Special Issue: Collaborative Commerce - Steel Industry Provides Fertile Ground for Virtual Distribution

Virtual business models often have been theorized but seldom demonstrated. If, however, one were charged with finding a successful, real-life example of a virtual business, the beleaguered domestic steel industry would hardly seem the place to look.

But that's where you will find Straightline Source, a subsidiary of U.S. Steel based in Pittsburgh, Pa. Straightline has developed a remarkably robust virtual business model that after only one year of life has proved its value in the marketplace and is quickly gaining adherents.

Straightline essentially is a steel distributor with a difference - it owns no fixed assets, such as plants or equipment or distribution centers. Instead, it contracts out all physical services and manages the flow of information that coordinates those services. The purpose, and the result, is an extremely efficient and collaborative supply chain that benefits suppliers, processors and customers of carbon and flat-rolled steel products.

"We compete in the steel distribution business against traditional distributors that process steel products, but we go about that by creating opportunities in a different way," says Dan Pavlick, managing director of information and strategy at Straightline. "We don't own any fixed assets, but we coordinate the flow of material and information."

	"Straightline's mill to end-user service is going to change the marketplace." - Gary Corson of Taylor Coil Processing

Straightline, which grew out of supply-chain improvements initiated by parent U.S. Steel, is truly an e-business. While it accepts orders by phone or fax, it encourages customers to order via EDI or through the web, where they can configure products online and immediately receive multiple quotes with different volume and service parameters. Order status is continually updated and accessible to customers online, and Straightline applies technology to leverage the orders of multiple customers and enable processors to reduce scrap and waste.

With traditional operations, explains Pavlick, customers either purchase steel from mills and have it delivered to processors for cutting to specification, or they buy direct from one or more of the approximately 3,500 steel processors, or service centers, in the U.S. Arrangements then must be made to deliver the cut steel to the customer, often on a just-in-time basis.

Generally, in the first category are very large customers like auto and appliance manufacturers, while the second group consists of smaller customers - metal stampers and fabricators and OEMs of manufacturing equipment, agricultural tools, heating and air conditioning units and much more. Straightline primarily is aimed at these small to mid-sized companies, which purchase steel both as contract customers and spot buyers, but in relatively small quantities. The company's service area currently spans 34 states, most of which are east of the Mississippi River.

For its customer base - now numbered at more than 5,000 and growing - Straightline provides a one-stop solution. It buys the steel, has it delivered to processors, arranges for them to cut the steel to the customer's requirements, and takes care of final delivery.

"When we buy the steel we need to be as cost effective as anyone and as cost competitive as anyone," says Pavlick. "From that point forward the costs all are related to things like freight and processing fees. We reduce costs by making things more efficient for the processor - for instance, making sure that when they put up a coil of steel they don't cut it once, take it down, and then two orders later have to put it up again. And we aggressively manage the minimization of waste." Even cutting seemingly insignificant amounts of waste out of a production process can result in significant savings over the course of a year, he says.

Concept Praised
Gary Corson, general sales manager at Taylor Coil Processing, Lordstown, Ohio, one of Straightline's 25 processing partners, says the Straightline concept is "truly unique" in the steel distribution industry. "Straightline's mill to end-user service is going to change the marketplace with a better way to do business," he says.

As an e-business, Straightline is built on web architecture. The basic enterprise system is Oracle 11i, which is used for order management and financial management. Other key applications include specialized order optimization software and demand forecasting solutions from Strategic Systems Inc. (SSI), Evanston, Ill., and a proprietary system called iTrac that tracks inventory from the mills to the processors and through delivery. iTrac also manages the electronic status messages that move between the parties, keeping the system up to date on inventory and orders.

The process begins when SSI orders steel from its mill suppliers, only one of which is U.S. Steel. This uncut steel is allocated to its processor partners based on forecasts developed using tools from SSI. Customer-specific forecasts, historical information and regional dynamics that consider the type of steel typically used by customers close to individual processors all are considered in determining the raw materials to order for each processor. By combining the buying power of all its customers, Straightline is able to get a better deal from the mills. In addition, says Pavlick, the company uses SSI SmartFORECAST to run 'what if' scenarios to model different sourcing patterns. "We take all this demand information and run different simulation models, so we can go to the mills and say, for this very specific range of products, maybe light-gauge or galvanized or heavier gauge hot-rolled, we can present this type of order quantity," says Pavlick. "What we want to do is hit the mill's sweet spot - to order from specific mills the product that they can manufacture most efficiently and most profitably. That makes us a good partner."

Straightline also focuses on creating efficiencies for its processors. On its own, the incremental business from Straightline increases efficiency, since most processors operate at only 50 percent capacity. "We are not adding physical processing capacity to the market," says Pavlick. "That capacity is abundant. What we are doing is leveraging that capacity and using it more effectively."

Key to this strategy is Straightline's ability to give its processors more efficient work orders. For this, it uses specialized software from SSI that aggregates daily orders and optimizes them based on a number of factors designed to keep costs down. Primary among these is a trim-optimization program that makes the best use of raw material. "One of the key constructs of our business is the ability to aggregate like orders," says Pavlick. After passing through the Oracle system, orders are sent to the SSI application, which analyzes them based on cut dimensions, grade and gauge, customer location and promised delivery time. Factors such as raw materials and finished goods inventory at each processor and processor capacity also are considered. An optimization engine then combines orders that are a good match. For example, a processor may have in inventory a master coil of a specific gauge steel that is 60 inches wide and several thousand feet long, explains Shoaib Abbasi, president of Strategic Systems. Combining two orders for 28-inch wide sheets of similar length would allow these orders to be cut simultaneously, with only four inches of waste. "We actually create layouts for the processor to look at that show the most efficient cutting patterns," he says.

