The entire supply chain has gone into survival mode. According to the March 2009 OESA Automotive Supplier Barometer from the Original Equipment Suppliers Association, 33 percent of automotive suppliers operating in the United States are significantly more pessimistic about the general outlook of their businesses over the next 12 months than they were at the beginning of the year. Factors contributing to this outlook include frozen credit markets, risk of customer bankruptcy and concern that the economic stimulus package won’t spur new vehicle sales.
Prime Advantage Corp., Chicago, a buying consortium for midsized OEMs, recently released the results of its Group CFO Survey, which represented U.S.-based manufacturers in more than 25 industries, including commercial food service, packaging, truck/trailer, material handling, food processing and construction. The survey pointed out that 93 percent of the respondents listed an "inability to measure customer demand among their three top internal concerns, with 76 percent of respondents citing this as their top concern. Credit markets and interest rates were the second-most frequently listed concern, and volatility of the dollar and a new administration and Congress tied for the third-most frequently listed concern."
Internal concerns reported in the survey were a direct reflection of the external concerns, with the ability to forecast results at the top of the list, with 45 percent of respondents.
"The uncertainty of current and near-term economic conditions has made it extremely difficult for manufacturers to plan for the future," Louise O’Sullivan, president, founder and CEO of Prime Advantage, said in her comments on the results. "Demand, revenue and margins are shrinking. In light of this, we are seeing manufacturers leverage strategic sourcing and procurement planning to better improve pricing flexibility."
And, according to "Turning the Corner: Global Metals Outlook," a report by Deloitte Touche Tohmatsu, New York, "radical cost structuring is vital to industry recovery, and leaner businesses will emerge."
Nicholas Sowar, steel industry leader with Deloitte’s Global Manufacturing Industry Group, said in the report, "It’s almost as if you can’t find customers anymore--they’ve become phantoms. It’s not surprising that so many companies are taking thousands of people out of their global workforce and being forced to restructure and divest some noncore assets."
Low demand, low inventories
In this customer-poor environment, nurturing stable relationships is paramount. Brian Carter, fabrication buyer at the John Deere Worldwide Product Development Center, Silvis, Ill., says the company’s current relationships with its service center suppliers are "very close. We deal with most of them every day."
He also says, "I’m happy with what they can do for us. They all go above and beyond with what we put in front of them."
Stefan Kohlgruber, purchasing manager at Fabco Automotive Corp., Livermore, Calif., a TS-16949-certified transportation industry supplier with a broad range of steer drive axles, transfer cases, split-shaft power takeoffs and other specialty products, says his company’s relationship with its service center suppliers is good--for the moment.
Executives at McNichols Co., Tampa, Fla., a service center specializing in hole products, such as perforated, grating, stair treads and flooring, point out, "Customers are cost-conscious, and they challenge us to find ways to save them money. We’re sensitive to this and proactively try to help them achieve savings. The decline in basic steel prices, for example, has benefited our customers. This means we’re providing more service and getting paid less for it."
They also note, "Certainly, the tight credit market has made an impact. We’re seeing more credit issues as our customers get squeezed by lenders and their own slow-paying customers. That affects cash flow, which is compounded by a greater level of bad debt. It’s a challenge to find ways to accommodate our customers with good credit records when the economy is causing lenders to tighten their policies, even when customers are credit-worthy."
Keeping communication lines open is key when material is tight, and inventories are likely to remain constrained until the market experiences an uptick in demand. This upswing could come as a result of the government stimulus package, but until some concrete evidence emerges, companies are stagnating in wait-and-see mode.
According to data from the Metals Service Center Institute compiled by KeyBanc Capital Markets, inventories experienced large swings since January 2001 because of a changing marketplace. Inventories were high in October, November and December 2004, matching levels in the beginning to middle of 2001, dropping to a low of 9,900 tons in October 2005. For February 2009, inventories were at 8,308 tons, the lowest level since January 2001.
