Metals suppliers are missing opportunities to improve profits due to obvious supply chain inefficiencies, agreed panelists at MSCI’s annual aluminum conference last month, calling for greater collaboration between producers and distributors.

Whether talking transportation, information technology or inventory levels, the six participants spoke of the need for a more streamlined, cooperative supply chain. The panelists, who were moderated by MSCI President and CEO Bob Weidner, included three service center executives: Dave Hannah of Reliance Steel & Aluminum Co., Bill Jones of O’Neal Steel and Mike Peterson of Peterson Aluminum; and three mill executives: Steve Demetriou of Aleris International, Jack Hockema of Kaiser Aluminum and Tim Stubbs of Indalex Aluminum Solutions Group.

“Within the supply chain, between the producer and the service center, there are horrible inefficiencies,” said Stubbs, the CEO of Indalex, Lincolnshire, Ill. “It’s a passion of mine to address them.”

Stubbs sees enormous potential to take cost out of the supply chain. “We need to start talking about tiered lead times, what sort of service level distributors need to meet their particular end customer’s needs. There’s a lot of waste in the system that, if improved, can result in significant cost savings.”

Hockema believes that wild swings in inventory are a revealing sign of a supply chain that doesn’t operate at peak proficiency.

“The greatest inefficiency for the mills is the stocking boom and destocking depression cycle [among distributors]. We just went through it this year with rod and bar. Service center shipments are down 3 percent. Mill shipments are down 14 percent. If you damage the cost-competitiveness of the mills, it damages the entire value stream,” said Hockema, the president and CEO of Kaiser Aluminum, Foothill Ranch, Calif.

All of the panelists agreed that downstream consolidation—mills acquiring service centers—is not the answer to a more efficient supply chain. In fact, the reverse is true.

“We feel adamantly that it doesn’t fit,” said Hockema, who also believes most aluminum producers will follow Kaiser’s lead and divest upstream operations, choosing to focus on core competencies. “Manufacturing semifabricated products is a very different thing than what the service centers do.”

Hannah, president and CEO of Los Angeles-based Reliance, said that the acquisition of a service center would make even less sense for an aluminum producer than a steel producer. Besides the inherent problems involved (the size disparity, the risk of upsetting other distributors), aluminum is not a large portion of most distributors’ business. “We’re 18 percent aluminum,” said Hannah, referring to his company’s product mix. “So 82 percent of what you [an acquiring mill] would get is stuff you’re not even involved in.”

One area ripe for improved efficiencies is transportation, the panelists concurred.

“It’s a huge line item for our company and an even bigger one going forward with the cost of fuel and where that’s heading. There’s a reason Warren Buffet is buying railroads,” said Peterson, the president of Peterson Aluminum, Elk Grove Village, Ill.

“It seems to be a weakness, not only for our company but for the industry as a whole,” said Demetriou, the president and CEO of Beachwood, Ohio-based Aleris. “We talk about it, but somehow we don’t seem to home in on the measurement like we do manufacturing productivity or fixed cost productivity or some of the other commercial strategies.”

What’s additionally troubling, he said, is that there seems to be no organized effort to discover why transportation remains such a black box. “When we’re doing business between ourselves and the service center, that’s a cost we both share, and somehow together we’re not attacking that in the best way. I don’t know what the solution is, but for the next couple of years it’s going to be a top priority of Aleris.”

Stubbs agrees that the supply chain partners have not addressed the transportation subject adequately, either in terms of suppliers delivering raw material to the mills, or the mills delivering product to the service centers and other customers. “I always shake my head. There are trucks passing each other all over the place. It’s madness.”

Jones, president and CEO of Birmingham, Ala.-based O’Neal Steel, said his company is working to address one part of the transportation issue with the installation of computers in each of O’Neal’s trucks. With GPS capabilities, the computers will be able to determine mileage usage and provide immediate information to make adjustments during the day. “We’ve gotten a fairly significant fuel cost savings out of that,” he said.

Jones also believes greater industry standardization would go a long way toward streamlining the supply chain. “Bar coding is the poster child for where our industry continues to miss the mark. Without standards that we can all use, we’re running in different directions and having to use different systems for different customers and different suppliers. It seems ludicrous we have not developed a standard system we can all use,” Jones said. 

“All of that complexity ultimately adds costs,” Stubbs added. “Everyone has a little twist, whether it’s bar coding or test certs. Everyone has their own way, and that adds IT complexity and people complexity.”

IT is also an area where some of the gaps can be closed. O’Neal is converting to a comprehensive ERP system that will “help us better manage inventories and better link us to both customers and suppliers than what we were able to do with our legacy system,” Jones said.

Peterson would like to find a similar system, though he thinks the options for companies like his are somewhat limited. “There are not a lot of options for middle market distributors. There’s not a lot of software devoted to our trade,” he said.

