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Vertical integration in metal fabrication

One metal service center’s approach to fabrication could be a harbinger

welded parts

Formed and welded parts are staged for downstream processing at American Fabricators Inc. (AFI), which was purchased by Kloeckner Metals Corp. (KMC) in 2015.

It’s no secret that metal service centers have boosted their fabrication capacity over the years to meet the needs of OEM customers. Although many haven’t trumpeted the fact, most know that vertical integration is a reality in some areas of the metal fabrication business.

Roswell, Ga.-based Kloeckner Metals Corp. (KMC), whose German parent acquired Namasco Corp. and Macsteel Service Centers USA and merged the two under the KMC brand in 2012, in recent years has been developing a new approach to the U.S. metal fabrication market. Earlier this year the company rolled out a formal communications effort on its website, laying out the full scope of metal fabrication services, from plate rolling and laser cutting to stamping, punching, bending, welding, assembly, and kitting.

“We’ve definitely been doing more with our marketing efforts and promoting our fabricating services to grow that area of the business,” said Steven Nghe, head of marketing and communications. “If we can make the supply chain more efficient, at the end of the day, it’s going to be better for the customer.”

KMC’s strategy involves more than just an expanded service offering, though. It’s a new approach to the metal fabrication supply chain.

A New Approach

In 2015 KMC acquired American Fabricators Inc. (AFI), a custom fabricator in Nashville, Tenn., and that AFI location remains the center of KMC’s fabrication capabilities. But the company is looking to build its fabrication capabilities at other branches to meet the needs of local customers, most of which are large OEMs.

Mark Zumbrun, director of fabrication, has spearheaded the effort. He began his career at Ryerson, then joined Edgecomb Metals more than 25 years ago. Edgecomb became Macsteel, which was acquired by KMC.

In recent years KMC has been sending out a portion of its fabrication work to fab shops on a toll basis; the fab shops charge for the labor and machine time, but they don’t own and so don’t charge for the metal.

“This has helped small fab shops particularly when it comes to working with large OEMs that are increasingly difficult to penetrate,” Zumbrun said, adding that fab shops that partner with KMC are effectively “utilizing the KMC sales team … The model we employ allows the smaller fabricators to increase cash turnover and cash flow, while focusing on their core competency.

“Also, we have our money in metals. Instead of sending you [a fabricator] just enough material to run three or four days, with frequent machine setups, we’re going to put enough metal on your floor to satisfy the job’s production requirements for a full month. You set up, and you run a month’s worth of inventory. I’m then going to get it off your floor, and we’ll pay you for it. And you didn’t tie up any money in metal.”

The arrangement also overcomes another common issue in custom fabrication: obsolete inventory. As Zumbrun explained, “We have contracts in place to deal with obsolescence, slow-moving inventory, and receivables issues.”

laser cutting

A laser finishes a cutting cycle at AFI.

Integrating the Fabrication

AFI has its own website and remains a brand, but it’s also integrated into a larger whole. It remains a center of fabrication expertise at KMC, considering the talent it employs and the number of machines (more than 35) it has on the floor.

As Zumbrun explained, the kind of fabrication equipment KMC acquires at its more than 45 North American branches hinges on the needs of the nearest OEM customers. Plants near heavy-equipment OEMs are investing in 8-kW fiber lasers, high-tonnage press brakes, and blasting equipment. KMC plants near, say, HVAC OEMs focus on lighter-gauge fabrication. “We sit down and talk with our customers and ask where they need help over the next five years. Where is their capacity tapping out? Are you running out of press capacity? Then we’ll focus on that area. Are you running out of roll forming capacity? We’ll then focus on that.

“And with many fearful that the boom of 2018 has turned into the bust of 2019, we have companies that thought they would have larger capex budgets than they have. But we have them covered.”

Zumbrun added that local customer needs also dictate how far downstream the manufacturing processes at a particular KMC plant go. “Some plants can take it to a point. We can punch it, laser it, bend it, and then we stop. Other plants do welding, hardware insertion, kitting, and line setting. And we’ve even done private-label manufacturing, where a completed product went into a box that went to the customer’s distribution center, who then sent it to the final customer.”

He added that company engineers—both in flat-roll cutting and leveling and in fabrication—collaborate to eliminate quality concerns. It’s all designed to eliminate the unexpected, and the farther downstream the unexpected occurs, the more expensive it can get. Say a job requires laser cutting a sequence of long, skinny parts. The laser operator sets up the job, runs the sheet, and lo and behold, stress in the sheet is released, the part springs up and crashes into the laser head.