Both Carter and Kohlgruber say the biggest challenge facing service centers today is material availability--having the right material on hand in the correct quantity. Kohlgruber says one way his suppliers can help serve Fabco Automotive better is to "have a wider variety of material on hand near our company."
"It seems that the suppliers don’t warehouse that much material because of the cost and the downturn in the economy," Carter says.
And the recent Metals Activity Report from the MSCI shows steep declines.
"For the second month in a row, steel shipments from metals service centers in the United States and Canada fell by more than 40 percent from year-ago levels during February. Continued economic uncertainty, coupled with dismal economic indicators, led customers to buy only as much metal as was absolutely needed, and service centers stayed in stock-reduction mode."
Aluminum shipments didn’t fare much better, according to the report. "Aluminum shipments from U.S. metals service centers declined more than 45 percent from those of the same month in 2008, while Canadian shipments of the light metal were down 26.8 percent."
These low shipments lead to low inventories. In the United States, the report noted that "at current shipping rates, month-end inventories of 8.3 million tons, down 16.3 percent from a year ago, equaled a 3.4-month supply."
Despite product tightness, Kohlgruber says Fabco Automotive isn’t having trouble receiving the material it needs. However, he says that "because they don’t have all our sizes on hand, we have to wait longer to get material shipped from the East Coast."
To stay nimble in a challenging environment, service centers must focus on elements that contribute to the customer experience. Alton Martin, CEO and co-founder of COPC Inc., Austin, Texas, an authority on customer contact center and vendor management operations, says that for service centers, "some of the biggest issues today are cost management and reduction while simultaneously preserving client relationships, identifying the key clients to make sure they don’t get left behind in cost cutting and retaining key personnel in an era of downsizing and staff reductions."
Martin notes that an important factor in service is ease. "Make it easy for the customer to work with you so they are likely to repeat business. Use technologies such as fast-path IVR [interactive voice response], screen pops and online knowledge bases that are up to date and easily accessible. Also, provide easy-to-use self-help options via the Web and ensure that the front-line staff are well trained and competent to handle customer needs."
These strategies are critical to survival, Martin notes. And like anything else in business, there’s a fine line between satisfying customers and alienating them, especially when it comes to retaining key staff. "Cut too deep and you irritate your key clients and they defect. [Customer service] is a true differentiator," he says.
The McNichols executives say they’re "focusing on getting closer to our customers, listening carefully to them, showing them we care and going the extra mile in being responsive. We try to be creative in offering cost-effective solutions. We look to improve customer experiences that cut costs. While that might sound impossible, we have found ways, such as introducing an e-mail service that provides customers with shipment status. They like it, and it cuts down on unnecessary phone calls.
"We challenge our folks to question every expense and activity that doesn’t add value to the customer so we can focus on those activities that do. McNichols Co. typically comes through these recessions with accelerated sales because we focus so intensely on customer service during these times. Our reputation for caring, responsiveness, fast shipping, quality and reliability gives us an added boost because customers remember how they were treated when they were struggling."
For now, service centers should stick to their customer service strategy and look for hope on the horizon. "I think there’s a basic disagreement or uncertainty over exactly what we’re in here, in terms of this crisis," said Richard McLaughlin, a steel specialist with Deloitte in the United States, in "Turning the Corner: Global Metals Outlook." "I’ve been doing an analysis for a client, and the business plan they are putting forward suggests that they think this is a very short-term and modest dip in overall activity. Then again, you may be looking at a permanent reduction in the production of metal-containing goods."
The report says, however, that the news might not be all bad for the global metals industry. "The current pullback in production has reduced inventory, indicating that there might be a strong comeback in terms of demand when the economy does pick up again. And industry consolidation may mean fewer players and decreased competition. The chance to buy bargain assets also presents an opportunity for those companies with strong balance sheets."
"For some companies, it is fairly clear to me that they are going to make some acquisitions," said Claude Martin, process sector leader for Deloitte’s Global Manufacturing Industry Group. "They need more critical mass. They have cash. So, clearly, they’ll be looking for bargains." MM