Business

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Professor Roy Shapiro prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1982, 1986, 2002, 2004, 2005, 2006, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O Y S H A P I R O

Halloran Metals

Jim, we’ve got to find some way of reversing the impact of this recession. With seven warehouses, we’re carrying loads of inventory and the expense is killing us. We can’t cut costs much without seriously disrupting the operations of one or more of our warehouses. On top of all this, we continue to try being all things to all people. Let’s take a new look at our operating strategy—we need to come up with some ideas.

Jim Rochleau, vice president-Operations of Halloran Metals, sat in his office adjacent to the company’s metal service center in Lynn, Massachusetts and reflected on the conversation he had just had with the firm’s president, Warren Hansen. Halloran’s financial results for 2001 (Exhibit 1) showed a profit decline of almost 70% from the previous year. In a few weeks, he and Warren would be meeting with the board. Little wonder, then, that Warren was suggesting a reexamination of the strategy that Halloran had pursued for more than two decades.

Halloran operated a network of metal service centers similar to the Lynn facility across the northeastern United States, buying metal (primarily steel and aluminum) in bulk from mills and then selling it to customers in smaller quantities. With 2001 revenues of almost $170 million dollars, Halloran was one of the largest participants in the metals service center industry in its region. While the U.S. steel industry had faced some economic difficulties throughout the 1990s, the steel service center industry had enjoyed a steady growth. The economic downturn of the beginning of the 21st century, however, had brought this growth to an abrupt halt, and several firms were finding themselves faced with financial problems.

The Steel Industry

The steel manufacturing industry was dominated by several large-scale domestic producers and equally large foreign competitors. Typical output from integrated steel producers fell into two basic categories: ingots and semifinished steel products, and finished steel products. The large, fully integrated mills manufactured a very wide range of finished products including such diverse items as plate, pipe, and structural shapes (Exhibit 2). In addition to the large mills, there were smaller manufacturers (minimills) that originally had produced relatively narrow product lines, specializing in two or three end products. The 1980s and 1990s saw a dramatic increase in the share of market for these minimills, as they expanded their product ranges, partly due to the efficiency of their newer equipment.

For the exclusive use of A. Bregante, 2020.

This document is authorized for use only by Anthony Bregante in SCM 860 – Summer 2020 taught by JOHN LANGLEY, The Pennsylvania State University from Apr 2020 to Oct 2020.

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Steel mills typically did not sell direct to customers ordering less than 20 tons of a specific type and grade of steel. These customers would, instead, purchase from steel service centers similar to Halloran. Purchasers of bulk quantities from the mills, however, often bought from service centers as well. They used service centers for small amounts of their regular purchases, for items not normally needed in large quantities and for rush orders. Steel mills typically operated on an order backlog, and required lead times of one or more months. Steel service center customers fell into three broad categories: OEMs (original equipment manufacturers) used steel as a direct input to their production processes. The importance of the steel component in their operations varied considerably depending on the characteristics of their end products. Fabricators used steel as a primary raw material, and steel accounted for the bulk of their purchasing expenditures. Maintenance accounts needed steel only for repairs to buildings, plant and machinery.

A few of the large domestic steel manufacturing companies had their own captive service center operations. These centers differed from independent service centers inasmuch as the products they sold were often items of which the parent mill had excess inventories.

Economic downturns, in general, tended to decrease overall steel consumption. In addition to the effect on revenue growth in the service center industry, users tended to eat into their own inventories and thus shrink material carried in the entire distribution channel. For small users, difficulty in securing capital exacerbated this desire to cut inventories and pushed marginal mill customers to buy from service centers. It often made sense for these former mill customers to place several smaller orders with service centers at higher prices rather than carry large inventories on borrowed money.

The North American Steel Service Center Industry

The service center industry was a major force in the metal business in 2001, taking more than 27 million tons (over 25%) of the output from North American steel mills1. While OEM and mill inventories had been dropping, service center inventories had held steady.

Most of the processing currently done by service centers was “Stage-One” processing (e.g., saw cutting, burning, and shearing). This consisted of relatively minor conversion of finished steel products to sizes specified by the customer. The equipment required for this service was relatively modest and did not require a great deal of investment. Orders requiring this type of processing often carried an additional charge, especially small orders, but service centers nevertheless found it unprofitable and somewhat disruptive, but necessary for maintaining customer goodwill. Somewhat more complex processing was involved if a customer needed special metal hardness properties. Very rarely did service centers have heat-treating or tempering facilities and such jobs were normally farmed out to independent heat-treating shops.

Considerably larger investments were required for “intermediate” processing (e.g., slitting and leveling). Traditionally the domain of the integrated steel mills, this consisted of the conversion of large lengths of steel in coils to specified dimensions. In an attempt to improve their profitability, steel mills had been trying to cut back the amount of processing in order to concentrate on maximizing output tonnage of basic steel by just producing larger and larger coils. This was increasing the pressure on service centers to become more involved in slitting and leveling, which would require larger investments in equipment.

1 American Iron and Steel Institute, www.steel.org/stats/2001.htm

For the exclusive use of A. Bregante, 2020.

This document is authorized for use only by Anthony Bregante in SCM 860 – Summer 2020 taught by JOHN LANGLEY, The Pennsylvania State University from Apr 2020 to Oct 2020.

Halloran Metals 683-062

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The Steel Service Center Institute (SSCI) noted that two major changes had occurred in the industry during the 1980s and 1990s: increased purchases of foreign steel by service centers, and increased processing of metal. The SSCI predicted that service centers would continue to evolve from metal brokers to intermediate processors, falling between the mills and the end users. SSCI expected tonnage growth of 3% to 6% per annum for the service center industry as a whole for the next few years, with metal sold having more processing done by service centers than previously.

