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July 1, 2006

Supply Chain-Logjam

The hard part of the metals business used to be making and fabricating the stuff. Now, simply getting product to its destination has emerged as a major headache. The bad news—there's no relief in sight.

Marmon/Keystone Corp. has the steel, but shipping it is another matter. Truck drivers are in short supply—it takes twice as long (about six weeks) to hire a driver than it did a couple of years ago, says Norman E. Gottschalk Jr., president and general manager of the Butler, Pennsylvania service center company.

“Your costs go up every time you don’t have a driver because you are still making payments on the truck,” he says. “Or you have to find a common carrier to haul for you, and sometimes you have to plead with them to take the work.”

A shortage of drivers, high prices for diesel fuel and the aftermath of Hurricane Katrina have caused mills and service centers to pay premiums to line up the transportation needed to deliver metal on time, cutting into otherwise healthy profit margins. It’s not just trucks: Rail and barge, which are less-expensive options for moving big tonnages, have become less reliable and more expensive as well. The consolidated rail system is stretched, and barges are in short supply. After waiting around for a barge, for example, a mill may give up and ship metal by truck.

Mills and service centers try to pass along cost increases to customers, but there often is a lag. If logistics costs for a service center represent 10% of revenue, and these costs are running 20% higher than planned, that is equivalent to 2% of revenue that is not fully recoverable—a material percentage of profit, says Stephen Fraser, president and CEO of ADS Logistics LLC in Homewood, Illinois. “It’s a significant problem—well beyond annoyance for most companies,” he says.

As important, the shortage of reliable shipping options has reduced the ability of metals companies to provide fast-order turnarounds and meet just-in-time delivery schedules.

The reasons for this difficult and growing logjam are many and systemic. Truck drivers and railroad workers are reaching retirement age, and the fields haven’t been attracting new blood. Railroad mergers have led to well-chronicled freight delivery snafus, and rail car shortages will take years to overcome. The number of barges is in decline, and the cost of using them is rising as shipping companies bid up labor costs. Overlaying everything is the substantial increase in fuel costs—variable but destined to stay at historically high levels because of growing global petroleum demand.

“The ability to move freight used to be a lot easier,” says Rick Blasgen, president and CEO of the Council of Supply Chain Management Professionals in Oak Brook, Illinois. “The buyer was in control, but it’s not that way. The balance of power has shifted.”

With no end in sight, Blasgen and other logistics experts say mills and service centers must improve supply chain management and make sourcing and stocking decisions with transportation in mind. It may be something as simple as unloading faster to “keep the truck moving,” Blasgen says. Shippers must consider ways to stage inventory closer to the user, such as vendor-managed inventory programs, where suppliers assume responsibility for keeping adequate stocks on hand, says Jim Ruiz, vice president of business development at Pittsburgh Logistics Inc. in Rochester, Pennsylvania.

Tight capacity has been particularly painful in rail, where years of underinvestment have resulted in shortages of rail cars, says Nucor Corp. CEO Dan DiMicco. The lesson, he says, is to rebuild during the tough times. “You get steel cheaper. When you’re trying to play catch up, raw material prices are high. Everybody is busy. But busy doesn’t mean efficient.” A spokesman for Fort Worth, Texas-based BNSF Railway Co. says the railroad has been investing all along, having spent $22 billion since 1996.

TRUCKS STOP
The shortage of truck drivers is a growing concern for service centers, which use flatbeds almost exclusively. For the 10 years ended in 2003, the driver pool grew only 1%, but the demand for drivers grew by 3.5%, says Chris Lofgren, president of Green Bay, Wisconsin-based trucking company Schneider National Inc., which provides tractor-trailers.

Many truck drivers who have spent their careers on the roads are in their 50s, and younger men aren’t coming into the field in the same numbers. Wal-Mart Stores Inc. has been attracting drivers out of industrial hauling with salaries estimated at $65,000 a year, $10,000 to $15,000 more than the salaries typically paid by service centers. A Wal-Mart spokesman didn’t return phone calls.

And transporting metals on a flatbed truck is more physically demanding than driving a van, Gottschalk says. “At each stop, the driver often has to remove the tarp, then put it back again,” he says, a routine made more difficult in poor weather.

The long-haul, heavy-duty truck industry is short by 20,000 drivers, a deficit that could widen to 111,000 by 2014 if current trends continue, a 2005 study by the Alexandria, Virginia-based American Trucking Associations (ATA) shows.

Not only are drivers in short supply, but base rate costs are climbing as a result of increased costs and higher demand—up in the range of 4% to 8% last year, which was up the same amount in 2004, Ruiz says.

In addition, escalating fuel costs have led to fuel surcharges from the low 20% to the high 30% range, and vary quite a bit because rates are negotiated, Ruiz says.

