Last week, Denis was talking to a customer who has traditionally ordered on an ex-mill basis. That is each month, they place an order for 200 MT of plates. The mill then makes the steel, rolls the plates and delivers them to the client a few months later. Typically, for new rolling, you are often looking at 12 – 16 weeks ex-mill for most European mills, followed by the time taken to ship the steel plates.
As customers increasingly require accelerated delivery times, this slow delivery can make life difficult. Our customer was worried about a Chinese competitor who was now 30% faster at delivering than he was. There are ways of significantly reducing this delivery time whilst controlling the costs.
At it’s simplest, it works like this:
– Get a supply agreement with stockist
– Stockist purchase steel from mill and keeps in warehouse
– Customer requests plates as required and pays on dispatch/delivery
Stockholding is a dangerous game. Basically, you have to guess what the market demand is going to be for different steel grades and dimensions. Then you have to invest cash into your stock. If the market changes, it can get painful. So when a customer talks to the stockist and asks “Can you stock X for me?”, the stockholder is like “Sure, but…”
The BUT is because he is being asked to invest his cash in something that he might not be choosing to stock anyway. The customer may also lose the order, which results in the stockholder having a lot of X that he can’t sell and eventually, has to discount heavily to recover his cash. So he says “Sure, but give me a long term contract”.
The long term contract is a PO. It allows the stockholder to go out and buy all the X you need for a year – knowing that at some point during the year, he will be delivering it to you. This allows the customer the security of supply and a good price. It’s a bit more expensive than buying from the mill because the storage space, handling, risk and cost of capital all have to be accounted for, but it’s usually cheaper than plates purchased from stock as there is far less risk of not selling it.
Normally, the contract specifies details such as annual and monthly requirements, how to handle variations (if you have very big or small requirements) and fixed pricing for a certain period.
Once this is in place, the stockist will then arrange a delivery schedule with the mill and the plates start being delivered to the stockist. Now this can be just for a few ultra-specialised plates that you require – say for some S690 tested down to -80 or some 360 mm S355J2+N, or it may be for larger quantities of a particular grade that your supply chain relies on.
Then each month, you send us the requirements and we load it on board the vessel and ship it out to you. This can save as much of 60 – 70% of the time of purchasing from the mill whilst still retaining some of the price benefits of buying from the mill.
It’s a lot more suitable when you either have a long term project or are manufacturing a large number of similar items. For a lot of customers, it works well in helping to reduce the amount of cash tied up in stock (and the wastage that is incurred from poor storage). Of course, it also helps to reduce the cycle time. It’s not just in time but it is a lot closer than traditional ways of buying steel from a mill.