June 2003

MCN Case Study: Contractors Steel
Growing in a Shrinking Market

While the weak steel market is forcing most to cut back, one Michigan service center is forging ahead with expansion.

BY TIM TRIPLETT,
EDITOR-IN-CHIEF

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At a time when many metals service centers are faltering, Contractors Steel Co. has remained profitable. Indeed, despite the weak economy, the Livonia, Mich., steel distributor is in the midst of an expansion and has aggressive plans to grow the company even further in the next few years through internal initiatives or acquisitions.

Donald R. Simon, president and chief executive officer of Contractors Steel, founded the company in August 1960 at the urging of his wife, Esther. “She told me that the $137 a week take-home pay I was making at a small steel service center in Detroit was not enough. So I quit my sales job, rented two small rooms in a Detroit building supply company, plus a small space in the rear of the building, and went into business for myself.”

Contractors Steel was started with 25 tons of various steel items purchased from another service center, which Simon stored on the ground under a tarp. He then purchased a 10-ton Bucyrus Erie 50-foot boom-tracked crane and an old beat-up truck from the county. “My wife answered the telephone. We had a driver for our one truck. I ran the crane, sold the steel and ran out to collect the money so that I could buy more stock. I also sold my Ford retractable hard top and bought a 1954 Chevrolet with power glide, which I used as a second truck,” he recalls.

Contractors Steel today is quite a different company. It operates four facilities—Livonia, Belleville, and Wyoming (near Grand Rapids) in Michigan and another in Twinsburg, Ohio. Together, they represent 836,000 square feet under crane, and allow the steel distributor to hold 75,000 tons of inventory. The company now has sales of about $103 million a year, compared with $300,000 in 1960.

Last June, Contractors Steel completed a $5 million addition at Belleville, its newest facility built in 1999, increasing its storage space by 85,000 square feet, to 260,000 square feet. In addition to boosting the capacity for plate and beam inventory, some of the space was used for additional processing equipment. This includes four new Zenar 25-ton, radio-controlled cranes, and the planned addition of another flame cutter and a high-production saw when the economy turns around and demand justifies the investment, Simon says.

The main reason for the expansion, however, was to make space for even more steel. “We carry more inventory than the average guy, but that way we can take care of all of our customers’ needs,” Simon explains. “We attempt to carry every size of the products we sell—small to large, common or oddball—so that we can take care of the total order.”

Simon admits that holding so much inventory ties up a lot of capital, but “in the long run, it’s the best thing for both us and our customers. We have just about everything in stock, so we rarely have to turn customers down.”

Taking on new debt by expanding in a down market can be risky, but the strategic benefits are worth it, he insists. “Most of our expansions have been during slower times, when other people are retrenching. Inevitably, we have been able to [increase market share] when business turns around. We are banking on a turnaround within six months.”

The capacity the company recently added will likely be absorbed within the next year or so, “and then we’ll be looking to expand again,” Simon says, either by adding onto existing facilities, building new ones, or acquiring other service centers.

Geographically, Contractors Steel plans to concentrate in the Midwest. “We want to remain a controllable distance from our existing plants.”

While Contractors Steel has changed substantially over the years, many elements of its business philosophy remain the same, including its emphasis on rapid delivery. JIT wasn’t a catch phrase in 1960, but just-in-time deliveries helped the company get off the ground. “The only thing that differentiated us from the other guys was our ability to deliver products fast, as well as having competitive prices and good quality. I think that has given us an edge,” Simon says.

Using its own fleet of 65 tractor-trailer and straight trucks, Contractors Steel delivers 18,000 to 20,000 tons of product each month. “We have found that owning our own fleet is more cost-effective than leasing. We control our own transportation needs with our own dispatchers, and every unit has its own cell phone,” he explains. “We occasionally use common carriers for orders out of our delivery zone, but generally we deliver all our orders within a four-state area.”

Contractors Steel’s customer base includes fabricators, sheet metal shops, machine shops, contractors, welding companies and others. It provides them with value-added processing services such as sawing, shearing, plasma and flame cutting, press braking, punching, drilling, rolling, grinding, mitre cutting and cambering.

The service center operates a total of eight 0.50-inch by 72-inch plate shears, 17 saws, five plasma cutters, seven flame cutters and a 60-inch Blanchard grinder, plus a wide array of material-handling equipment, including 50 cranes. “We have invested a lot of money in our company. We are constantly buying new equipment. We do whatever it takes to service our customers,” Simon says.
Contractors Steel is considering adding leveling equipment “to help us compete in an industrial base where five service centers have folded in the past two years,” he adds.

Like most other companies in the current economic slump, Contractors Steel has been forced to cut costs, including trimming its staff by 10 percent to 270 employees. Unlike many, it has remained profitable. “We have never had a losing year since we’ve been in business,” he maintains.

He attributes much of the company’s success to “a top-notch, aggressive, dedicated and smart management team who knows how to market steel at a profit.” Being relatively small and privately held also gives Contractors Steel a nimbleness others lack. “When we want to do something, bang, we can do it. We are real fast at making decisions. It might take longer for a larger, public company.”

Simon is cautiously optimistic about the second half of 2003, reporting recent signs of a pickup in business. Any improvement, he predicts, will be gradual. “The construction business is not good. In the Detroit metro area alone, there are hundreds of buildings for sale or lease, so I don’t expect any great construction boom for quite a while. Those buildings need to be filled before people build new buildings, and it will be years before they fill up.”

Meanwhile, Simon and Contractors Steel anxiously await the upturn. “We are well positioned to take advantage of the increase of business, which I think is not far off.”

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