Over the past two decades, most metals “distributors” have become “service centers,” investing in new processing equipment, from saws to slitters to lasers. As the theory goes, the more value added to a piece of metal before it goes out the door, the higher the ticket and greater the potential margin. “Add value” has become the unquestioned mantra of the service center industry. Yet a case can be made that such a strategy is not without risks.

=  Risk 1—Earning a sufficient return on the cost of new equipment. With increased automation and computerized controls, processing systems are more efficient and precise than ever, but that productivity comes with a greater upfront cost, which takes longer to recoup.

=  Risk 2—Vulnerability to economic swings. Processing lines must run at fairly high levels to generate consistent profits. In the event of an economic slump, overcapacity on processing lines may grow as customers look to cut outsourcing costs and bring more work back in-house.

=  Risk 3—Finding, hiring and training qualified personnel. Executives report that one of their biggest challenges is recruiting individuals with the desire and aptitude to operate the newest processing technologies.

=  Risk 4—Competing with customers. Service centers that add processing capabilities may find themselves at odds with fabricator-customers who offer the same service, and suddenly decide to buy their steel elsewhere. Even the perception that a service center has become a competitive threat can result in lost business.

=  Risk 5—Straying dangerously from your core competency. Adding value blurs the line between distributing raw metal and producing parts, and raises the bar on quality performance. Historically, service centers were bundle breakers, buying in mill quantities and divvying products up for resale. The name of the game was largely inventory management and material handling. Today, service centers must be fluent in the language of their customers, including such complex dialects as “lean manufacturing” and “Six Sigma.”

=  Risk 6—Greater product liability. Without delving into the legalities, one might assume that if a service center takes a greater hand in the actual production of a part, it may also take on greater exposure to a lawsuit resulting from a part failure.

=  Risk 7—Misjudging profitability. Calculating the margin on metal bought and sold is relatively simple. Factoring value-added operations into the equation makes it significantly more complex. Many service centers fail to accurately assess the true cost of the time involved with processing. Thus, processing operations may actually hurt the bottom line.

Ultimately, the marketplace will decide where processing can be done most efficiently. In the meantime, what’s more risky—pursuing a value-added strategy or sticking with the business model of the past while those around you look to the future?