The Steel Service Center Industry continues to face the challenges of operating in a highly competitive marketplace, where profitability has been significantly affected by increased customer demands for value-added services, volatile steel pricing, just-in-time production programs and reduced margins. Service Centers that have either survived the industry meltdown of the early ‘80’s, or have started operations since that time, are acutely aware that the times of fat margins and a cavalier approach to quality, and inventory management are long gone. The challenge today, is to effectively manage and control the procurement, sale, processing, and logistics of the inventory cycle, while accurately trackoing the costs associated with inventory transactions and maintaining the integrity of material traceability. It is these business elements that are the major contributing factors to the success of any Service Center. This White Paper looks at the problems facing Service Center’s that are currently using “legacy” inventory management systems that were developed in the 80’s or Service Centers that are just now, discovering the inadequacies of their existing IT systems. The White Paper provides an insight into how the Steel Service Center Management (SSCM) Enterprise System addresses these challenges by utilizing a common sense approach and leading edge technology to provide the toolset to allow management, sales and production staff to effectively track and manage inventory through out the inventory cycle.
The most
common cause of business failures in the Steel Service Center
Industry is poorly managed inventory. High inventory levels, aged
stock, ill-advised purchases, poor material resource planning
– can all contribute to a rapid fall into the abyss of business
failure or staggering profit losses. How often has senior management
watched inventory levels creep upward in an unabated march to
the inevitable profit swallowing write down? How many Service
Center’s have been the recipient of a huge surprise at year
end when physical inventory counts reveal a huge disparity to
booked value, or finding material you thought was located at an
outside warehouse has gone astray?
Material Resource Planning and Procurement Many business solutions that are currently in use by the Service Center industry do not provide the depth of reporting or application tools to effectively determine and manage inventory requirements. Then there is the over-kill system that relies so heavily on automated triggers, that they are often discarded because the maintenance required to address the anomalies is not worth the effort expended to correct the data. This usually results in Purchasing personnel being fully dependent on Sales personnel to advise them what inventory is required and when. A system that cannot effectively provide the means to requisition material based on customer inventory requirements often results in material and delivery shortfalls and/or high inventory levels. The inability to effectively track the associated carrying costs for inventory levels beyond requirements then becomes a hidden cost that can be a huge burden on the profitability of the company. Many systems do not have the ability to provide management with the information they require to consolidate on-hand, on-order, in-process and produced material into a meaningful format that allows effective management of procurement and expediting.
In today’s frantic just-in-time environment, Services Centers are faced with the management problem of tracking inventory movement from vendor warehouse, internal or external storage locations, outside processor warehouses, customer warehouses etc. The ease with which a coil can be lost or duplicated right in your own warehouse by an input error or omission is a common problem for Service Centers utilizing older legacy systems with little integration integrity or data validations. How many times has a production order been returned because the material selected for processing cannot be physically located? How many times has a carrier returned to the production facility from a vendor or storage location, because the material cannot be located? In most instances this material remains unavailable for processing or sale until located, usually during an inventory count.
The ability to trace inventory back to the vendor source has become a nightmare for many companies that do not have the ability in their system to capture and track source material information through out the life cycle of the material. Many systems provide a tracing mechanism in their application that is time consuming and frustrating particularly for Quality personnel attempting to pull together the information for a Nonconformance Report or Vendor Claim. The inability to adequately trace material to the source can result in rejected vendor claims, material certification errors and lost revenue.
In the past, standard costing for added value inventory costs associated with processing, freight, outside processing, storage, scrap etc. have been at the best, estimates. The dartboard approach to calculating these costs and applying them to material often results in margin anomalies that often times cannot even be analyzed. How can management be sure that all costs have been recorded and more importantly, are these costs accurate? For many Service Centers this requires exhausting detailed analysis and painstaking inventory maintenance at every step of the inventory cycle. Freight costs are a prime example. Many companies utilize systems that automatically apply a freight rate based on the carrier vendor’s quoted rate per hundredweight to or from a destination. As material is moved, this rate is applied by the system to the cost component of the individual shipment based on the destination and weight of the inventory. While this provides an accurate rate based on the quoted price, it does not factor the true cost of the shipment, when a load contains multiple drops at different destinations, fuel surcharges, drop charges etc. Most carriers charge a minimum load charge to the farthest destination. For a full load that has one drop 200 miles away and several drops at 50 mile and 100-mile destinations – the carrier will submit a bill for a full load based on the farthest destination. Based on the destination rates applied by the system, the two shipments made to the drops along the way, would not reflect the actual freight costs incurred, based on the carrier’s billing. This variance would not be reflected in the freight cost allocated to the material and the margin analysis on the shipment is affected. If the system has no ability to match freight costs to the carrier’s invoice, this additional cost is likely to be charged to the booked value of the inventory, ultimately causing a shortfall in the cost of goods sold for these sales. Processing costs are difficult to estimate accurately and once again Service Centers are faced with the standard cost base pitfall that may or may not hit the target for true allocation of production costs. Did the production work order capture the downtime associated with pulling a coil that was off gauge? Was additional scrap incurred for those laps that needed to be removed for surface imperfections? What was the actual time it took to process material applied to a production work order. Is my estimated scrap calculation anywhere close to my actual? How can storage and carrying costs be accurately calculated and added to inventory? What happens if they change?
