The New Age of Adding Value
Service centers toe the blurry line between distribution and manufacturing.
By Tim Triplett, Editor-in-Chief
With literally more than 150 ways to process pipe and tube, the opportunity for service centers to differentiate themselves and improve their margins by adding value to their products is wide open. At the same time, the trend in value-added processing of tubular products is being fueled by industry consolidation and the changing economy.
Don McNeeley, president and CEO of Chicago Tube & Iron Company, Romeoville, Ill., notes that industry consolidation favors the larger players. As a market matures it is driven by price, and in a price-driven market the advantage goes to those with economies of scale. “If you are not part of that consolidation, you have to recognize that the consolidators are going to have a big advantage. So how can the rest of the market fight back? By offering more value-added services,” he says.
Adding value is nothing new for Chicago Tube, which has been involved with fabrication and engineering since 1914. “When I saw the consolidation beginning to occur, I decided that rather than chasing traditional bulk distribution, we would focus our investment dollars in vertically and horizontally expanding the light manufacturing and fabrication portions of our business,” McNeeley says.
In the past, Chicago Tube offered traditional services, such as threading, coupling and bending. Today, it also offers pressure vessels, welding, even welding of dissimilar materials, which requires special expertise. The company also has invested over $20 million in six-axis laser equipment for three-dimensional cutting of round and rectangular tubing. “We have made a pretty big commitment,” says McNeeley, whose company was acquired by Olympic Steel in 2011.
The number of companies investing in laser technology is growing, but at $1.5 million to $4.0 million a pop, not every service center operation can justify the expense. “It calls for a whole new level of scrutiny. If you have not been into sophisticated engineering or value-added in the past, there is an expensive learning curve,” he adds.
Few service centers take value-added to the same level as Chicago Tube. “We cut the tube, laser it, bend it, then weld it into a subassembly. We put all the pieces of the puzzle together, almost to the point you might call it light manufacturing,” McNeeley says.
Rather than making the investment in equipment to handle all the various processes in-house, many service centers partner with other job shops, often their own customers, to outsource work. Recent concessions by some unions have facilitated this trend, McNeeley notes. “The real victory by the large OEMs in collective bargaining agreements is not necessarily in wage reductions, but in the easing of certain work rules. They have been able to successfully negotiate the ability to sub out certain processes they could not outsource before.”
Some tube mills are looking to sell more value-added product directly to OEMs, which raises the age-old question: Where is the line between a distributor’s order and a manufacturer’s order? “There is always some concern that tube manufacturers will expand their value-added and compete with distribution,” McNeeley says.
Chicago Tube takes great pains to avoid even the appearance of a conflict of interest with its customers. “We are very sensitive to that,” McNeeley says. “We don’t put any piece of equipment in without talking to our customers first. We will never compete with our customers. That is not our goal.”
Marmon/Keystone’s “virtual manufacturing”
Marmon/Keystone Corp., Butler, Pa., has found a way to offer customers nearly every process imaginable without ever competing with a single one. The company outsources nearly all its value-added processing. “We use customers to service other customers,” explains Tom Brenneis, Marmon/Keystone director of value-added services.
Today, Marmon/Keystone offers over 150 services for pipe and tube in carbon, stainless and aluminum, as well as stainless and chrome bar. “Everything from A to Z—anodizing to zinc dichromate plating,” Brenneis says. The five most commonly outsourced services include machining, such as turning, milling, grooving, threading and channeling; honing; fabrication and assembly, including weldments; drilling; and laser cutting. “It endears us to the customers because we are not just a steel service center providing raw material, we are a component supplier.”
Outsourcing work to job shops and fabricators that buy pipe and tube from Marmon/Keystone allows them to fill unused capacity on their processing equipment, which makes the entire supply chain more efficient. And in the process, Marmon/Keystone sells more metal.
In some small way, these types of partnerships also help to combat offshoring and keep part-making in this country. “When we give work to a machine shop, chances are good they will call us when they need tubing. They feel loyalty to us,” Brenneis says.
This “virtual manufacturing” approach may involve several value-added suppliers. A single order might be sawed to length in-house, then go to a machine shop for honing and notching, then to another shop for coating, then back to Marmon/Keystone for kitting before being delivered as part of a just-in-time program.
Marmon/Keystone’s Value-Added Services division is a separate profit center from the company’s main distribution business. Value-Added team members are posted at the distributor’s branches all across the country. It’s their task to sell the concept to the nation’s largest OEMs, and to qualify and monitor the work of over 800 outside vendors that do processing for Marmon/Keystone customers. “We try to go after parts that have never been outsourced by major OEMs, so it is new business for our processing partners,” Brenneis says.
End-use industries served by Marmon/Keystone, by way of their processing partners, run the gamut from heavy equipment to medical devices. Brenneis acknowledges that it takes much effort and expertise to monitor the work of hundreds of contractors to make sure they deliver products that meet Marmon/Keystone standards. But the challenging economy has made OEMs more willing to relinquish control of low-level manufacturing steps in search of greater efficiencies and cost savings.
“The OEM does not see you as just another service center,” Brenneis says. “You actually become an extension of their manufacturing operation.”