With trucks in short supply, shippers are trying to match loads with carriers, says Brian Yamaguchi, manager of transportation and logistics for Lynwood, California-based Earle M. Jorgensen Co., recently acquired by Reliance Steel & Aluminum Co. In the past, Yamaguchi says, shippers auctioned their loads to get the cheapest prices. It was up to the carriers to line up backhauls to make the runs profitable.

The shortage of drivers now gives carriers the leverage to choose where they will travel, and third-party logistics specialists now try to match shippers and carriers, and eliminate inefficiencies. Still, it’s hard to overcome long-running relationships and loyalties.

Yamaguchi says EMJ tries to know its carriers better. “When you send a carrier back to its home area, it tends to get there with few problems. And since it’s where they want to be, they tend to not have as many problems getting back out of there. If we’re shipping to Eldridge, Iowa, the carrier who’s based out of Eldridge and has most of its drivers domiciled in that area actually wants that load and is not concerned about getting its next load.”

EMJ reaches out to other shippers to find collaborative opportunities, but that requires sharing information and involves some risk. “Good, affordable trucks are hard to find, so if you’ve worked hard on your carrier base, you’re not exactly going to be enthusiastic about sharing all the information on your carriers to another shipper who may be paying more than you,” Yamaguchi says. “It’s like introducing your girlfriend to the star quarterback. She may decide to trade up.”

RIDING THE RAILS
The picture is probably worse for rail, used mainly by mills for 30% to 80% of outbound shipments, and by service centers for inbound coil shipments.

Rail tonnage is growing along with the economic upturn of the past two years. The number of carloads originated by Class 1 railroads (the largest railroads) rose 7% in the past two years to 31.14 million, data from the Washington, D.C.-based Association of American Railroads (AAR) shows.

Though railroads are investing in infrastructure, they haven’t kept pace with demand, so congestion grows.

“The railroads have struggled to manage volume growth,” says Randy Cousins, an analyst in railroads and steel at BMO Nesbitt Burns in Toronto. For example, system-wide, on-time performance at BNSF, one of the continent’s largest carriers, fell to 77.9% in the first quarter from 80.3% last year and 88.7% in 2003, BNSF data shows.

Efficiency is more difficult in metals, which represent only 3.2% of tonnage shipped by Class 1 railroads in 2004, or 59.3 million tons, the most recent AAR data shows. Unlike coal and agricultural products, which take up an entire train, steel products move by carloads and go to multiple destinations. As a result, on-time performance for industrial products in the first quarter was only 67.2% at BNSF, compared to 80% for agricultural products and 93.7% for coal.

The shortage of rail cars is painful for mills. “A couple of years ago, you could make a phone call and get a car in a day or two. You didn’t have to plan,” says Greg Maindonald, vice president of operations services at steel producer IPSCO Inc. in Lisle, Illinois. “Those days are over.”

DiMicco says the situation is particularly acute in Blytheville, Arkansas, where the steelmaker operates two large mills served by BNSF. Cars are in such short supply that Nucor is required to bid on them, putting the steelmaker in competition with its local customers. The BNSF spokesman says the bidding program is a market-driven way for customers to let BNSF know the value they attach to capacity.

One solution is to lease rail cars, but the strategy is risky because of the commitment involved to keep the asset productive.

BARGING IN
The outlook for barges, which are used primarily by mills to move scrap and metals products up and down the Mississippi River and other waterways, is just as poor. Barge rates have risen by a range of 35% to 50% in the past year as a result of higher fuel costs, Fraser says. In addition, older vessels have been dismantled for scrap value, leading to a 20% reduction in the number of working vessels to about 10,000 covered barges today, says Tom Torretti, managing director of sales and marketing for Cooper Consolidated CTLC, a logistics, stevedore and barge company based in Mandeville, Louisiana.

A 2-cent increase in fuel prices translates to a 1% increase in base rates for barges, he says.
Hurricane Katrina intensified the problems, damaging channels and washing away parts of the inland waterway. Meanwhile, labor costs have soared because so many workers fled the Gulf Coast, Torretti says.

Hiring by the Federal Emergency Management Administration (FEMA) has driven up barge labor rates in the Gulf more than 50% to $28 an hour from $15 to $18 a year ago, contributing to the overall higher rates, says Jim Baber, vice president at TKX Logistics in Maumee, Ohio, a trucking and logistics firm.

With energy prices expected to stay high and shortages expected to last three to five years, metals companies will have to plan further ahead and adopt techniques of supply chain management, Fraser says. The logistical problems in transportation pose a challenge to service centers trying to reduce inventory rather than add to it. Better forecasting could help.

“Knowing the timing of orders and production is the solution,” he says. “You can keep inventory low, but still be prepared and schedule the most-effective transportation.”

Logistics experts expect to see an increase in vendor-managed inventory programs, where suppliers assume responsibility for keeping adequate stocks on hand. Also, the transportation function is getting more attention from the highest levels of companies.

“In the past, companies saw freight as a necessary evil,” Baber says. “They did not really pay much attention to it.”