Steel Service Centers require a management information system that provides a cost effective business solution to applying modern inventory management methods utilizing a common sense approach. Significant design consideration was expended by the developers of SSCM to approach the Inventory Management requirements of a modern Steel Service Center. The design of the system is very much centered around Inventory Management and is the result of many years of first hand knowledge and analysis of the problems associated with the inability to capture or retrieve data that is vital to the effective control and management of Inventory. This shortcoming is inherent in many enterprise systems and packaged software solutions. Management and users need to have the ability to utilize a system that can provide the application tools required to accurately capture, track and analyze all aspects of the inventory cycle associated with their operation. The system needs to fully integrate all applications to seamlessly validate and update inventory related data in real-time and provide the means to review and analyze inventory related transactions effortlessly. The costs associated with inventory transactions need to be automatically allocated by the system in a manner that is accurate and can be validated, so that variances can be identified and required corrections can be easily reallocated. Users require a system that can give them one stop access to selected inventory records, with out having to open and close screens displays, or remember key record id’s to access related data, stored in other applications. The system should provide screen access to all Sales, Production, Purchasing, Logistics, Quality and Invoicing data pertinent to the selected inventory record. SSCM provides all of these tools in a unique and innovative set of applications that gives the Service Center complete control of Inventory Management.
The system has been designed around the basic premise that Inventory Management is the key to profitability. The following commentary details how SSCM provides a common sense business solution to Inventory Management.
Material Procurement, and Material Resource Planning SSCM’s purchasing application integrates Material Resource Planning, Material Requisitions, Request for Quotations and Material Purchase Orders into a blended management tool that allows management to effectively manage material procurement and expediting. MRP’s are created to record each customer’s weekly inventory requirements utilizing company specific minimum and maximum target weeks to calculate the inventory levels required to satisfy the customer’s needs. ( Figure 1) Figure
1 - Material Resource Planning – Header/Customer Product
Display
At a glance the user can see on-hand, on-order and variance summary totals for master stock and cut stock. (Figure 2) Figure
2 - Material Resource Planning – Material on Order Display
MRP reporting allows the sales and purchasing department to review, analyze and maintain inventory levels. Figure
3 - Material Resource Planning – Material On Hand / On Order
Display
A summary
of Stock Requirements allows the user to review at a glance, Figure
4 - Material Resource Planning – Stock Requirements Display
SSCM enforces the creation of material requisitions for material that is to be allocated for a specific customer. Purchase order line items utilize the requisition to allocate and reserve material on order to specific customers and this is passed to the inventory when received. The purchasing application also allows the purchasing department to create Requests for Quotations to monitor and manage vendor quotations and review pricing and delivery responses from the vendor. While many systems currently available, have incorporated features to automate the purchasing by automatically creating orders based on pre-determined criteria, our research has revealed this feature requires constant maintenance and actually increases the margin for error. SSCM enables the effective control of procurement by providing the user with a sensible approach to reviewing and maintaining inventory levels that are optimum for customer satisfaction, production planning and reduction of aged inventory and the carrying costs.
Material movement is tracked efficiently through SSCM’s logistic system. The application allows the user to easily create shipping orders to handle virtually all movement of inventory. This includes material shipments to and from vendors or processors, movements of inventory from branch warehouses or third party locations, and customer product shipments and returns. The system’s table driven logic uses destination codes to identify locations and allows the system to calculate, and store a variety of freight related costs that are vendor specific. Vendor freight rates for minimum loads, fuel surcharge, drop charges, waiting charges etc, are easily entered for each vendor. The creation of shipping orders to track inventory movement allows companies to apply shipments to a load and assign the load to a carrier. Inventory records are updated to reflect the new location code for all items that are shipped. This feature allows complete control of inventory at a variety of locations. Once dispatched freight calculations are applied to the shipping orders based on the costing rules that apply to the carrier. The resultant costs are then prorated back to the cost components of the inventory items to ensure that the real costs are captured and distributed. The system allows freight recalculations and user overrides where a flat one time rate is used for the load. SSCM’s invoice matching component provides a dynamic method to easily match the carrier invoice to the shipment and compare the costs allocated by SSCM to the actual costs contained on the billing. Variances are immediately displayed and the user can easily investigate the cause prior to posting. Variances can be booked or reallocated to the shipment. This costing method ensures that all freight costs are accurately recorded in the inventory system.
