Cabin fever is an annual mid-winter epidemic suffered by we northerners. It's caused when snow, frigid gales and the solstice cycle render the sun's rays too rare and feeble to sustain mental health. The result is a sort of human hibernation, whereby victims spend way too much time hunkering down in their toasty habitats.
It was during a bout with cabin fever in late January that I sought comfort by reaching out to a sector of our industry that has suffered from its own version of the chills dating back to the turn of this century. Though cabin fever and economic malaise are not the same disease, there are enough similarities to inspire a feeling of kinship. So I set a goal of making contact with every member of ASA's Industrial Piping Division to see how they're getting along.
The IPD is an ideal thermometer for the PVF industry. That's because its membership spans manufacturers, distributors and master distributors, and includes many of the industry's top PVF firms in all of those categories. (See box on next page.) I made contact with almost all IPD companies via e-mail, and had conversations or written exchanges with about two dozen executives or spokesmen. Mostly I listened to what they had to say about their business aches and pains.
First, the good news: 2004 brought the first upswing of the 21st century for virtually all of the IPD members I chatted with. Most reported double-digit sales increases, and most were upbeat about 2005. The sickness that had gripped the PVF sector during the first few years of the new millennium clearly has run its course.
These conversations covered a wide range of topics, and I focused on what they saw as their main concerns. Common themes emerged over and over, frequently unprompted by the interviewer. These subjects can be distilled into five major categories.
1. Managing Price VolatilityLast year brought unprecedented price increases for steel and other commodities going into PVF products. “Our sales were up about 44% in 2004 over 2003, though I'm guessing about two-thirds of that was due to price increases,” said Jim Irwin, president of Ohio Pipe & Supply in Cleveland. That's a robust year even after subtracting the inflation. Similar experience was reported by many IPD members.
“We're coming off an outstanding year,” said Jay Glass, president of Chicago-area PVF distributor Illco Inc. “The return of inflation has helped a lot of people, especially those that keep big inventories, which we do.”
“Increased pricing is in many ways a good thing,” echoed Mike Abeling, president of Los Angeles-based Consumers Pipe & Supply and past chairman of the IPD. “Distributors should be making a lot of money. If not, they're doing something wrong.”
There's also a yang side to the euphoria, with several aspects. One is that it presents a monumental PR problem.
“The last 12 to 18 months have seen a period of price escalation like most people have not witnessed in their entire career,” said Gary Ittner, senior vice president of supply management for McJunkin Corp., based in Charleston, W.Va. “We'd had a few periods where stainless went a little wild, but never before have there been such large increases for such a wide range of product. The price implications have been hard for customers to understand.”
Then there's the flip side of that problem consisting of customers who have been a little too educated about commodity prices. “I have some customers who react to every rumor,” reported Guy Mersereau, vice president of sales and marketing for Westlund (Emco's PVF division based in Edmonton, Alberta, Canada). “They read something in the paper and then call me saying they heard the price of scrap is going down, so when do my prices drop? An inordinate amount of time gets taken to explain things to customers.”
According to Dennis Niver, vice president/purchasing & alliances for Red Man Pipe & Supply (Tulsa, Okla.), another issue comes from MRO clients who have automated systems that have a difficult time digesting price increases. “Invoices get cross-referenced with contract prices loaded on a client's computer,” Niver explained. “If it's higher due to price increases than what's loaded, it goes into a black hole and has to be manually handled outside the system. Numerous people then have to get involved in the approval process to get payment. This has forced us to spend a lot of time with clients explaining that we need their help in handling these price increases.”
Gary Cartright, president of Houston's Piping & Equipment Inc., was the only one we spoke with offering a contrary view of last year's price increases. “For us, passing on price increases is not that big a deal.” He credits his company's “Quarterly Market Condition & Activity Bulletin” as a major reason. Distributed to clientele and published on P&E's Web site, the bulletin offers a detailed narrative of economic trends in various PVF product sectors. “We've been doing this since the 1980s,” he noted. “It keeps people educated about what to expect from the marketplace.”
Cartright revealed another helpful tip to ease customer anxiety. Lag behind the pack a bit. “We let the big steel companies put all their price increases in, then wait a month or so before we do ours. By then, they know what's coming.
“Price isn't THE big issue with everyone,” said Cartright. “With some people it is, but others are more interested in quality and service. Somehow, we as an industry have to figure out ways to get paid for providing those things.”
Sheldon Nierman, vice president of Independent Pipe & Supply (Canton, Mass.), addressed another angle brought up by numerous IPD members. Call it the fear factor.
“We're concerned that the appreciation we've enjoyed on our inventory over the last 12 months will end, pricing will go down, and we'll be sitting with high-priced inventory in a downward market,” he said. “We're faced with a juggling act trying to have the right amount of inventory on hand and in the pipeline to service our accounts, yet not find ourselves with a surplus if the price goes down. Yes, distributors are making money on inventory increases, but as I said to my sales manager, 'don't spend all the profits.'”
