Modern Metals’ editorial advisory board discusses the importance of innovation in today’s up-and-down market

March 2014 - Since the recession, most companies are not content with the status quo. Instead, they’re striving to ensure their businesses will be competitive now and into the future by actively participating in the marketplace, addressing key concerns and paying attention to customer feedback.

In an environment where tools such as fax machines and carbon paper once ruled, advanced technology including cloud computing and wireless communication now dominates. Simply put, technology has changed the way the metals industry operates. “Technology has helped us all become more efficient,” says Dave Hannah, chairman and CEO, Reliance Steel & Aluminum Co., Los Angeles. “The access to information and communication is really incredible. I don’t think we could have guessed 30 years ago that we’d be where we are today.” 

For instance, technology has made it easier to interact with customers, collect opinions and use them when determining future strategies. “Gathering feedback and insights from consumers and customers can lead to better decisions that will reverberate through the life cycle of product and development,” noted global management and consulting firm Booz and Co., which conducts an annual study of R&D spending. 

In the company’s 2013 study, executives said their companies spend 8.1 percent of their R&D budget on digital tools, and they’re turning to customer immersion labs, discussion platforms, e-commerce tracking, rapid prototyping (including 3-D printing) and crowdsourcing to achieve a “better and deeper understanding of customers’ needs.”

Digital tools can provide companies with a new perspective. And they are most successful when coupled with tried-and-true strategies, such as project management tools, CAD software and collaborative environments—especially in light of larger projects and far-flung global teams.

It’s not just large entities who are implementing new ideas to help their companies run smoothly. Smaller and mid-size companies also are in a race to innovate—albeit in a different way. Lonnie Terry is president and CEO of the North American Steel Alliance, San Juan Capistrano, Calif., a purchasing cooperative of more than 121 independently operated steel service centers. He points out although smaller and mid-size companies face a lot of the same challenges, they “innovate differently from the larger companies because they must. Innovation in their organization is driven from the bottom up; they must be able to compete, deliver acceptable margins and earn fair return on their investment. Because they do not have comparable resources to the mega centers, they must invent a way to do more with less in order to achieve their operating objectives.”

Drivers of change

“Nothing focuses the mind like a crisis,” says Richard McLaughlin, partner, World Steel Dynamics Consulting. He notes the financial pressures of the past few years have caused the industry to accelerate its pace of change. 

“We were hoping at this time a year ago that the year would turn out better than 2012,” says Hannah. “It didn’t. Volumes were essentially flat and there was a lot of catch-up in the back half of the year. Pricing was the real headwind last year. It’s difficult when prices are going down pretty much all year long.”

“The challenges posed by the economic downturn, subsequent global oversupply and a changing economy have led to significant changes in the steel industry,” McLaughlin says. “We have witnessed a structural reduction of inventories in the steel value chain, and difficult decisions—some voluntary, some not—about how capacity reductions and facility reconfigurations get made.”

McLaughlin says World Steel Dynamics estimates the global overcapacity in steel exceeds 200 million metric tons. “This overcapacity could lead to a flood of exports, threatening margins for producers worldwide. Should such a surge take place, we would expect that trade protection measures will be initiated in countries suffering damage to the domestic industry. Unfortunately, these measures are usually taken after the damage is done,” he notes.

“Fragile or underperforming economies can pose a threat to operations in the United States through excessive imports but also directly impact other factors like raw material costs or scrap prices,” adds Bill Steers, general manager, communications and corporate responsibility, ArcelorMittal Americas. “As just one of many examples, recent reports of economic trouble in Turkey and the link to lower scrap exports have resulted in falling domestic scrap prices. And from a trade perspective, we must continue to ensure that global steel production is done on a level playing field and allow market forces to work through fair trade practices to ensure the long-term health of the industry.”

Looking forward, World Steel Dynamics thinks more balanced conditions will emerge in 2016 or 2017; however, “in the meantime, steel producers’ margins may remain under pressure, and in such a capital-intensive industry, maintaining (and growing) competitive and technologically advanced facilities will be a challenge,” McLaughlin says.

Another pressing concern is a rapidly aging workforce. “We need to continue to attract good young people,” Hannah says. “I think the industry is more visible now than it has been in the past, and we need to continue to work at that.”

Programs like ArcelorMittal’s Steelworker for the Future are designed to increase knowledge of the steel industry. “[We] partner with local community colleges to prepare individuals for high-tech, well-paying jobs in steel or manufacturing through classroom learning and hands-on training while earning wages to offset tuition,” Steers says. “We also partner with targeted four-year colleges and universities focused on engineering and technology to prepare metallurgical, mechanical and electrical engineers for positions within our industry. It’s important that as these new hires come on board, we provide them with the work environment, tools and support needed to sustain those workers for years to come.”

Encouraging workers to take ownership of their jobs and actively participate in companywide improvements builds a culture of success. “We want everybody in the company to be an innovator, not just the marketing people or the engineering people,” says Scott Kelley, president and CEO of Service Center Metals. “We want everybody to have that type of innovation mentality.”

Service Center Metals, based in Prince George, Va., has implemented incentive programs to encourage employees to “come up with process improvement, cost reduction ideas, ways to improve safety and ways to improve our products, tighten tolerances, increase our recovery, speed our die changes, and improve packaging,” Kelley says. “We expect everybody to come up with ideas to make us better. Innovative compensation plans really fire up innovative ideas throughout the entire culture of the organization.

