In 2003, Metal Center News
released its first Top 50 survey of the service center industry’s largest companies. As we do now, we asked respondents to list the services they offer their customers.
That year, only nine of the Top 50 companies offered services that would be considered, at least today, as nontraditional service center processes – fabricating, manufacturing, welding and so on. There were a handful of large players dabbling in it, but it remained mostly off limits.
Fast forward 15 years, and the story has changed dramatically. In the most recent Top 50 survey, released in September of 2018, nearly half the respondents acknowledged offering downstream processing as part of their suite of services. A full 44 percent are now offering bending or welding in addition to slitting, leveling and cut-to-length.
Moreover, few in the industry expects this migration downstream to stop anytime soon.
One of the companies included in last year’s list of the largest companies is O’Brien Steel Service Co., a Peoria, Ill.-based operation that had $124 million in revenue in 2017. O’Brien Steel was a very early adopter of the downstream model.
O’Brien Steel Service made its first foray downstream in the mid-1980s, following an orderly progression. “It went from a burning machine to a plasma machine and oxyfuel to machining to forming and shot blasting. Customers wanted a plate burned to size, then they wanted the holes drilled to size, and some even wanted weldments,” says Mike O’Brien, vice president of O’Brien Steel Service.
“Trying to sell a 2 by 2 by quarter angle against five other guys gets pretty tough. Our success has been finding ways to cater to the needs of our customers, especially in the manufacturing industry,” he adds.
Finding a niche is the common refrain from service centers that expand their offerings. In some cases, it’s driven by geographies and the macroeconomy.
“We’re in Los Angeles. There isn’t a whole lot of manufacturing going on here,” says Ron Kong, owner of M&K Metal, Gardena, Calif. “The larger manufacturers are leaving California because of the regulatory costs and the cost of taxes. The larger manufacturers that would have had that equipment have gone and left a vacuum.”
M&K has found its place in the void they left behind. Their press brake is often employed by the smaller, design people who aren’t looking for larger orders, but custom work the remaining manufacturers would prefer to avoid.
“That’s the industry we serve. Our clients are typically smaller welders that have a one-time job or go from job to job and they need the capabilities of doing A or B or C. They utilize us on a sporadic, job-by-job level.”
Across the Southern California market, another service center company is filling a different gap with the same basic principle. California Steel Services installed large press brakes to handle the material its customers couldn’t. “We can help them fulfill their business so they don’t have to put a lot of money out of their pocket into equipment,” says Parviz Razavian president of California Steel Services Inc. “We’ll be able to give them our services.”
A few hundred miles east, the story is similar. AZ Metals, Mesa, Ariz., is taking the same approach to its metal fabrication work as it does to distribution.
The company was founded as a supplier of small-quantity metal, which is more common in the Southwest, a region not flush with heavy industry. As larger service centers would prefer to avoid the smaller orders from maintenance people or retail customers, AZ was founded to fit that bill.
Since then, the company has continued to move downstream, following that general philosophy. In addition to traditional service center functions such as sawing or shearing, AZ Metals has grown to include finger and magnetic brakes, hole punching and drilling. Most recently, the company added an entire fab section with MIG, TIG and Arc welding, plus tube rolling and notching. “We’re almost full circle where a person can come up with an idea, put it down on a piece of paper and we can take the raw material and make what they need,” says Doug Cone, president and co-owner of AZ Metals.
But the foundation for the fab operation mirrors its distribution philosophy. Rather than go after the larger production customers, the company is typically doing one-off or specialty work for hobbyists or maintenance people who simply need something fixed.
“Just being a fab guy doesn’t mean you’ll fab anything off the street. Most of the fab guys are looking for 100 pieces of something. They’re looking for more volume,” says Cone. “Very few of them are designing small fabricating work or one-offs. It’s more of a nuisance for them.”
Just as service centers find their way downstream, the reverse also happens and fabricators move into metal distribution. That’s what happened with SMF Inc.
In 2013, the fabrication company acquired its third facility, a small operation in Anderson, S.C. The purchased company operated a small service center, which SMF initially intended to close down. However, the company was making decent sales, but its margins were terrible given its lack of buying power. SMF, which serves as a Caterpillar supplier, had that kind of clout.
So, SMF kept the service center side of the business, which has proved to be a nice complement to the company’s fab shop. “It’s a very secondary market for us. It’s not our focus by any means. But it’s been a nice thing for our plant in South Carolina,” says Nick Estes, sales manager.
