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A recently installed Kinetic plasma cutting machine adds to the processing capabilities at O’Brien Steel Service’s facility in Wausau, Wis. (Photo Courtesy O’Brien Steel Service)

Up and Down

Service centers and manufacturers see opportunity in vertically integrated supply chain

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From mill to end-use manufacturer, the metals supply chain has become more fluid in recent years. The lines between distributor and manufacturer, in particular, are becoming increasingly blurred, with vertical integration pushing more companies both upstream and downstream from where they may have initially started.

The recent trend among service centers to add more downstream services, even going as far as to manufacture specific parts and equipment for their customers, is a popular topic of conversation among company executives and trade show attendees. “Value added” is the guiding principle among service centers, and at least anecdotally, it would seem these companies are becoming increasingly more active in the world of metal fabrication.

“More and more [service centers] are offering value-added services to the metal they provide,” says Rakesh Kumar, vice president of sales, service and marketing at metal fabrication equipment manufacturer Cincinnati Incorporated, Harrison, Ohio. “We have been noticing that trend for the past three to five years.”

Don Patterson, partner at Olathe, Kan.-based machine tool distributor Black Rock Machinery, says the trend isn’t slowing down or reversing; in fact, it’s accelerating. And customers are the reason why.

“In the steel service center business, customers want less and less raw material and more and more parts with the first operation completed,” Patterson says. “I’d say that there’s more and more of that being asked of the steel service center.”

But another popular, although less talked about, trend is the move some manufacturers are making upstream. Whether it’s simply purchasing a cut-to-length line and bringing first-stage processing in house or wholly transforming a business model and expanding into the world of metal distribution altogether, manufacturers are seeing new opportunities as well.

“A number of companies have gone the other way,” says Steve Baker, industry sales leader for the Bradbury Group, Moundridge, Kan. “They might start out with some sort of roll-forming operation or tube-making operation, and when the volume gets big enough, they might move back up the stream to do their own slitting, let’s say. That’s happened a lot of times.”

With so much movement within the metal supply chain, service centers and fabricators alike are wondering what are the costs and benefits of expanding their operations, when is the right time to make the move, and what, if any, obstacles stand in their way.

Looking at each trend individually, it’s clear that any move up or downstream depends on your customers.

Moving Upstream

Priefert Manufacturing, Mount Pleasant, Texas, was founded in 1964 as a maker of farm, ranch and rodeo equipment. But it wasn’t until the early 2000s that the East Texas manufacturer purchased its first slitter, bringing steel processing in house and setting out down a path that would lead to metal distribution.

With the acquisition of additional equipment, Priefert started processing its coils and making its parts. Chris Shipp, vice president of sales at Priefert, says the company’s volumes were high enough back then to justify the initial purchase of these machines, which Priefert used solely for in-house processing at first. “We got started for our own needs, and then it just kind of started to flourish,” he says.

Eventually, Priefert started receiving inquiries from neighboring manufacturers to purchase some of their excess steel. “We saw a business growth aspect that we could do more of that for others,” says Shipp. “We never really got serious about the steel service center business until about five years ago.”

Priefert Steel, an operating segment of the parent company, has grown tremendously in that time, currently representing 60 percent of Priefert Manufacturing’s total business. The company has four locations on the steel service center side, which together move approximately 8,000 tons of steel a month. 

Because of Priefert’s unique history, Shipp says the company offers its customers, primarily end-use manufacturers, a technical know-how not common among typical metal distributors. “We work closely with end-use manufacturers because that’s what we know,” he says. “I have a knowledge base that’s a lot different from a normal service center, and that’s what you get from someone who’s a manufacturer. We utilize that strength to fit our niche in the industry.”

Like Priefert, Carter Lake, Iowa-based service center Owen Industries didn’t start out in metal distribution. The company was founded in 1885 as a foundry and iron fabricator. In the 1960s, Owen Industries bought its first coil line and moved into the service center business. “Now, that service center business by revenue is probably our biggest divisional sales source,” says Tyler Owen, president of Owen Industries.

