Is Timing Everything?

The cost of carrying inventory is one that many businesses would rather do without. But eliminating inventory altogether requires a supplier that can deliver the goods when needed, and deliver them accurately and completely. This method is called “just-in-time” delivery and normally requires a dedicated supplier that works as a partner with the retailer or manufacturer.

Just-in-time delivery shifts the burden of maintaining an inventory from the producer or manufacturer to the supplier. The idea is that the raw material, parts or products are delivered to the user “just-in-time” for processing, manufacturing or selling. The retailer or manufacturer then has virtually no responsibility for maintaining an inventory, or inventories are maintained at very low levels. Therefore, large storage buildings do not have to be built and maintained, and staffing and equipment are not needed to tend to the inventory.

Toyota is credited by many in the business community and management research fields as the first company to employ just-in-time as part of its production system shortly after World War II. The system, however, was limited to Toyota and its key suppliers. It wasn’t until the late 1970s and early 1980s that just-in-time became noticed in other industrialized countries.

In its purest form, just-in-time, when carried out properly, reduces or eliminates waste from various departments of a company, including purchasing, manufacturing, distribution and other support offices. Waste is anything other than the minimum required for production.

A model just-in-time company will have increased material and product flow and better quality, and will be operating at the minimum waste level. On the other hand, some types of businesses simply just want to cut costs by shifting the responsibility of inventory to the supplier. But therein lies the danger of not stocking the store. If the supplier cannot deliver the goods when needed, then sales are lost, or plants have to go idle. In addition, the issues of quality, wrong deliveries and returns in a just-in-time system need to be addressed.

In the scrap business, just-in-time deliveries of recyclable materials are constantly being made to mills and foundries. But paper mills have embraced the practice more than steel mills. Overall, in a strong recycling market like the current one, deliveries of recycled fibers and metals are flowing at a steady pace, and are being moved off the yards and collection sites as soon as they are processed.

LOW PAPER INVENTORIES

The relationship between mills and feeder yards is a classic supplier-customer one, with the mills being the customers, and some scrap paper yards even considering themselves as extensions of mills. “We are the inventory for them,” says Lyle Spoor, president of Oshkosh Paper Salvage Co., Oshkosh, Wis. “In a sense, we really work for the mills. They set the price – we don’t. And with the competition, they set the terms, too.”

Spoor’s operation moves only about 1,200 tons of paper feedstock a month. With a small, growing operation, he has to keep the recycled feedstock moving as fast as possible, and he can’t afford a softening of the market. “We need to move our material fast, so we don’t keep a lot of inventory here, either. As soon as we get it baled, we are moving it out the door. I am not sure whether it’s just-in-time or not, it’s just that we are moving it as fast as we can.”

One mill manager in the Midwest says he operates on a three- to four-day inventory of feedstock. “We are a small mill, and we cannot afford the expense of keeping a lot of inventory on hand,” he says. The manager also says that trusting relationships are critical in a situation like this, especially if there’s a chance that the bales that are delivered are contaminated or not exactly the feedstock they are suppose to be – and there is always that chance. “If you are operating on a low inventory, and get some bad bales, then you have to make sure the same supplier or someone else can deliver what you need and just-in-time becomes more critical.”

One danger in keeping supply so low, especially if the mill is relying completely on the feedstock being delivered by truck, is that severe weather could prevent truck deliveries, causing a mill to shut down. “I could imagine a snow storm really disrupting a situation,” says one industry observer. “On the other hand, if a portion is being railed in, then it is a safer situation.”

Conversely, some mills have reportedly stocked an inventory of up to two years, buying recycled feedstock when it was less expensive, then sitting on it to use when prices went up. “Those hedging tactics may be good for the company, but they disrupt the marketplace,” says one industry observer. “It’s hard to turn the supply on and off at the collection level. Suppliers want a steady stream and some consistency. Going on a buying spree to save a few bucks just creates peaks and valleys, and it disrupts the industry.”

