever—cost flexibility, honest-and-open communications, enhanced supply chain operations and help with reducing the complexity of their logistics practices.

When times are tough, value engineering can distinguish service centers as a strong link in the supply chain, pushing tensions to the wayside. By providing help with issues beyond simple logistics and distribution, service centers can take some of the market pressures from the shoulders of their customers to nurture a long-term mutually beneficial relationship. While this help isn't always easy and often not cheap, the investment can solidify a supplier's reputation as a partner.

With demand fluctuations, Almetals Co., Wixom, Michigan, has had some difficulty responding to requests for larger supplies of metal at times. “Our customer relationships, especially in relation to increased demand, have been strained lately,” says James Chain, president of Almetals, a specialty metal distributor and processor primarily working with aluminum, stainless steel, clad metals and coated steel products to the automotive, appliance and electrical industries. “In response, we've tried to carry more inventory, make our customers aware of (how the increased demand for metal affects inventory levels) and educate them about mills and the necessary lead time.”

Chain says that Almetals' customers primarily are concerned with delivery and quality rather than cost alone. Overall, in stainless steel and aluminum, there has been an across-the-board 35% industry increase in pricing over the past year, however, Almetals has still found a way to differentiate itself: The company has achieved less than one-tenth of 1% rejection rate in the last two years and on-time delivery is consistently within the 97th to 98th percentile.

In addition, Almetals tries to relieve delivery and inventory concerns by providing solutions above and beyond what's required. For instance, when a global electronics customer wanted more equipment space, Almetals developed a new skidding process and racking system for stored metal, reducing inventory space to 1,800 square feet from 7,500 square feet. The new production machinery placed in the emptied space increased productivity nearly 30% at lower cost.

At customers' request, Almetals also added a slitting line for light metals, increasing its business in those products by 20%. “These types of solutions take time and capital, but we understand that's part of our job too,” Chain says. “We're not just selling metal, we're helping the customer in the long term, and that builds relationships and helps us too.”

SPEED THRESHOLD
Investment doesn't always equate to something tangible. GKN Aerospace manufactures structures for the F-18 fighter jet and giant C-17 military cargo plane. It can take multiple shifts to machine the bulkhead for the C-17, and the finished part is larger than an automobile, explains Bill Williams, senior director of supply chain at the St. Louis company. If, as sometimes happens, the part has to be scrapped, it's important to get replacement plate as quickly as possible from supplier AMI Metals of Brentwood, Tennessee, a division of Reliance Steel & Aluminum Co. of Los Angeles, California.

Just as in the auto industry, kanbans ensure that usage at GKN triggers replenishment from the supplying service centers. “We're really pleased with the result,” Rees says. “We work more closely together and without strains.”

Nevertheless, it's been quite a revolution. GKN no longer has purchase orders or even buyers for its service center-sourced metals. “Our people participate in the daily meetings and handle the order flow,” Rees says.

“We give them a desk and phone alongside our own folks, and they get on with it as part of the GKN buying community,” Williams adds.

Better still, AMI also undertakes additional value-added operations. Before aluminum plate can be prepped for 3-axis and 5-axis machines, for example, positioning holes must be drilled into it, and a surface cut undertaken—”material prep.” “The service center bought the machine tools and now carries out those operations for us,” Williams says.

Williams says that in just two years, the lead-time has come down 50%, while inventories have fallen 10%. The service center has benefited as well, he believes. “It's all about long-term relationships and partnerships,” he says. “They have learned from working with us how to go to other customers like us and get business by offering the same capabilities.”

Rees concurs. “The way we work with GKN, we're now working with Airbus at Filton in the United Kingdom and on a contract at GKN in Yeovil, U.K.”

“Getting vertically integrated with your customer and being a strategic partner definitely puts up barriers of entry to our competitors,” Rees says.

GREATER BUY IN
To ease its strained relationships, Macsteel Service Centers USA Inc., Newport Beach, California, worked to improve customer service with a $3.2 million IT upgrade meant to impact inventory levels dramatically, says director and Senior Executive Vice President Jeffrey Samson, who heads the company's technology function. The upgrade included replacement of almost 700 dumb terminals with an equivalent number of networked PCs ($1.3 million), server consolidation ($1.2 million) and application consolidation and migration performed by Transoft ($700,000), says Nak Sung, vice-president of information technology.

While this sounds like a hefty investment, consider the benefits. By the end of 2005, Macsteel expects the ROI to equate to $2.5 million annually. By the end of 2006, ROI will increase to $5 million annually, and after five years, ROI will reach $10 million annually. The savings come from dropping the number of weeks of inventory from today's 10 to 12 weeks to an anticipated six to eight weeks later. Savings of between $1.6 million and $2.0 million annually are expected in shipping costs.

A legacy of the company's acquisition-based history had left it with 12 different regional systems running on 12 different servers, coded in COBOL—a 1960s-era computer language—and based around a non-standard flat-file database structure. “We didn't have a single corporate view of the business,” Sung says. Worse, Macsteel service centers in adjacent cities lacked the ability to interrogate each other's inventory holdings. For example, up to 20 Macsteel branches served United Technologies, a major customer, and each branch managed a separate account.

The solution: retain the highly customized, service center-specific computer systems, which formed part of the company's competitive advantage, but underpin them with an up-to-the-minute relational database. With the new system, Macsteel service centers have a single view of United Technologies and other major accounts nationally.