The manufacturers we spoke with as a rule don't anticipate any steep price declines.
“Everybody is a little nervous about the future,” commented Larry Dildine, president of the Phoenix Forge Group. “There's a lot of talk about another round of material increases starting second quarter.”
Bonney Forge CEO John Leone offered: “It's really a cloudy crystal ball about what will happen with steel. About 30% of people think it will increase, 40% say it will be flat, and 30% say prices will go into a death spiral. I'm one to believe steel will be flat in price or likely to go up, and I see demand continuing to be strong.”
Going hand-in-hand with last year's price spiral were shortages of certain PVF materials. “Right now, we're not seeing any shortages,” said Steve Thompson, chairman of Central States Industrial Supply, expressing an opinion I heard from other IPDers. “There are a few stretched delivery times, but nothing terrible that I'm aware of.”
“The year's just getting started, but as we see it right now, our ability to take care of our customers is as good as it's ever been,” commented Tube Forgings President Jay Zidell. “We've got plenty of raw materials here or on order. We're still a little concerned about the ability to get seamless carbon steel pipe to make fittings out of at the right time, in the right quantities and at the right price. But based on existing inventories of finished goods and raw materials on order, we feel very comfortable.”
2. Health InsuranceWhen I asked IPD members to identify their most pressing business problem, I was surprised to find the cost of medical insurance listed by so many, along with workers' comp. Rising health costs are a regular topic in the news media, of course, but I viewed it as one of those nagging issues, like government red tape, that bugs everyone but isn't necessarily at the forefront of day-to-day concerns. IPD members beg to differ.
“Health care is probably our biggest issue on the cost side of the business,” said Steve Thompson. “If all of our other expenses went up at the same rate, I don't know what we'd do.”
Almost everyone I spoke with told of skyrocketing premiums coupled with decreasing coverage. Kip Miller, president of Eastern Industrial Supplies (Greenville, S.C.), pointed out that in his home state of South Carolina, businesses are permitted to get insurance quotes from only a single agent. “Monopoly of insurance is an issue here. The agents know they are going to get the business regardless, so you don't know if you are getting the best deal or not,” said Miller.
Companies based in California seem to get beat up worst of all. “We've doubled our premiums in both workers' compensation and medical insurance in the last three or four years,” said Rob Raban, president of master distributor Industrial Valco (Compton, Calif.).
“We don't really have free competition with insurance carriers. On the medical side, there are only two carriers we can go to, Aetna and Blue Cross, that will carry us on a national basis,” said Raban. “Because our business is based in California, I can't go to regional carriers to get insurance for operations in Texas.”
Raban described a nightmarish workers' comp situation in his home state. Recently, his company experienced its first major claim (a longtime employee who developed a back problem) in 54 years of doing business. That single claim has driven the firm's insurance modifier from .74 to 1.2, and its annual workers' comp premium now costs more than that single claim.
Literally adding insult to injury is the practice of insurance companies to add what seems to be inflated processing costs to the claim, and then basing premiums on the added expense. For instance, a $100,000 claim might entail a 30% processing charge, so it's booked as a $130,000 claim.
“The worst thing is, I've paid so far above the cost of that single claim over the years. Even now, my annual premiums would pay off the claim that's open. So I'm getting no benefit from the broad insurance pool that's out there. That's more than a little frustrating,” said Raban. “I would like to self-insure,” he added, “but the state makes it so difficult you'd need an army of clerks just to provide the paperwork needed to get it done.”
Self-insurance involves covering minor injuries out-of-pocket and buying insurance solely to cover catastrophic claims, plus a fee to an outside administrator. It is said to be viable for companies with at least a couple of hundred employees, which leaves out the vast majority of PVF industry firms. McJunkin is one that does self-insure, and Gary Ittner told of its success in getting medical costs to actually decrease in 2004, and passing along the premium reduction to employees. “The reason is, about three years ago we intensified our safety efforts. The goal is to keep our EMR under 1.0, and that's become a key reporting parameter,” said Ittner.
(EMR stands for “Experience Modification Ratio,” an insurance industry metric that compares a client's claim history with other firms in the same business category. 1.0 is the average, or perhaps the median. The smaller the number, the better the health and safety record of the company.)
Another avenue open to some firms is captive insurance, in which a selective group of firms from similar industries form an insurance company to cover themselves. Consumer Pipe & Supply belongs to one, and Mike Abeling said it enables his company to pay about 50% below the norm for workers' comp coverage. He explained his program a couple of years ago at an industrial PVF panel discussion I moderated at the ISH North America event in Las Vegas, emphasizing that only low-EMR companies are allowed in the captive program and can be kicked out if their safety record deteriorates.