“We also take pride in how fast we can make a decision and how fast we can implement it,” Kelley continues. “Even if we make mistakes, I would rather have that type of mentality because if people have ideas and they see that we can implement them and execute quickly, they come up with more ideas.”

A meaningful working relationship

Although Kelley notes 2014 is off to a decent start with “momentum headed in the right direction,” he says he’s keeping a close eye on economic numbers and hopes “they’re not going to filter down and create a long-term problem.” 

One key indicator that provided a minor blow to positive sentiment was the January PMI. According to the January Manufacturing ISM Report on Business, although economic activity in the manufacturing sector expanded in January, and the overall economy grew for the 56th consecutive month, the PMI decreased 5.3 percentage points from December’s seasonally adjusted reading of 56.5 percent. In addition, the New Orders Index decreased 13.2 percentage points to 51.2 percent from the December reading of 64.4 percent and the Production Index decreased 6.9 percentage points to 54.8 percent.

The dip was attributed to adverse weather conditions, which snarled travel and created logistical issues for both businesses and their employees. However, even though the recovery has been inconsistent and slow, many sectors are forecast to perform well this year, McLaughlin says, “especially automotive and energy.” 

The long-awaited improvement in residential and nonresidential construction also will bolster steel demand, he says. “Furthermore, there are important structural changes taking place that bode well for the future. In the energy industry [the U.S.] is reducing its levels of oil and gas imports dramatically and can see achieving energy independence in the not-too-distant future. Automotive production in North America is increasingly structured to not only supply domestic demand but for export, as well. Finally, the U.S. is emerging as an increasingly attractive location in which to locate manufacturing facilities. .... [The U.S.] could be on the cusp of a resurgence of manufacturing, as our market size, stable political and economic systems, and low-cost energy conspire to reverse the long-term decline in the manufacturing sector.”

Despite a positive long-term outlook, the slow nature of the current recovery has “left two lasting imprints on the steel industry: financial and credit constraints that have permanently removed a layer of inventory and a slower level of economic growth that appears to have become the new normal,” McLaughlin says.

After the economic downturn in 2008, it’s been impossible to maintain historic levels of inventory because of tightening credit requirements and internal financial constraints, McLaughlin says. “Clearly, the metals industry has experienced a structural change; supply chains have been shortened, unnecessary activities have been eliminated, and every dollar is being squeezed to obtain the maximum value.

“The slow pace of economic activity has compounded that stress,” he continues. “Rapid market growth has a way of compensating for inefficiencies; rising prices and volumes reduce the penalties for slow moving inventories and poor business decisions. In static and uncertain markets, competition threatens margins every day and survival depends upon informed decisions about customers and products, and aggressive management of costs and prices.”

Belt tightening requires all participants in the supply chain to communicate and collaborate. “Everyone requires shorter lead times and operates with leaner inventories, so that burden is pushed throughout the supply chain,” Steers says. “We all need to work together to be more efficient and responsive without sacrificing quality and delivery performance.”

“People don’t want to carry a pound more inventory than they need,” adds Kelley. “That requires short lead times. It requires you to tighten up your process. ... Everybody wants to get as many turns as they can to improve their financial performance. With the volatility in metal, nobody wants to get stuck with a bunch of inventory if metal prices fall.”

“Customer/supplier relationships have and will continue to change, market to market,” says Terry. “For one thing, mill suppliers have had to reinvent themselves using technology, consolidation, etc., to compete in a worldwide market. Due to these changes, they no longer have the resources to physically call on the smaller distributors, which creates an information gap in the market. What we have is a season of choosing up sides, therefore both sides must find the right fit and commit to a plan of action. Buyers and sellers cannot be all things to all people. As a result, relationships have changed but become much more meaningful.”

That collaboration goes beyond inventory management and includes shortening lead times for new product development, as well. “For example, automakers want stronger material, but they also want the material to be lighter, safer and still affordable,” Steers says. “ArcelorMittal has responded by working with the customers to create the S-in motion catalog, the ultralightweight door, the door ring, among other steel solutions. We are continuously educating our customers and consumers that steel is the perfect balance of affordability, fuel efficiency, manufacturability and sustainability without compromising safety.”

“At the same time, we are working closely with customers to impress upon their engineers the benefits and value of steel in structures such as bridges,” he continues. “The United States is in a position where significant upgrades to our infrastructure are needed today and over the next 25 years. We have steel products available that offer a very economical, safe and sustainable solution over competing materials like concrete.” 

Although conditions are improving and companies are continuing to employ new, innovative strategies, while strengthening relationships, the next few years will require flexibility and patience. “Someone once told me that running a business today is like ‘shooting a flying duck from a speeding boat,” Terry says. He notes the constant pressure of dealing with constantly changing, restrictive government regulations, uncertain markets and coordinating efforts to attract skilled employees, will continue to weigh on metals companies.

“It’s such a competitive market—not only domestically, but also globally—that you have to continue to improve from a quality standpoint,” Kelley adds. “The expectations from customers never stop increasing and we like to be the ones that try to set the bar in that regard. We’re the underdog, and we have to try harder and be smart and flexible—and our employees know that. In order to be competitive, we have to keep getting better every day.” MM