As Zumbrun explained, KMC aims to eliminate these issues before any metal reaches the laser. “We spend a lot of time on the front end going through those types of scenarios. For some products we might have to look into another type of leveling. Other products might not require it. Regardless, now we have experts on both sides [coil processing and metal fabrication], and there is no finger-pointing.”

Capacity Management

How much fabrication capacity an OEM builds in-house—be it a comprehensive amount or next to nothing—depends on the business model; the nature and complexity of the work; the level, type, and reliability of fabrication capacity in the area; the demand cycle of the product; as well as the company culture and available expertise.

No matter the situation, though, everyone in the metal fabrication supply chain strives to reduce risk. Relying too heavily on internal fabrication capacity—especially without building relationships with outside partners that could offer additional capacity when needed—could in many cases introduce excessive risk. Machines might be busy during peak seasons but sit idle during the slow months, and no manufacturer wants millions of dollars’ worth of equipment sitting idle for long periods. And if those machines can’t meet capacity demands during busy times, an operation without outside partners runs up against a wall; it just can’t produce any more. All this makes the metal fabrication supply chain a fluid thing.

“A lot of our fabrication work comes from customers bumping up against capacity,” Zumbrun said. “So we know for six months out of the year they need us, and the other six months they’re going to do the fabrication themselves. That’s OK, and it’s all communicated upfront.”

The same can apply for KMC’s custom fabrication and stamping suppliers. KMC works to keep its available capacity as flexible as possible. Part of this strategy involves outsourcing some capacity to custom fabricators and stampers, many of which act as toll processors, charging for the processing time and labor without owning the metal.

Mark Zumbrun of Kloeckner Metals Corp.

As director of fabrication, Mark Zumbrun leads fabrication sales for both KMC and AFI.

What if a custom fabricator has a specific technology or process that’s unique or requires significant processing? “Say one of our [fabricator] partners has a $10 part that’s $8 worth of metal. We’re going to pay them the labor [to fabricate the metal as a toll processor]. But then there are some parts that are worth $2 of metal and there’s $8 worth of value-add. In this case, the fab shop will sell to the customer directly, and we’ll just sell them the metal.”

“We’re Not a Fab Shop”

Look at a bar chart depicting the revenue mix of many job shops and you’ll likely see a narrow head (the high-revenue work) and a long tail of low-volume work. A typical job shop might have hundreds of customers, but just a handful provide the majority of revenue.

According to the annual “Financial Ratios & Operational Benchmarking Survey” from the Fabricators & Manufacturers Association, around five customers make up more than 50 percent of shop revenue at the typical custom fabricator. Of course, high revenue concentration introduces risk. A shop can grow on the backs of one or a few large customers, then be left out to dry when those large customers change sourcing strategies.

Especially since the last downturn, many fabricators have put a renewed focus on diversification. And according to Zumbrun, KMC’s approach can give a fabricator another avenue to achieve that diversification.

“We’re not a fab shop,” Zumbrun said, clarifying that by “fab shop” he means the small job shop that thrives on low-volume work. “We’re a parts manufacturer and inventory control and supply partner. We don’t want to make five of this and four of that. We can’t make any money on that. That doesn’t fit our structure, so we’ll steer all that business to our fabricator partners.”

He described a typical scenario in which a member of the KMC sales team visits an OEM customer or prospect and reviews a list of part numbers. “That person might see a list of 400 part numbers. We can manage the top 300, but we can’t accept the bottom 100, so we’ll turn it over to our partners. We share our leads, because we want them to be strong. In fact, we’ve had some of our fabricator partners add equipment, like a fiber laser, because we’ve helped them build a new market. This in turn makes [the fabricator] a better supplier to Kloeckner, because the shop has additional capacity.”

Smoothing the Ripples

Vertical integration has been around for decades in metal fabrication, as each player attempts to service customer needs in new ways. Custom stampers get into custom fabrication and vice versa; fabricators have their own machine shops; sheet metal fabricators delve into tube fabrication; metal service centers and OEMs build up their own fabrication capability. All work to shorten time to market, reduce price and increase quality for the ultimate customer, and reduce risk to make the business sustainable.

Zumbrun said he sees KMC’s place in all this as a supply chain manager. It can supply the metal as it always has. But it can also grow in supply chain management and, ultimately, work to smooth out the ripples of chaos caused by the unexpected.

About the Author
The Fabricator

Tim Heston

Senior Editor

2135 Point Blvd

Elgin, IL 60123

815-381-1314

Tim Heston, The Fabricator's senior editor, has covered the metal fabrication industry since 1998, starting his career at the American Welding Society's Welding Journal. Since then he has covered the full range of metal fabrication processes, from stamping, bending, and cutting to grinding and polishing. He joined The Fabricator's staff in October 2007.