Another industry executive says that paper mills have developed a comfort level over the years and have gradually decreased their feedstock inventory. “Before, mills were operating on a 25- to 30-day inventory, but now with improvements in distribution, transportation and arrangements with suppliers, that figure has gone down to about a 10- to 15-day level. Some smaller mills even operate as low as on a one- to two-day level because they have tweaked their delivery arrangements; and older mills just do not have the space. So, just-in-time is not a matter of choice for those mills.”

One thing seems certain, and that is the importance of the relationship between the mills and the suppliers. Many agree that the partnership between mills and suppliers is the key to help mills obtain that comfort level. Once a new mill starts operating, and developing those partnerships, then it will begin to carry increasingly less inventory until it reaches its own comfort level.

Because waste paper is a by-product, a mill has to get it when it’s there, says Roy Geiger, vice president of waste paper for Fox River Paper Co., Appleton, Wis.

“Twenty five years ago, some mills used to have a three-month supply on hand, but today it’s just not feasible,” says Geiger. “At Fox River we have a three-day supply on hand, another three-day supply in trailers and another three-day supply rolling on its way. It’s not exactly just-in-time – at least what we think of as just-in-time. The key is having good relationships with suppliers, and lots of them. We use 325 tons per day of post-consumer paper – all office grade – and I don’t think we’ll ever have a problem getting enough paper, no matter how it is delivered, simply because 85 percent of office paper is still landfilled in this country.”

There were rumors throughout the paper industry that some mills had to shut down during last winter because feedstock supplies were disrupted by bad weather. “I had heard that was the case with a few mills,” says Marty Rusk, manager of procurement for Packaging Corp. of America, Cleveland. But neither he nor anyone else would say which mills those were.

“All I can say is that there was a lot of panic buying this summer due, in part, to the low inventory situation,” he says. “I think that, generally, you will find that mills up north will tend to inventory more feedstock simply because of the possibility of transportation disruption in the winter. But all mills may start storing more feedstock closer by as safety nets.”

Another paper mill purchasing manager says he tries to keep inventories as low as possible, usually between four and 10 days. “I don’t think we would get any lower than that,” he says. “There are many uncertainties in transportation that I think prevent us, or anyone else, from going any lower. Most mills have a core of suppliers that keep the flow coming, and that is the ideal situation. For us to build a larger facility to store more inventory would not be feasible. So, cost is a very powerful driving force – especially in this industry.”

STEEL INVENTORIES HIGHER

Although paper mills are fairly comfortable with lower inventories, steel mills are not. Mills keep plenty of scrap on hand, in part, because of quality issues, according to Richard Burlingame, a Cleveland-based consultant in steelmaking raw materials who was the director of research and chief metallurgist for the Luria Bros. Corp. for 25 years.

“If a mill is melting scrap that doesn’t quite make the heat it wants, then there are problems,” he explains. “The mill then has to find out why the heat was bad and look for new feedstock. And when all of that is going on, it can get hectic. Therefore, a mill has to have the grades it needs on hand, so that it can go to them if a heat is bad. Otherwise, the mill would have to reschedule operations, and you do not want that to happen.”

With feedstock, Burlingame says, there are a wide range of available grades with a wide range of qualities, and because of that, there is a greater risk to steel mills. “Items like merchant pig iron, hot briquetted iron, prompt industrial scrap and #1 grade scrap – you can depend on those types of feed stock in a just-in-time delivery mode, because the quality is uniform,” he says. “But even #1 scrap can be laced with copper, bronze and other alloys. Therefore, it is important for a mill to have plenty of scrap nearby ready to go.”

“I don’t know of any mill that uses just-in-time,” says Ron Evans, nonferrous purchasing manager for Schnitzer Steel Products Co., Portland, Ore. “It is just too dangerous. They have to have enough inventory on hand to melt at all times, that’s just the nature of the business. For us, as a processing yard, we want to process the scrap and get it out of here as fast as we can, but we do not employ any just-in-time measures.”

