Steel Works Inc Case Study

 

Steel Works, Inc.

2

Background

Steel Works, Inc. is a manufacturer of customand specialty use steels with annual sales of $400million in 1993. Founded in 1980 by three brilliantmaterial scientists from MIT, the company nowemploys more than 2500 people at 5 differentlocations. With its first product, DuraBend™, thecompany earned a reputation as a high technologyprovider and quickly established a niche positionin what is typically regarded as a commoditymarket. Its two divisions, Specialty Products andCustom Products, are very separate and distinctbusinesses.

Custom Products

Lemming’s first interview of the morning waswith Stephanie Williams, President of the Customdivision. “Our motto is ‘The Customer ComesFirst, Second, and Third, But Never Last’”explained Ms. Williams. “The Custom divisiondevelops most of its products under contract for asingle customer, for sale exclusively to thatcustomer, and works very closely with them frombefore a product is invented until our product is apart of their product. We have the best scientistsand engineers in the world, and that is why thebiggest companies in the U.S. come to

us

. We’vedesigned the metals that make our customers’products work great. That’s why we typicallyaren’t allowed to sell our products to anyone butthe original customer – our customers’competitors would love to buy from us.”Williams went on to explain that eventuallywhen a product is no longer leading-edge, theCustom division will negotiate with the customerto allow Steel Works to sell the product to anyone.“Such discussions are an art form,” explainsStephanie, “but it can make a huge difference insales revenues for us.”“Take DuraFlex™ R23, for example. Wedeveloped that under contract for one of the bigthree auto companies. It took us over a year todevelop, and there is still no product like it in themarketplace. Yet we were able to convince ourcustomer to allow us to sell it openly on themarket at a 30% premium over what we chargethem. We still sell in large volumes to ourcustomer, and Specialty Products makes a smallfortune manufacturing the exact same steel andselling it at a higher price to four other automanufacturers and a copier company.”Williams displayed a schematic of CustomProducts’ manufacturing system. The threemanufacturing sites were each located within afew miles of one of Custom Products’ three R&Dcenters, which served the West, Midwest, andEastern regions of the U.S. Customers and theirproducts were each assigned to a specific plantand R&D center. Steel Works operated severalwarehouses located near the plants.The only question on Lemming’s mind waswhy the inventory levels were so high. The replywas direct and blunt: “We’ve got to keep ourcustomers happy. Customers aren’t satisfiedwhen you tell them that they have to wait threeweeks for delivery! We listened to that corporateinventory reduction mandate in 1991 and cut ourinventories back 20% and we were running out of product every week!”

Specialty Products

“Let me tell you something,” Barry White saidas he stormed into the room, “we are

nothing

likeCustom.” Mr. White was President of theSpecialty division, whose sales have been the mosthard hit in recent months.“That Custom division has nothing to do allday but play in laboratories. We’re the ones out inthe marketplace selling every day and bringing in67% of this company’s revenue. I’ve got the bestsales force around, and they are what makes thisbusiness work.”“Custom thinks they’re so special becausethey’ve got some big customers, well guess what,so do we. Our largest customer in Specialty bringsin 10% of the revenue for this company, and it iswith blood, sweat and tears that we keep themand everyone else as our customer. You want tosolve some problems? Manufacturing is wherethe problems are, you should talk to them. I’vegot my plant managers screaming at me every daythat the CSR’s [customer service representatives]are screaming at them because the customers isscreaming at the CSR’s for not having any steel inthe warehouse to ship. And that’s not the CSR’sfault, it’s manufacturing’s fault.”“Last week the IS department comes knockingon my door telling me how great it would be if allof Steel Works was on a common computersystem, and wants me to pay $12mm for mydivision. They think they understand our business

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