Steel Buyers Basics: Trouble

The bad news about steel supply disruptions is that they tend to feed on themselves.  Information about shortages is communicated to the market very quickly (thanks for that SMU) and both suppliers and users of steel can suddenly decide to submit orders to protect themselves from outages.  This increased order activity pushes out lead times creating further shortages that, in turn, cause buyers to place additional orders (sometimes duplicate orders) creating even more supply shortages, and so on.  Once started, supply constraint problems can get worse very fast.  Mills take a long time to ramp up production and foreign steel is several months away.

Also trouble of this sort can break a buyer’s career within his organization.  A buyer’s internal customers do not care who is at fault, they just want material.  When a supply disruption occurs and you do not have a workable backup plan, face the truth, don’t make excuses, and don’t just blame the supplier.  When supply constraints occur, a buyer has to convince his internal customers that their pain is his pain.  Communicate the details of what is going on and err on the side of over communication both with your suppliers and your customers.  People don’t like problems but they hate uncertainty.

I think there are four strategies to deal with steel supply shortages.  However, first a buyer must understand exactly what material is required to run the business.  Don’t just rely on your material planning system, go and find out for yourself. Hopefully, if you have good relationships with operations and sales, they will let you know what can be delayed in their schedule and what must be produced.  In my experience, material requirements change all the time so until the shortage passes be prepared to put in the extra effort every day to stay on top of your company’s needs.

Once a buyer knows what is needed then it is time to look for supply and the first place to look is in on-hand inventory.  Almost all organizations have excess supply, and now is the time to get rid of it.  G90 can be used instead of G60, Galvalume instead of Galvanized, wider width coils can be slit, white painted will work instead instead of bright white, 24 gauge instead of 26 gauge.  Also don’t overlook damaged material; suddenly operations may be able to find a way to use it.  Finally, there are some firms that specialize in cold rolling steel.  If you have hot rolled or cold rolled in a gauge too heavy to use then these firms can toll process the material and reduce it to a gauge (and/or by annealing modify it to a grade) that you can use.
 
Second, examine your current order book, and make sure it is optimized for the material that you require.  Even if steel is in process mills can be flexible about changing to some extent.  Slabs can be hot-rolled to a range of gauges, hot-rolled can be cold-rolled to a range gauges, until coated, the mill can change the level of coating weight or even the coating type.  Work with your supplier’s salesperson (and their customer service rep) and explore all the options possible.

Third, look for new suppliers.  Typically new steel mills are not a good option because they don’t keep inventory and will want to service their ongoing customers first.  Service centers and brokers are a better option.  Normally there is 2+ months of supply in service center inventory so perhaps they have what you need – or at least something that can be modified to what you need.  Brokers and service centers are always looking for new customers and also have relationships with other suppliers so they may be able to help a buyer find material.

Fourth, now is the time to think outside of the box.  Is there are new supplier who has been knocking on your door?  It’s time to see what they can do.  Is there a new type of material that might be used?  It’s the right time to get operations to try some.  Is there a change in specification under discussion (particularly if the change uses less steel)?  Now is the time to make it happen.  Material shortage problems can be a buyer’s opportunity to bring innovation to his organization.

Finally one last point, sooner or later suppliers catch up to demand.  Suddenly all those extra orders are cancelled and the market turns and drops.  (Anyone who lived through 2008 will remember the market swing that year.)  So don’t believe that shortages will last forever and keep an eye on mill lead times — be prepared for the market to go to oversupply just as quickly as it became constrained.