“I just don’t think just-in-time makes sense with all the competition for scrap today,” adds another purchasing manager. “Mill operators have to consider the delivery time it takes for scrap to reach the mill. In some cases, that could be more than a week. Plus, mills buy from numerous sources and most do not have one dedicated supplier that would make just-in-time workable. I really do not know of any steel mills that are using just-in-time in the true sense of the word.”

Luke Pietrok, purchasing manager for Cascade Steel Rolling Mills Inc., McMinnville, Ore., says that he keeps about a 30,000-ton supply of scrap on hand which normally lasts three weeks. “We are receiving scrap every day and our typical inventory is a blend of different grades,” he says. “We don’t have a strong scrap supply in our immediate area, so we have to travel further out to get the feedstock. Overall, I think that if we went to a just-in-time inventory method it would jeopardize our operation. The only way I could see that method working is if a mill had a dedicated yard as its primary supplier.”

FAST FOR FOUNDRIES

Unlike steel mills, foundries of all types seem to operate more in a just-in-time environment. The reason why is similar to why paper mills run with minimal inventories on hand – lack of space. For example, the Ford Motor Co. foundry in Cleveland is fed primarily by a ferrous scrap yard directly across the street from the facility. The foundry maintains a limited supply of scrap on hand, with the majority of it being stored at the primary feeder yard. A rail line connects the two, so there is an easy, uninterrupted supply of scrap.

“Traditionally, foundries have been close to suppliers,” says Burlingame. “Many times you will find a small foundry connected to a small yard, with the foundry requiring delivery of a certain raw material from the yard many times a day.”

Art Grossman, president of Gross-man Bros, Milwaukee, Wis., whose company’s scrap operation feeds numerous foundries, says that just-in-time delivery is a part of his company’s everyday operation. “We have materials that we have to ship on a daily basis to customers, most of which are foundries. That’s because foundries normally have only a day of supply on hand due to space limitations.”

The company supplies material to both ferrous and nonferrous foundries, and to some it is the majority supplier. “There is one foundry that we supply with 90 percent of the feedstock, so it is important to be able to have the scrap that is needed,” says Grossman.

He cannot remember ever running out of a feedstock for a customer, especially for the foundries that operate in the just-in-time mode. “We have always been able to meet our customers’ needs,” says Grossman. “Price is important, but service is more important in these types of situations.”

And building a good relationship with a customer is paramount to establishing the trust that is needed in just-in-time deliveries. “There is one foundry, for example, that we have been working with for 60 years,” he boasts.

MINIs AND MICROs

As increasing numbers of minimills come on line, they are being positioned closer to manufacturing to be more efficient and to provide just-in-time deliveries of their own products. But they will still need a healthy supply of scrap and will have to draw from scrap yards near and far.

“Because the minimill is positioning itself for just-in-time delivery of its end product, doesn’t necessarily mean that it will require just-in-time scrap deliveries,” says one industry observer. “It will just mean that more scrap will be needed, and the new mills will have to keep on top of that as competition heats up and more steelmaking capacity comes on line.”

Taking just-in-time one step further, some steel companies are experimenting with the idea of an even smaller version of the steel mill – the “micromill.” Like the foundry that is most often next to, or in, a manufacturing facility, the micromill would be located next to a major manufacturing facility, like an automobile manufacturing plant. And also like the foundry, the micromill would require a dedicated, nearby feeder yard, or its own yard for supply.

However, technical issues still make the micromill just an idea. And Burlingame has concerns about shifting toward the manufacturing customer, and away from the raw material supplier. “I think that it is more critical for the mill to be closer to its supplier, than to its customer,” he says. “These new mills are expensive to operate. The cost per hour is very high, but the cost to stockpile scrap is not. So, I think they need to locate where the abundance of scrap is located.”

The author is managing editor of Recycling Today.