“Even so, we have to battle continuously (to keep costs down),” said Abeling. “I wonder how many companies in our industry are still covering health premiums 100%?” he asked. “We just can't do it anymore.” Judging from these interviews, hardly anyone in this industry does.
3. Technology/Supply Chain ManagementThe third top concern expressed in these interviews had to do with implementing technology to cut transaction costs and for capital expansion, although it's not so much a concern as a source of pride. It's clear from our conversations that a new attitude has taken charge of an industry not too many years removed from the days of manual order entry and inventory counting. IPDers spoke with excitement of all the new technologies they were adopting. Manufacturers and distributors are using GPS to track vehicles, equipping sales personnel with laptops, installing sophisticated customer service software, and melding the Internet into their sales and marketing.
“We're continuing a big effort to market our product electronically,” said Michael O'Quinn, vice president of U.S. sales for Zy-Tech Global Industries. “Our online store was developed over a two-year period, and we gave it a big push last year. E-commerce is a driver for us as we strive to become more and more efficient.”
“EDI is moving to the next generation,” remarked Red Man's Dennis Niver. “Now we're doing more and more business-to-business over the Internet, along with online catalogs and things of that nature. We're doing it with major customers as well as vendors.”
“We're putting in a new computer system that we think is state-of-the-art for our industry,” said Industrial Valco's Rob Raban. “It's designed around our inside sales force, which is critical to master distribution.” Among the features he described was the ability to call up cut sheets on the computer screen rather than searching through catalogs for technical specs. The company also will have the ability to fill an order from multiple warehouses if one doesn't have sufficient stock. Tasks that used to take 10-15 minutes or more now get done in a few keystrokes.
A most interesting conversation about supply chain management took place with Doug Clendenin, marketing communications manager for Crane Valves North America. CVNA is part of the Crane Valves Group, which encompasses an array of business units supplied by factories around the world.
“Global sourcing presents many challenges,” said Clendenin. “Manufacturers have learned how to outsource effectively, but that leads to a host of related issues that they haven't figured out yet, like managing inventory, price changes, distribution logistics and so on. These supply chain issues are things that distributors have been dealing with for years.”
Labor cost savings obviously is the main reason why manufacturers go offshore, but many are not prepared for the inevitable glitches that arise. Clendenin illustrated: “We think we're communicating an idea clearly, the (foreign) people nod in agreement, and we walk away thinking we have the problem solved. Then a few months later, the same thing happens and we find out it has not been solved.
“Partly it may be the language barrier, or it may stem from cultural differences. They may have agreed that they understood what we're saying, but they didn't necessarily agree on that's the way they're going to do it. As a result, it's required a different outlook on business. Crane has spent a significant amount of time on a new initiative that creates a link between strategy and actions,” said Clendenin.
All of the manufacturers we spoke with had significant supply chain and/or capital improvement projects underway. “We continue to invest in physical plant and equipment - and in our people,” stated Tube Forgings' Jay Zidell.
“We're putting in a new software module for customer and supply chain management that will be completed in the latter part of 2005,” said Phoenix Forge's Larry Dildine.
“On the manufacturing end, we have a number of serious projects underway that I won't disclose. One plant is totally off limits even to our best customers,” Dildine added. “We have to do that to stay ahead of the curve.”
Bonney Forge is nearing completion of a $6 million expansion at its Mt. Union, Pa., plant. “It's been part of our culture over the years to invest in productivity improvements even in bad times,” said John Leone. “You have to be a low-cost manufacturer to succeed in this industry.”
4. The People DilemmaNo surprise that several IPD members would address an issue that Westlund's Guy Mersereau said “has been there since the beginning of time.”
“That's the ability to locate, train and keep people who can fit into our vision. We're not an industry that kids strive to work in from grade nine.”
Emco/Westlund has invested some major league dollars in a training initiative they call the “Customer-Driven Leadership Program.” According to Mersereau, last year more than 200 branch managers and senior regional managers underwent the four-day training. By the end of April this year, some 800 outside and inside salespeople, counter personnel and others will attend. Now in its third year, the program is mandated for everyone in the Emco organization that makes contact with customers. “Its purpose is to instill pride in our core values and drive those values throughout the organization,” explained Mersereau.
He added, “It goes hand-in-hand with the other key issue I mentioned, that of adjusting to price uncertainty. That's because people with experience and solid client relationships can better handle the communications process.
“Also, we have tied employee pay to customer satisfaction. There's a fabulous correlation between the regions that have the best employee retention and customer satisfaction numbers. We're making sure our people get that message,” said Mersereau.
Eastern Industrial Supplies is another IPD member firm that emphasizes employee relations. One of the things they emphasize is to get employees - or “associates” in the modern lingo - involved in cost reduction by sharing the savings. A program called “Tip for Kip,” referring to President Kip Miller, allocates 10% of the first year's savings to the associate who provides a cost-saving tip.
