08.08

Extruding Confidence

With its low-cost production and service center distribution strategy, SCM is weathering the aluminum extrusion storm well.

By Tim Triplett,
Editor-in-Chief

A victim of the weak U.S. economy, the market for aluminum extrusions has eroded by more than 17 percent in the past two years, from over 4 billion pounds to less than 3.5 billion pounds. But because of its lean manufacturing and service center distribution approach, Service Center Metals claims to be holding its own in the market for soft aluminum extrusions.

Service Center Metals was founded by three friends, industry veterans and all former employees of Reynolds Metals Co.: R. Scott Kelley, president and CEO; Chip Dollins, vice president of operations; and R. Randolph Weis, vice president of sales and marketing. In 2001, the trio got together and began discussing the opportunity they saw for a tightly focused aluminum mill with state-of-the-art equipment.

Recruiting investors—and going without salaries themselves for nearly 17 months—the partners managed to pull together enough capital to construct and equip a 78,000-square-foot mill near Richmond in Prince George, Va.

The company began production in July 2003 with a single line including a 2,800-ton Presezzi extrusion press and Omav material handling equipment. Business was so good that by April 2006, they had added a second line with a 5,500-ton press, doubling the size of the plant to 155,000 square feet and tripling its capacity.

Central to SCM’s success is a small but highly motivated workforce.

The economy was booming in 2003 when the company first launched, but in the past two years has cooled considerably. “Even in these difficult market conditions, we have been operating five or six days a week, 24 hours a day,” says Kelley.

The company posted $140 million in revenue last year, up from $99 million in 2006. Such rapid growth ranked Service Center Metals No. 4 on the Virginia Chamber of Commerce’s list of the 50 fastest growing privately held companies in the state.

Sourcing billets from Alcoa, which are heated and forced through dies of various sizes, the company produces over 1,000 different profiles of rod, bar, pipe and tube on the two presses. Because of its service-center focus, the company places a special emphasis on enhanced machine-grade products with improved hardness, straightness, surface conditions and dimensional control. “We’ve had a great relationship with Alcoa ever since we started up. They have been impressed with our success and we have become a significant customer with them,” Kelley says.

But as proud as they are of their physical plant, it’s their distribution strategy that really sets them apart, say the company’s top managers. “What makes us unique is that we are the only extrusion mill that is 100 percent focused on the service center industry,” Kelley says. “We have no direct sales. We have been focused on service centers since day one.”

Kelley, Dollins and Weis point out that their service-center-only distribution strategy has insulated them from some of the extrusion market’s downturn. While the market as a whole has declined by more than 17 percent, service center sales have only dipped by 6 percent. Because service centers cover so much territory in terms of both geography and product range, they help SCM spread the risk of any shifts in the market.

While Kelley declined to specify the total number of service centers selling SCM extrusions, he says the company has achieved its goal of nationwide coverage. Much of its current business comes from a 300-mile radius around Chicago, he says, where service centers supply machine and equipment manufacturers that remain busy despite the downturn in the economy.

Everything produced at SCM is made for a specific customer, which allows the company to operate without a depot. Orders are shipped all across the country from its Virginia headquarters. In line with its lean manufacturing approach, raw material and finished goods inventories are kept to a minimum of 14 or 15 days combined. “We focus on running everything made to order. Fundamentally, we believe the inventory belongs with the service centers and not with us,” Weis explains.

The conventional approach to extrusion production is to run the same product for as long as possible to minimize downtime from die changes and to build inventory. With its modern equipment, motivated workforce and made-to-order philosophy, SCM does not hesitate to change dies dozens of times each day as needed to turn orders around quickly. “A die change here is like a tire change in a Nascar race. They do it as fast as they can,” says Kelley.

In 2007, SCM produced 80 million pounds of extrusions from three shifts working five or six days per week. It has the capacity to produce over 100 million pounds, but opts to take a break on Sundays.

Building and construction is the biggest market for aluminum extrusions, and it’s also one of the weakest in today’s economy. The biggest extrusion market served by service centers, however, is machinery and equipment, which is faring relatively well. “Because of the weak dollar, that market is actually doing better. Foreign companies are building plants here in the United States because they can’t afford to ship product here. People are also exporting significantly more overseas,” Dollins says.

The volatile price of aluminum, at a record high around $1.50 per pound in July, is a concern for an extruder like SCM, whose margins get squeezed if it can’t raise prices as fast as the cost of billets increases. “It wasn’t too long ago when metal would move 3 or 4 cents in a month, and that was a big deal. Now it does that in the morning and changes again in the afternoon. That’s a big difference in the metals equation,” Kelley notes.