Inventory
Traceability
The tag inventory module allows the user to view and browse a complete history of the life cycle of the master coil through processing to shipment. (Figure 6) Once again drill down features allow the user to view pertinent documents such as sales order, work order, receiving report, heat chemistry and physicals, shipment information, produced cuts, quality info etc. – all with the click of a mouse from a single display. Figure
6 – Material History Display (Cut Tag Selected)
In addition, the SSCM system has robust audit tracking capability for all major application components including tag inventory. Audit trails are captured for all transactions and/or user edits and can be viewed on screen. The audit record contains the component that was added or changed, the value before the change
Figure
7 - Tag Audit Display (Audit Detail Selected)
SSCM gives the user a powerful tool to review and manage inventory records from an easy to use display that provides a detailed history of every item received into the system and single mouse click access to related records in other applications.
SSCM ensures that all cost components associated with inventory are captured and maintained through the inventory life cycle. From creation date to shipment date costs are recorded and validated for all processes. Exception and variance reporting is captured through SSCM’s innovative A/P invoice matching feature that provides the user to match vendor invoices to verify inventory cost components for material purchases, freight in and out, fuel surcharges, drop charges, outside processing costs, storage costs etc. Virtually any vendor related added value cost component is uniquely identified and verified to the recorded inventory cost. Internal production costs are handled efficiently and utilize activity based costing and/or standard based costing. SSCM suggests that both methods be used to compare anomalies between standard based estimates and real time costing. SSCM’s Production Processing component handles scrap and processing cost calculation and allocation. When a work order is created and the setup details are entered scrap weights and percentages are dynamically estimated. Each setup can have one or more setup line items. The estimated weight of each piece to be generated is dynamically calculated based on the average source tag weight and dependant on the type of process. For example a slitting process would determine the pounds per inch of width (PIW) and multiply that value times the width of the finished cut divided by the number of Outside Diameter (OD) reduction cuts to determine the estimated weight of each cut. The difference between the sum of the estimated finished cuts to be produced from each source tag, subtracted from the average source tag weight is the estimated scrap weight. The system allows a pre-set scrap rate to be set that will generate a warning or critical error if the estimated scrap exceeds the pre-set limit. This feature alerts the user to set-up errors and provides a management tool to suspend production for orders that are exceed scrap guidelines. The pre-production work order displays the estimated scrap weight and percentage values, so that these values can be quickly checked prior to production. Once the work order has been completed and all the finished cuts have been weighed the actual scrap weights and the associated costs are calculated and allocated to each of the finished cuts. These include costs carried forward from the master coil and calculated processing costs along with the allocated scrap costs for the process. The SSCM system supports margin analysis calculations throughout the ordering life cycle. Estimated margins are automatically calculated at the customer product level, based on entered cost elements such as material, freight in, freight out, pickling, processing, scrap etc. to determine the total estimated costs associated with each product and the selling price assigned for each product. These estimates can be edited at the sales order level without affecting the integrity of the cost and pricing components stored in the customer product table. This feature allows sales personnel to change the estimated cost of material, for example, in the event that a higher cost inventory item was substituted due to a no stock situation. If the sales order is for a ship from stock item the exact costs are copied from the inventory item selected. All these values can be expressed in various units of measure and in several different currencies. The system provides a further estimated margin analysis when sales orders are assigned to a production work order. This analysis calculates the total estimated margin using the actual costs of material to be processed, the estimated production costs, estimated scrap and compares this to the estimated sales order margin analysis to determine the variance. Final margin analysis is performed after invoicing to reveal the actual margin vs the estimated margin for each invoice generated. These features allow management to review and analyze estimated margins from point of sale through production and compare these estimates to actual margin calculations after shipment and billing. Cost and margin analysis are key components of Inventory Management and SSCM provides a full-featured application that allows management to apply strategies to reduce costs and improve profitability.
The Steel Service Center Management enterprise system represents the new wave in business solutions geared directly to the Metal Service Center Industry. This business application presents a new and innovative approach to managing the complexities of today’s modern service center. The design aspect of this business solution combines flexibility and scalability, wrapped up in a fully functional set of applications that supports a powerful Inventory Management toolset. Service Centers that have taken a forward looking approach to their information system requirements and truly understand the realities of the problems associated with inadequate or outdated inventory IT components, would do well to take a close look at SSCM. The SSCM solution definitely hits the mark.
For more information on ISMI and the SSCM Enterprise Solution contact:
99 Queen Street South,
Or by e-mail to: info@isscm.com
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Enterprise
based Inventory Management