Miller remarked that many good ideas appear simple and obvious in retrospect. For example, for years Eastern had been providing company uniforms to many workers as a way to build cohesion and esprit. One associate suggested that the same ends could be achieved a lot cheaper by letting people go back to wearing jeans, but providing sweatshirts, t-shirts and jackets with the company insignia. It saved the company more than $8,000 a year.
“People are more important than profits,” Miller stated. “Profits are important, of course, but we believe that putting people over profits will bring profits. If we meet their needs financially, provide opportunity and so on, we'll have lower turnover than our competitors, and that contributes in a big way to profits. In 2001, we were able to get through the bad times without layoffs, because with the help of our people we figured out ways to cut other things.”
Technology may help provide at least a partial solution to the industry's people problem. Mike Abeling told of one of his best customer service employees moving from California to Pennsylvania. Rather than write him off, the company let him work remotely, and he said the arrangement “is working out great.”
As attested to by so many call centers in far-flung parts of the globe, “it doesn't matter where people are to process orders. Technology makes it easier to find good people and utilize them,” said Abeling.
5. ConsolidationThis topic didn't come up in these conversations as much as you might think it would. My guess is because it's more of a “big picture” issue that doesn't impinge much on day-to-day operations. But a couple of respondents approached consolidation from different angles.
“The shrinking user community in the industry is an issue from our standpoint,” noted Michael O'Quinn of Zy-Tech, a valve manufacturer with a large presence in the energy marketplace. “With the Exxon-Mobil acquisition and so on, the number of major users have gone from 20 to 10. This consolidation is creating a narrower supply channel, which has its own dynamics.”
Ernie Coutermarsh, vice president of industrial sales at Bedford, Mass.-based F. W. Webb, spoke of consolidation in the altogether different context of product diversification. “F.W. Webb weathered the storm better than most purely PVF distributors,” he said. “That's because we can offer a total package of PVF, plumbing, HVAC and fire protection, and we find customers want to buy more stuff from fewer people.
“This has been going on for awhile,” he continued. “Consultants have spread the message that it's not how much a valve costs that matters as much as how much it costs to get the valve. A lot of money has been spent educating our customers about transaction cost reduction, and one of the quickest ways to cut transaction costs is to reduce the vendor or supplier base.”
According to Coutermarsh, the one-stop shopping attraction applies to both MRO and mechanical contractor clientele. “We still have to bid on large mechanical jobs, but if we're close we usually get it because our logistical and handling cost is less. We can bring in PVF, plumbing, HVAC and sprinkler pipe on one truck and stage it. That enables us to ace out many strictly PVF distributors.”
5a. Morals & EthicsThis topic can't really be included as a top concern in that only one individual raised it. But it's an appropriate way to wrap up this review.
“Something I'm noticing is that more and more people seem to be talking about running their business morally and ethically,” observed Mike Abeling. “I think it's a backlash against all the Enron-type debacles.”
Within days of our conversation, the Wall Street Journal carried an article detailing how some of the world's largest construction and energy companies, including Bechtel and Fluor, have adopted a zero tolerance policy toward the bribery that has become the standard M.O. for doing business in most of the world's underdeveloped nations - and not entirely unknown in advanced societies. Also, financial service companies such as Smith Barney and UBS have embarked on marketing campaigns to promote trust and moral values.
Talk is cheap, of course. I asked Abeling to elaborate on how he is putting these values to work in his company.
“We launched a program last July in which we brought in our outside salespeople to talk about values of trust and teamwork, and how that translates into the work they do,” he said. “Our vendors should be team members, and we should work with them as a team to take pride in the products and services we offer.”
Well put. Maybe if this last item were fully implemented, the other top concerns might not be such concerns after all. <<
Sidebar: A Peek Inside The IPDThe Industrial Piping Division is an energetic special interest group within the American Supply Association geared to the needs of companies whose primary business is in the industrial PVF sector. At last count it had 85 members spanning manufacturers, distributors and master distributors.
In addition to the normal advantages derived from ASA membership, IPD members benefit from a variety of programs and publications aimed specifically at them, such as:
- Twice a year Commodity Reports prepared by a panel of IPD members representing different regions and product sectors. These comprehensive reports contain keen market intelligence covering a wide range of PVF product categories, including carbon steel, stainless and other alloys and thermoplastic products.
- A monthly Materials Market Digest report reviewing market trends for PVF metals, scrap, energy, resins and paperboard. It is prepared by industry sage Ed Scott.
- Maybe most important of all, a networking community geared specifically to the industrial PVF sector.
For more information, contact Amy Black at the ASA office, 312-464-0090, firstname.lastname@example.org.
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