Because of aluminum’s high price, service centers are being cautious in their purchasing, and maintaining lean inventories. “One thing about service centers: you are either dedicated to their business or you’re not,” observes Kelley. “They demand a very high level of service, and if you are not used to delivering that level of quality and response, you are just not going to be successful.”

One customer, David Shaw, executive vice president and chief operating officer of Copper and Brass Sales Inc., Wallingford, Conn., says SCM’s can-do culture is evident in its approach to customer service. “We are proud to have been SCM’s customer from day one. They don’t offer the full size range, but what they make, they do very, very well.”

Details about the company’s startup costs and ownership are proprietary, Kelley says, “but we have a very bullish group of investors who want to expand the business based on our success so far.”

SCM’s board of directors includes: J. Wilt Wagner, retired vice chairman of Reynolds Metals Co.; Joe A. Hollingsworth, Jr., owner and CEO of The Hollingsworth Companies; Ken Smither, president of Smither & Co.; Raymond C. Dee, retired executive vice president of Cressona Aluminum Co.; William D. Kramer, retired chief financial officer of Alcoa Engineered Products; Jim Rogers, president of SCI Investors and lead director for Owens and Minor; and Kelley, the company’s president and CEO.

He remains confident that SCM’s lean manufacturing approach will help sustain it during these lean economic times. “We don’t have a lot of anything around here, other than business and fun,” Kelley concludes.

SCM Strives to ‘Nucor’ Aluminum

Service Center Metals aspires to be to aluminum what Nucor is to steel—but with an exclusively service-center focus. Since opening its new plant near Richmond, Va., five years ago, SCM has been striving to set a new standard for low-cost production in the soft extrusion segment of the aluminum market.

The partners credit Bob Lowe, president of Nucor Building Products, for giving them guidance and inspiration. Nucor’s metal building group constructed SCM’s original plant. “We thought when we approached him that maybe we would get an hour or two of his time, but he spent the entire day with us. He was just a fanatic about Nucor and what they believe,” recalls Dollins. “A couple years later we went back for a checkup and flew our whole safety committee to Nucor for a meeting.”

Loosely modeled after Nucor’s productivity-based compensation approach, workers at SCM have a powerful incentive to maximize their productivity. Plant workers can actually double their hourly wage based on how many pounds of extrusions they produce each day.

SCM’s workforce currently numbers 116. “The incentive program has been one of the primary drivers of our success, without question,” says R. Scott Kelley, SCM president and CEO. “As you walk through our plant, you won’t see a lot of people, but those you do see will be working with a purpose.”

SCM does not promote internal competition by pitting one shift against another. Rather, to promote overall teamwork, the bonus is distributed company wide based on the number of pounds the plant produces in each 24-hour period. Incentives are calculated daily and paid weekly, on top of the workers’ base pay, so there is a close correlation between their effort and their reward.

SCM’s compensation program minimizes personnel issues by making the system self-policing, Kelley notes. “If someone is not carrying their weight, their teammates will give us a heads up.”

“We try to keep it simple,” adds Chip Dollins, vice president of operations. “If you make an incentive program so complex you can’t explain it to people, then it doesn’t work.”

There’s little need for an organizational chart at SCM. The organization is nearly flat. The founders and handful of middle managers sit in the same cubicles as everyone else. “People tend to focus on size of office and how many windows they have. Not us. That is part of the culture we have tried to build here, a team-based approach,” says Dollins.

The open office environment promotes ready communication between co-workers. Sales, customer service and operations people are sometimes clustered so they can address problems together quickly. “We work very hard on communication. We’re very sensitive to keeping that small-company feel,” Dollins adds.

Each Tuesday is a training day. All three shifts spend an hour during training discussing safety issues, customer feedback, quality and the financials from the previous month. “Training is a big part of the culture here. We try to do something meaningful every week,” Kelley says.

The three partners are proud of the open, inclusive and creative company culture they have cultivated, with a workforce on a first-name basis with both management and machinery. It was at the suggestion of employees that they decided to name their first extrusion press Elvis. When they added the second, larger press two years later, it was dubbed The Boss (after rocker Bruce Springsteen, of course). The high-tech Fanuc packing robot on the shop floor was named Hal, after his computer cousin in “2001: A Space Odyssey.”

“As we tell our people, if you are not adding value by improving quality, improving service or reducing cost, you’re wasting your time. We have eliminated the bureaucracy you see in most companies,” says Kelley.