This solution is based on SSI's existing trim optimization software, says Abbasi, but some custom features were added. "The difference with Straightline is that it is trying to optimize across a whole network of manufacturing facilities, so what we had to do was to extend our computations to include logistics elements - basically transportation and delivery costs - as well as the fee that Straightline pays the processors, which changes from one processor to the next," he says.

Partner Web Site
The cutting layouts as well as all other order information, including promise date, are made available to the processors through a partner web site. Processors take the work orders and build them into their production schedule. As the processing takes place they provide status messages to Straightline in real time. "The processors transmit messages to us continually with notices like, 'production complete,' 'ready to ship' or 'ship eligible, awaiting release'," says Pavlick. "A 'production complete' message automatically triggers internal communications that set off the logistics planning process, which includes the planning, coordination and dispatching of carriers to pick up the materials and deliver them to the customer on their requested delivery date."

Straightline owns but does not hold the inventory it buys from mills and ships to processors. To improve its cash-to-cash cycle, the company is committed to achieving better inventory turns than the 3.5 to 4 that is typical of the steel processing business. "We aspire to turns in the high teens," says Pavlick. "We think we'll reach that because so much of our business is based on the quick and timely exchange of information."

The tools make it easier for customers to manage the process of procuring steel.

The Straightline model also creates efficiencies for customers, beginning with order entry. At the Straightline web site, customers can use an application called StraightQuote to get an immediate price quote on an order, either of stock products or by configuring an order of specific grade, gauge, length and width. At least 16 prices are returned, showing differentials for varying quantities and lead times. By clicking on any of these prices, a customer can see the price per hundredweight of steel and the total weight of the specific order. It can then place the order online.

"We have an arrangement with new customers where we immediately go out to a credentialing service that confirms the customer is who he says he is based on his tax identification number or some other factor, checks that customer against a credit-type service, and reports back to us in real time," says Pavlick. "This reduces our cost by eliminating the need to maintain an internal credit group and it reduces our credit exposure. It also helps customers register quickly to do business with us."

Straightline recently introduced StraightEdge, an application designed to help customers that buy steel products under long-term contracts. This tool allows them to share their forecast information with Straightline by uploading forecast spreadsheets. "We can actually help them build and plan their forecast, which in turn helps us reserve material and plan out finished goods production so that we are replenishing finished goods in a very time-sequenced way and not producing too much at any point in time," says Pavlick. "We collaborate with customers on longer-range forecasts, say 12 to 16 weeks, and then lock in shorter forecasts, say one to four weeks."

StraightEdge also allows customers to view their historical usage and planned releases by part number, along with the finished goods inventory that Straightline currently has available to ship. Customers can thus compare the accuracy of their forecast versus their actual needs, enabling them to arrive at more accurate estimates going forward.

They also can review all their specifications, which helps ensure quality and reduce errors. And they can see where they stand relative to their contractual purchase commitments and execute releases against those commitments. "The contract tools help drive down material costs, but, more importantly, they make it simple for customers to manage the process of procuring steel," says Pavlick. "This allows them to better manage inventory turns of their own stock so they can reduce the cost of working capital."

The proprietary StraightEdge technology was developed and built internally by a team of Straightline software engineers and developers. It was designed to be simple and intuitive, with no complicated technology to learn or download.

Generac Power Systems, a leading provider of generator systems for industrial and consumer markets, based in Waukesha, Wis., is one of the customers that piloted the system. "StraightEdge allows us to see everything online - part files, orders and inventory," says John Cotter, CPIM, manager of production and inventory control for Generac's facility in Eagle, Wis. "By reporting everything online, we've cut communication time by 90 percent."

Cotter says Generac also expects to significantly increase inventory turns, "which will be a major cost savings for our company. Faster inventory turns allow us to use less space and reduce costs, which in turn improves profitability."

Straightline keeps tabs on inventory and orders with its proprietary iTrac system. iTrac is responsible for managing status messages between Straightline and its suppliers, processors and logistics providers. Every time messages are received, iTrac updates inventory records. "It handles the coordination of inventory levels that are being increased as new inventory arrives at processors and charged out as customer production is completed, as well as the valuation of that inventory," says Pavlick.

"This was really the foundational system that Straightline was built on," he adds. "It was developed by U.S. Steel over the last five to six years to support its large OEM customers, primarily the big three automakers."

After production at the processor is complete, iTrac sends a message to Straightline's third-party logistics provider Transtar, which also is a wholly owned subsidiary of U. S. Steel. Using software from Alternative Distribution Systems (ADS), Homewood, Ill., Transtar looks at a combination of orders and their ship-to zip codes and optimizes loads to balance freight and achieve maximum capacity.

"The idea behind our business is to continually look for ways to use information relocation as opposed to information dislocation as a means of driving more precision in order efficiency," says Pavlick. "We think everyone benefits."