Most service centers carried similar product lines. Metal of a given type and grade from one mill or from one service center was identical to that from another mill or service center. There were a few exceptions, such as Earl M. Jorgenson Co., a service center company that specialized in alloys, and was one of the most successful firms in the industry. Jorgenson competed on availability, i.e., the ability to provide from stock a specific alloy a customer might demand from its forging facility.

Halloran Metals

Halloran was one of the two largest independent regional service centers in the northeast U.S., with seven locations throughout New England, New York, and Pennsylvania (Exhibit 3). In the 36 years since its founding, the company had grown to sales of almost $170 million and an operating profit of $6 million. The company was privately owned.

Halloran’s organization structure (Exhibit 4) reflected its belief in the key role of entrepreneurship

in the service center business. The branches operated as profit centers,2 and branch management had considerable latitude in making operating decisions. The head office at Lynn was thinly staffed and provided basic central services such as IT, finance, accounting, sales reporting systems, etc., and overall monitoring of branch performance.

Purchasing played a crucial role in the service center business, and had centralized as well as decentralized elements. In a commodity business such as steel distribution, timing and volume of purchases could make a significant difference to margins and the ability to price competitively. The central office monitored the national market for steel and maintained relations with the steel mills. Small purchases were often made routinely by the branches themselves; purchasing of key products in large lots was coordinated centrally to enable the aggregation of requirements of the individual branches so as to realize the maximum advantage from volume/price breaks normally offered in the market. For example, consider the following monthly requirements for 2” x 2” x ¼” hot-rolled angle bar:

Concord 160,000 lbs. Woonsocket 85,000 lbs. Lynn 150,000 lbs. Newburgh 60,000 lbs.

Therefore, in total, Halloran needed to purchase 455,000 lbs. of this size and type of steel. On this product, the mill might be offering a $35/ton discount on purchases of 100 tons (200,000 lbs.) or more. Thus, Concord might order 220,000 lbs. and ship 60,000 lbs. to Newburgh. Lynn would then order 235,000 lbs. and ship 85,000 lbs. to Woonsocket. Both shipments would be made via the Worcester shuttle.

2 Except for Worcester, which, as Halloran’s processing facility, was operated as a cost center.

For the exclusive use of A. Bregante, 2020.

This document is authorized for use only by Anthony Bregante in SCM 860 – Summer 2020 taught by JOHN LANGLEY, The Pennsylvania State University from Apr 2020 to Oct 2020.

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Marketing and Sales

Halloran’s sales strategy attempted to incorporate two primary corporate principles; service to a broad base of customers and establishing market position through specialization. Service, as defined by the company, consisted of providing any customer with any reasonable requirement for metal overnight. As Jim put it: “We’re in business to give customers whatever they need. If they want red suspenders and the branch managers want to sell red suspenders, then we’ll get into the business of red suspenders.”

Halloran prided itself on rarely turning down an order, regardless of the size of the customer or of the order. In fact, branch managers needing an out-of-stock item to quickly service a customer were willing, on occasion, for a good customer, to purchase small quantities of product on the open market (if need be from local competition), often at a price significantly higher than that at which mill purchases could be made.

Halloran’s emphasis on a broad customer base was a key element in its strategy: “The volume business in the New England market is more price competitive and attracts more of the larger local and regional competition. Some companies really go after this ‘visible market’. The trouble is that that visible market is awfully thin—that volume is the first to go in hard times.”

With 12 product categories each containing anywhere from 35 line items (pipes) to 1,400 line items (cold-finished bars), Halloran offered over ten thousand line items in all. This substantial breadth of stock keeping units was twice the average for service centers in New England and challenged Halloran to live up to its service goals. The company was convinced that its service played a crucial role in developing and maintaining customer loyalty. The high service content also enabled Halloran to charge higher prices than the industry norm. Halloran did not, however, limit its opportunities to high-service, low-volume business.

Each branch did have opportunities to bid on bulk-order business, especially when required lead times were too short for mills to handle directly. Bulk business, however, tended to be very price competitive, and 5% margins were typical for orders of a truckload or more. Most of the bulk business handled by service centers in the Northeast was in flat-rolled steel. Halloran normally found it difficult to compete aggressively on price because of its intrinsically higher operating costs. The company’s success rate in winning bulk orders tended to be higher when the material required was part of the bidding branch’s specialization.

Even though branches were considered to be full-line centers, each branch specialized in one or more product categories. Inventory and sales were proportionately larger in these special categories relative to other products. For example, the Lynn branch specialized in cold rolled steels and aluminum. Exhibit 5 illustrates the impact of specialization on Lynn’s sales. The higher levels of inventory handled in special categories and the specific processing capabilities often allowed a branch to compete effectively on price in bulk business.

The ability to bid for bulk business was not the primary reason for specialization at branches. Jim believed that dominance in all product categories in a given market was simply not a practical approach. Specialization in one or two categories enabled a branch to carve out a niche for itself and allowed the manager to concentrate on the materials he or she understood best. Selection of the products in which to specialize was left completely up to the decision of branch management. Jim argued: “We must be “the best” in a couple of products. Do these very well and you will have a profitable niche. What we want a service center to do is sell two or three things and be a commanding part of the market in those two or three lines. The other products will follow.”

For the exclusive use of A. Bregante, 2020.

This document is authorized for use only by Anthony Bregante in SCM 860 – Summer 2020 taught by JOHN LANGLEY, The Pennsylvania State University from Apr 2020 to Oct 2020.

Halloran Metals 683-062

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