Changes to Steel Purchasing as Role of Service Centers Shifts

Today 35 percent of total steel consumption is sold through service centers and service centers have a bigger impact on the market than they did 20 years ago. The steel mills carefully manage their percentage of service center share as a portion of their order book.  The mills do a better job of maintaining their equipment than they did in the past and they do a better job of managing their capacity.

Purchasing managers are expected to be strategic (as opposed to speculative). Public companies have become a much bigger factor in the distribution network. Those service centers who are public companies are expected to grow market share and become larger either organically or through acquisition if they are to appease their stockholders. They also are expected to manage their working capital.

Ms. Parnel told those assembled that for a service center to find operating value they had to become a student of both the domestic and global markets. She told the group that the first thing she does every morning is to read every metals related publication possible. “You have to be global market savvy,” she said, “You cannot be successful if you believe only what you read.”

It is important to understand the role of the service center and develop strong strategic partnerships. Purchasing managers need to “grasp the impact of working capital as it relates to profit.” She went on to say that the market is completely different and the focus now is on inventory turns. “That is the only way you can make profit. You have to turn inventory in order to get your money out.”

She went on to point out purchasing needs to understand their customer base as well as their organizations value proposition. They then need to facilitate the total supply chain connection.

End users have become more efficient in understanding their needs and managing their inventories. The net result is there is not much value left for those who are looking to “fill the gap” between what the mill is unable to fulfill or from a lack of proper inventory management at a customer. Purchasing managers now have to think “long term”.

Many of the end users prefer to use their size and strength to control the supply chain. This takes the leverage from the service center to the end users which in some respects makes the distributors job easier (as long as they understand and manage the customer relationship properly).

She ended with a comment about the future of the metal distribution industry, “There will be significant rationalization of service centers in the next five years.”