As with the service centers turned fabricators, the company has found its niche handling smaller metal sales orders. “The accounts such as ourselves that were buying tons of steel, we never wanted that business, because then we’d be competing with the people we buy steel from,” Estes says.
The company has weighed the possibly of expanding its model to its existing Illinois and Oklahoma operations. But the sales force there is driven toward fabrication.
The blurring of the service center/fabricator line has not gone unnoticed to equipment makers. Companies such as Hypertherm and Bystronic have upped their marketing efforts to the service center community in recent years.
“We certainly see that as an emerging segment of the marketplace. We think our equipment lends well to what they’re trying to do, and we’re trying to market towards it,” says Brody Fanning, vice president of sales for Bystronic, Elgin, Ill.
It wasn’t always that way. “Ten years ago, we wouldn’t have dreamed of marketing directly to the service center industry. Today we do. We attend their conferences, we advertise in their journals. Those are steps we wouldn’t have taken 10 years ago,” he says.
And it’s not likely to stop, says Derek Weston, product marketing manager for Hanover, N.H.-based Hypertherm. “As we continue to develop and deliver solutions focused on operating cost reduction, productivity improvements and cut-quality enhancements, we fully anticipate even stronger partnerships within this sector.”
Weston says the distribution community has shown interest in the company’s CAM nesting and software programming, among others. For Bystronic, interest has picked up with the company’s launch of a 10-kilowatt laser.
“As a general trend, since service centers started to get into metal fabrication, they tend to focus on larger machines, whether it’s a larger press brake or higher-wattage lasers,” Fanning says. The access to full-sized sheets and the ability to perform these services and not be in direct competition with their customers drive the service center customers to the larger machines.
Avoiding head-on competition with the customer base is, of course, the primary worry for the service center interested in going downstream. “In the first half of my career, we never thought we’d have a press brake. We thought it was crossing the line with our customer base. We never thought we’d have machining centers, because it was crossing the line,” O’Brien says.
But often, those customers aren’t just OK with their metal provider expanding its offerings, they encourage it. “Usually, it’s a customer that has a package or program they wanted us to do. It’s not too often we bought a piece of equipment and said, ‘Let’s go find business for it,’” he adds.
For many service centers turned fabricators, the trend they’ve seen is for their customers to simply want to focus on doing one thing, and letting their supplier handle more of the load. “A lot of times people don’t want to have huge machines. They want a smaller footprint. If you have the client base and are smart about it, you get people like us to do your prefab work and go ahead and do the people welding or installing,” says Kong.
California Steel Services’ Razavian says communicating is key, as the company routinely seeks out the input from its customers on what it can do for them.
The same is true at AZ Metals. Cone says before his company moved into fab work, it surveyed its existing Arizona customers. “I put the feelers out to some of the fab guys, asking what their thoughts were about AZ Metals getting into some of this fab work. Almost everybody was for it. Only one customer expressed some concern whether AZ Metals would end up competing with them, and it was a low-level concern.
“I didn’t lose a single customer out of the deal, and we’ve gained many, many over the last three months,” he says. The company expanded its facility in late 2018.
That growth trend is also under way at California Steel Services. The company will move into a new 87,000-square-foot facility in December near its current location in San Bernardino.
With this growth in size, both companies will continue to look at opportunities to expand its services.
Of course, there are challenges that come with the move downstream. Accurately quoting fab or machining jobs can be a little more challenging than distribution sales. Companies describe a bit of a learning curve, one that is anything but uniform.
“It used to be very cumbersome to quote this stuff, it takes a lot of time and resources to do it,” says O’Brien. “We’ve evolved, and put in some departments to do the quoting and read prints.”
And even though AZ Metals hired some experienced fabricators, those individuals were coming from environments where they were making parts, rather than the one-off type work AZ specializes in. And that difference is sometimes lost on existing and would-be customers. “You have to train them that there’s a difference between a one-off and something that’s mass produced,” Cone says.
While the service center operators remain open to further moves downstream, they typically see it as something they’ll react to, rather than a step they’ll take blindly.
“It’s contingent on how the market evolves around you. In business, it’s always a moving target,” says Kong.
The equipment manufacturers will undoubtedly be ready to handle their next move.
“We think there’s a lot of market potential left in the service center industry. They’ve got a difficult decision whether to get into secondary processing, because it can put them in competition with their customers. But we see it as a trend that’s fairly inevitable,” Fanning says.