Hannah cautions against spending too much energy searching for the latest and greatest technology. “Our business is not rocket science. It’s blocking and tackling,” he said. “We want sound, high-level technology, but we don’t want to lose sight that this is a people business. We don’t want people glued to their screens.”

Hannah pointed out that there is an upside to supply chain inefficiency. “We are the buffer between those people who don’t know what they need until this afternoon and the people who make it,” said Hannah. “In some respects, we don’t want to get too darn efficient. There is work to be done and places to get better, but the service center industry exists because of that inefficiency.”

Navarro: The China War Is On

Peter Navarro confessed to his audience at MSCI’s Aluminum Products Division Conference that the title of his 2007 book, “The Coming China Wars,” is already out of date.

The China Wars are already afoot.

Navarro, a professor at the Paul Merage School of Business at the University of California, Irvine, and one of the most vocal critics of Chinese trade, admits that acknowledging the threat is the first step. Many business executives see a growing China as no threat at all, with its cheap labor and growing demand for goods. But Navarro cautions that American businesses that plan to be operational “for years, not days,” must develop a strategy to compete with this looming threat.

He outlined seven ways in which China has already or will impact U.S. companies: skyrocketing energy costs; a seven-fold increase in aluminum capacity; effect on customer demand in economic slowdowns; low wages depressing long-term wage growth and consumer buying power in the U.S.; currency manipulation making U.S. companies easy to acquire by foreign interests; and a high level of pollution that will partially be to blame for legislative action taken in North America.

The lure of Chinese goods is always the low price. Navarro says there are eight factors that drive China’s price advantage, with more than half of them falling under the category of unfair labor practices. The top one, however, is not among them.

“Give the dragon its due. China doesn’t have the cheapest labor in the world, but it has some of the most well-disciplined, so when you adjust for productivity, it turns out to be the cheapest,” said Navarro, noting that those cheaper labor costs represent 40 percent of the “China Price.”

But at least five other drivers of the China price advantage are items that could be considered unfair practices. Some, such as illegal subsidies and currency manipulation, are obvious and get the bulk of the attention in Washington, D.C. But Navarro notes three other factors that contribute to the “China Price.”

Counterfeiting and piracy of other company’s products and designs is one. “Think about if you’re a car company and you don’t have to spend money on research and development, you don’t have to spend money on marketing. How would you like it if you didn’t have to pay any of your IT or software costs?” he asked.

Similarly, China’s lax to non-existent standards on worker health and safety or environmental issues are other competitive advantages.

“It’s a real trade practice. If you didn’t have to put scrubbers on, or abide by environmental regulations, it would be cheaper to make your product,” Navarro said. “You might not sleep too well, but it would be cheaper. How do you compete with a country that does that?”

One other driver, the amount of foreign direct investment, is not directly related to unfair trade, but has its roots there, Navarro claims.

“You have to ask yourself, ‘Why are investors attracted to China?’” Navarro asks. “Free land, cheap currency, export rebates. Much of the FDI is attracted by unfair trading practices.”

Ultimately, the “dragon” that is Chinese trade practices poses some kind of threat to virtually every faction in American politics. And the only way to combat that threat is to put aside some ideological differences and work together, Navarro says.

There have been some alliances, as labor and management have put down their swords on occasion to tackle the Chinese economic advantages. But there are others that could join the fight.

U.S. environmentalists should be going after China. Not only is Chinese production the least regulated on an environmental level, but its rapid growth is using an abundance of energy along the way. Sixteen of the world’s 20 most polluted cities are in China, Navarro says.

Additionally, human rights activists have long targeted China for its abuses, and its working conditions remain unregulated and often dangerous, he says.

The latest special-interest group to take notice of China is consumer activists, who have rallied around the recent recalls of dangerous Chinese-made toys and other products. Navarro opened his presentation with a picture of a metallic children’s playground slide with a cheese grater at the bottom, a not-so-subtle comment on the safety of Chinese-manufactured products.

Working in concert, these groups could bring significant combined clout to bear, but their attitudes make that unlikely, Navarro says. “They all hate, distrust, despise and don’t talk to each other. I don’t see a political will here to deal with it.”

Moreover, he sees one sector losing its desire to fight. With each job off-shored to China, the corporate sector has less reason to confront the Chinese on its unfair practices.

“You need to build a broad-based coalition, with a broader message, rather than just looking at it through your own lens as an industry. You must fight these wars on a variety of fronts, whether it’s in Congress or the White House or the Treasury. It’s not one or the other, it’s all of them.”

Navarro will continue to sound the alarm, regardless of how many may choose to ignore him.

“I don’t know if I’m Chicken Little or Paul Revere, but my message is simply this: We have been preoccupied with Iraq, but we are on a collision course with China right now, economically and perhaps internationally,” Navarro said. “Much of their advantage is protectionist, and the punch line is we are paying for this with a loss of jobs, stagnant income, skyrocketing energy prices, unsafe products and a more polluted world.”