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Safety in Numbers: Cooperatives Provide Independent Service Centers a Shield of Protection Against Merger Mania
This article appeared in the December 1999 Service Center Outlook section of American Metal Market
Main Street isn't what it used to be
Affected by suburban sprawl, the independent stores of Main Street America are being dwarfed by large warehouse-style retailers that locate off the main drag and hunker down in strip malls on the outskirts of town. In doing so, mega-centers are effectively shifting focus away from the traditional town center with their very presence.
As shoppers migrate to the larger stores with hopes to cash in on better deals and lower prices, Main Street stores face a fight to hold onto a revenue stream that is heading elsewhere — a place where bigger is perceived as being better.
The above scenario, albeit hypothetical, is not totally fictitious. Nor is it a new phenomenon or exclusive to the retail industry. It is a situation affecting independents in all industries.
To survive in this aggressive environment, independents find themselves with new and greater responsibilities to find innovative ways to cultivate customer loyalty, thrive, and effectively secure a tourniquet around the sprawl that threatens their livelihood.
In the steel service center industry, the trend of mergers and acquisitions is creating a sprawl of giant consolidated centers that are unfolding across the United States. These mega-centers also come with big business objectives - servicing national accounts through a broad network of regional centers. They aim to capture customers through combined purchasing power, cost efficiencies, and a dominating national presence.
For smaller independents, this climate creates an atmosphere where they can no longer afford to do business the same way. If they do, they run the risk of eventually being swallowed up by the bigger guy — or not being competitive for customers.
While this scenario certainly presents challenges to the independent service center, it by no means should be construed as a no-win situation or the harbinger for the center to fold up shop, cry "uncle" and become part of the sprawl. Not when there is such a thing as a cooperative.
For independent service centers, purchasing cooperatives provide the same leverage and benefits that being a mega-service center does, but with one exception — cooperatives allow independents to remain autonomous and retain their brand identity.
Service centers that seek the purchasing muscle of the big guys, but want to retain their own vision are finding that joining a cooperative is the first step toward putting sprawl in check and reclaiming Main Street.
Until 1996, with the formation of the North American Steel Alliance (NASA), there were no cooperatives catering to the steel service center industry. NASA attracted in the short span of four months 30 member companies, representing more than one billion dollars in revenue.
Within three years of its inception, and during a time when merger mania is peaking, NASA's membership is 81 companies strong with over four billion dollars in combined annual revenues.
Making a Cooperative Work for Your Center
There are many ways that a cooperative can work to the advantage of an independent center. Benefits of belonging include flexibility, stability, and a continuance of personalized service and commitment to customers and suppliers.
Belonging to a cooperative enables independents to continue going about their business, be it servicing a niche market or specialty market by providing value-added services that make your center stand apart from the others.
But most significant, the main draw of a cooperative is that it offers independents the combined purchasing power of a larger entity. Joining a cooperative, therefore, becomes the first step in leveling the playing field by working toward driving costs out of the system.
With the same buying muscle as a larger entity, an independent center can keep abreast with competitive pricing.
Cooperatives also offer cost-cutting synergy for their members. For instance, in addition to purchasing product, service centers can purchase standard office items ranging from desks to chairs to computers, enabling the center to improve internal operations, which also goes toward containing overall cost and keeping up with the big guys.
A cooperative also empowers an independent center by linking it to a nationwide network of centers that can work together when it comes to servicing clients with specialty or even regional needs. This is especially important when dealing with steel, which by its nature is not a product that is transported easily over long distances because of its sheer size and weight.
So, for instance, if an East Coast service center has a customer that needs steel on the West Coast for a project, then the East Coast center can communicate within the cooperative and find a member center that can help fulfill the request. This type of synergy creates a better overall business climate and is another way independents can compete against mega-centers by having their own network.
By working with each other, independents in a cooperative can successfully service national account needs while maintaining their identity. It also allows them to continue with their own vision of personalized, value-added service for their customers.
Look Inward; Eliminate Redundancies
An independent belonging to a cooperative, therefore, has many of the same benefits available as a mega-center does, except that by holding onto its autonomy, an independent maintains its home rule. With home rule, there also come certain responsibilities. For instance, independent centers must be more hands-on when it comes to managing efficiencies within the organization because, even though a cooperative may provide wonderful benefits, any business is only as strong as its weakest link. So, independents must learn to shore up internal operations.
At Denman & Davis, we incorporate many business practices of large corporations, i.e., activity-based costing (ABC) and adapt them to our particular needs. Activity-based costing is a valuable tool that gives management a pretty clear picture of what is generating the company's profits or its losses. It provides the ability to track operating profits for specific "cost objects" (customers, orders, products) and to identify non-profitable ones.
When a business knows exactly which customers and products are making money and which ones are loss leaders, then true savings can be realized. Which is why ABC is so important. It is a proven strategy for increased profitability, yet probably less than 10% of the steel service center industry (mega-centers included) are not using it.
Zero inventory and increased inventory turns are also stimulating a lot of industry buzz, and are what every cost-conscious business (service center and customer) strives for in the drive to free up capital for other ventures (i.e., purchasing of new equipment, added personnel) that would benefit the company.
One way to achieve zero inventory or increased inventory turns is through Just-in-Time (JIT) delivery. This means providing your customers their order with world-class quality when and where they want it, every time. Not only does this go a long way toward fostering a good working relationship with the customer, but it also saves them money because the material is not sitting idle on their warehouse or production floor.
At Denman & Davis, we use our own fleet of trucks to provide JIT delivery and achieve an A-rating with most of our customers for on-time delivery. Recently, the company (with a 97% on-time rate) was among nine vendors (out of 1,300) selected by the Metropolitan Transit Authority/NYC Transit (MTA) to be presented a Vendor Performance Award for teamwork, commitment to the job and cost containment.
Another efficiency tool is Electronic Data Interchange (EDI). EDI enables trading partners to engage in a business-to-business exchange of documents (i.e., purchase orders, invoices, order acknowledgments) in a standardized format. By doing so, it eliminates redundancies in the system, not to mention eliminating duplicate office documents and reducing paper flow. While EDI may be eclipsed or supplemented by the burgeoning E-commerce, it currently remains a valuable tracking tool.
Power in Numbers
Most of all though, when an independent chooses to remain independent, it sends a message to employees and customers. By retaining its own corporate culture and philosophy of personalized sales service, an independent may foster a greater sense of loyalty and motivation among employees, which in turn is felt and passed onto customers.
Employees from top down have greater incentive to excel, knowing that the service center has held onto its piece of the pie, but they also have the added security of knowing that center has the "safety in numbers" competitive edge that a cooperative provides.
In short, when an independent has battened down the hatches on its own costs and is running a tight ship by offering the best quality and best service it can, it won't lose customers or business to large mega-centers espousing that bigger is better.
Ultimately, joining a cooperative should be icing on the cake and just one way that an independent can drive costs out of the system.
It also provides an independent with the best of both worlds, and because of that, the proverbial storefront on Main Street stays. A bit changed here, a bit refined there, but still standing and surviving and better equipped to flourish in today's harsher and more competitive global economy.
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