“The screens that users see are exactly the same as before, but the database and the data network are state-of-the-art,” Samson says. “We acquired the source code in 1996 and began modifying it extensively from 1997, customizing it to our precise needs. We have changed our business processes around those modifications, and around improved processes that we identified. It's now a best fit for our business.”

Today, when service center managers need to see what stock is held in other service centers, the requisite inventory holdings are a click away. They doubtless hope not to need that information, but knowledge that it's there if required assures that customers won't belet down. The investment helps build relationships two ways, Samson says. It helps Macsteel to leapfrog the competition and add new high-value capabilities going forward.

NOT JUST ANOTHER SUPPLIER
Winning new business always is welcome news. But at Steel & Alloy Processing Ltd. of West Bromwich, U.K., new business at its customer ThyssenKrupp Body Stampings, Cannock, in Britain's industrial Midlands, posed problems in 2002. “That's the problem with business expansion,” says Stuart Fletcher, ThyssenKrupp's general manager of engineering. “It can outgrow your capabilities to respond. So service centers caught in this Catch-22 need to work smarter, not harder.”

Under normal operating conditions, three times a day, Thyssen, a supplier of automotive body panels to Ford, BMW, Renault and MG Rover, would buy steel strip and coil that it needed for the next few hours of production, bringing it to the press shop from Steel & Alloy's warehouse, which was crammed to capacity with 1,200 tons of steel (essentially representing 9 days of supply). The on-site warehouse, built in 2001, could not accommodate metal for Thyssen's extra business, and securing extra storage was an expensive solution.

Steel & Alloy's account manager David Heaven, a former buyer at Thyssen who had managed the Steel & Alloy vendor relationship believed that the Thyssen system for ordering steel could be improved by replacing inaccurate forecasts with actual demand. Fletcher authorized a joint team from each company to undertake a “value stream mapping” exercise, tracing the flows of information and steel from order inception to the press shop.

The results, says Fletcher, were sobering. “Levels of inventory accuracy were poor, the information flow very complex, and poor planning of the press shop was giving rise to erratic demand patterns,” he says. As a result, day-to-day activities were dominated by a heavy reliance on manual inventory checks and “work arounds” in the planning process.

PUSH VS. PULL
Between them, the two companies decided to go for a pull-based ordering system. Instead of basing inventory in Steel & Alloy's on-site warehouse on a combination of forecasts and press schedules, demand would be triggered by the 20 to 25 jobs actually running on the presses each day, which in turn would trigger the replenishment of the warehouse with fresh supplies of coil and strip.

The current method for pulling materials is based on more factual information, not less. The system takes into account the latest customer schedules, press work in process levels and the manufacturing leveled economical batch size (optimized press run condition). In addition, the system provides accurate by-the-hour data that controls the pull.

The idea wasn't new, of course. Pull-based kanban-style ordering was introduced to the British automotive industry by Honda in the mid-1980s and adopted shortly thereafter by Toyota for its massive Burnaston plant.

At Steel & Alloy, body panels for Toyota, for example, were produced in a dedicated cell, which triggered pull-based ordering at the warehouse. But pull-based scheduling has a fatal weakness: it works best in situations where presses and production equipment are grouped in cells dedicated to supplying one customer, thus providing very stable levels of demand. A move away from dedicated cells to gain improved levels of equipment utilization had forced Thyssen to rely on push-based schedules to avoid situations when pull-based orders for different customers combined to form accidental overloads and conflicts.

To avoid the same conflicts, says Fletcher, a joint team was established, containing logistics and procurement people from both Steel &Alloy and Thyssen. In addition, Britain's Society of Motor Manufacturers and Traders, an industry lobbying group, recommended a low-costinitiative whereby help could be obtained from Accelerate, a European Union-funded partnership of Chambers of Commerce and regional development agencies. In seven years, this partnership has helped more than 1,000 businesses improve their production efficiencies and acquire best-practice manufacturing techniques.

Together, the team came up with a system of electronic kanbans. “We still use schedules for planning purposes, and to provide indications of future demand to the steel mills, but the actual [work order] is pull-based,” Heaven says.

The results speak for themselves, Fletcher says. The warehouse now holds just 750 tonnes of metal. Other benefits include a headcount reduction at ThyssenKrupp in excess of £50,000 per year, a contribution through efficient planning allowing ThyssenKrupp to achieve press shop efficiency savings of £300,000 between October 2003 and May 2004, and a reduction of £51,680 of stock held within the supply chain. What's more, despite market stresses, Steel & Alloy kept its customer happy while increasing business.

“[This collaboration] ties us in to our customer even more closely,” Heaven says. “Thyssen is one of our biggest accounts, and this helps us win more business from them. It's all about understanding what the customer wants and giving it to them.”

 KANBAN DEFINED

KANBAN (kán ban) Japanese-derived word used to describe a common pull-based production control system. “Kan ban” literally means “card signal.”

Often seen as integral to just-in-time (JIT) production, kanban is a pull-based signaling system. Materials are released to production only as the customer demands them. Conversely, a push-based system delivers material to production after orders are processed and material becomes available. Kanban works best for operations that have a balanced workload with a limited number of products.

Although there was awareness of pull-based kanban-style ordering systems within the British automotive industry in the mid-1980s, Honda's tie-up with the MG Rover accelerated implementation of the process. The arrival of Toyota in the United Kingdom hastened the spread of the practice throughout the automotive supply chain during the 1990s, explains Chris Butlin, a specialist manufacturing advisor with the British Government's Department of Trade and Industry's Manufacturing Advisory Service.