Here, too, it was the customer that prompted the transition, and it’s been the customer that has shaped Owen Industries’ evolution as a distributor, fabricator and manufacturer of steel products. “It’s all been customer driven,” says Keith Siebels, general manager of PVS Metals and vice president of sales for Owen Industries. “We started off basically with a cut-to-length line, a shear, and we’ve grown into laser cutting and punching. Beyond that, our customers have pushed us into press brakes, some machining, and all the way over to powder coating.”

But when it comes to coil and plate processing, manufacturers and fabricators should consider whether they have the volumes to support adding the necessary equipment for first-stage processing, as well as the high cost of these machines. Patterson says some downstream processors and manufacturers have moved upstream, but he adds that the obstacles associated with doing so are too great to make it a widespread trend.

“I would say that there’s a growing interest among the OEMs and the job shops to just buy the coils from the mill and bring them into their place and decoil them and level them themselves,” he says. “People are interested in doing that, and it makes sense, but then they see the price tag of doing it. Everybody wants to eliminate the middleman and try to go direct from the mill. At least for decoiled products, it just doesn’t happen. It’s not prevalent.”

Baker agrees. “It’s really all volume based,” he says. “If you can’t justify it on the cost saving side, then most people aren’t going to do it because it’s a fairly big investment.”

For manufacturers making the move upstream, the initial purchase cost of a coil line or plate processing equipment can be prohibitive. This means that most fabricators and job shops simply don’t have the volumes to warrant the investment. But for larger companies that can justify the purchase, the combination of existing downstream metal fabricating equipment and technical know-how can create niche opportunities in the metal distribution sector.

Moving Downstream

Whether through acquiring smaller fabricators or purchasing metal processing equipment outright, it’s no secret that plenty of service centers are moving downstream. But how do you know if your company is in a position to add a laser, press brake or other machining equipment, and what opportunities and obstacles exist for those companies making the move?

The first thing service centers should know is that the initial cost of adding a piece of equipment can be significant – anywhere from a few hundred thousand dollars to a couple million, depending on the type of machine.

“It’s very capital intensive,” says Mark Radtke, general manager of NPS Metals and NPF Finishing, two subsidiaries of Owen Industries. “It requires a lot of money to buy the pieces of equipment to process steel. Not everybody and anybody can get into this market.”

If your company is in a position to make an equipment purchase, you’ll also need to make sure you have the right people in place to run the machines you buy and also to sell the products they produce. The other major obstacle to moving downstream is lack of personnel. 

Mike O’Brien, co-owner and vice president of Peoria, Ill.-based O’Brien Steel Service, says the process of selling fabricated steel differs significantly from simply packaging shipments of raw metal. “It takes a lot more people and it takes a lot more know-how than just shipping out bundles of steel,” he explains. “It takes more training, and personnel is a big problem right now. That’s one of the biggest obstacles, having the knowledge and training to do so.”

Radtke says Owen Industries’ employees are the company’s greatest asset, but agrees that it can be a struggle finding the right people. “There’s a shortage of personnel at the build level and with customers too,” he says. “We’re actually seeing more opportunity for big packages from our bigger customers because they’re having the same dilemma we’re having with getting qualified people on the shop floor.”

If you can clear these hurdles, there are plenty of opportunities for the downstream service center, including access to niche markets, the potential for larger parts orders and increased revenues. 

“We think value added has saved our company,” says O’Brien. “Just selling two-by-two-by-quarter-angle against 10 other competitors, it’s tough to differentiate yourself. When you can do all of these processes in house, it does. 

We have the processing that allows the large equipment manufacturers to come to us and, under one company, get multiple processes done. Where other people would have to outsource two and three steps of a particular part number, we can do that all in house.”

By bringing these operations under one roof, O’Brien says the successful service center can save their customer time and money, both of which can add up quickly if a part requires multiple processes at several different locations.

But even with these potential benefits, service centers can’t lose sight of the customer.

Any move downstream runs the risk of bringing the service center into direct competition with their main customer base: fabricators and OEMs. “The steel service centers are walking this fine line between adding more value to the part before it goes out the door and not stepping on the toes of another customer who might do these same processes,” Patterson says.

Shipp agrees, saying that regardless of the direction, the potential for conflict exists. “There comes a point when you have to be careful how downstream or upstream you get because you’ll be competing against your customer,” he says.