The Web? There's No Reason To Rush
David H. Hannah doesn't consider himself a technophobe. It's just that as the chief executive of Reliance Steel & Aluminum Co., a Los Angeles metals distributor, Hannah wasn't convinced that a wrenching, Net-centered overhaul was necessary--not for such a prosaic operation. Now, he's starting to wonder. Rather than bet the company on such a move, Hannah is following a game plan familiar to many Old Economy companies: He is dipping his toe cautiously into Web-based sales with the help of a couple of Net-savvy partners.
Founded in 1939, Reliance operates in 21 states. It booked a record of nearly $1.6 billion in sales in 1999. Almost all of that came in the old-fashioned way: over the phone, the fax, or from in-person sales calls. And rather than rely on snazzy, Internet-style logistics and outsourcing, Reliance ships product--typically thousands of pounds of steel or aluminum coils--just as it did in the 1970s, via a fleet of heavy trucks operating from one of its 74 processing and distribution centers scattered across the country.
In late 1999, Reliance's mode of operation took a big step forward. The company signed on as the principal supplier to MaterialNet Inc., a new Internet business that conducts reverse auctions on its Web site (www.materialnet.com). These are auctions in which buyers post their terms, and sellers then compete by lowering their bids until the digital gavel is pounded.
Reliance also contracted with Invera Inc., a Montreal company that specializes in software for the metals industry, to create an e-commerce site expressly for the metals dealer.
As Reliance steps slowly onto the Net, Hannah, 48, says his 585 salespeople don't have to worry about losing their jobs. He compares Net technology to fax machines, which were supposed to revolutionize sales 10 years ago, but ended up simply facilitating communications between the company and its clients. And while the Net might help Reliance serve its handful of giant customers, such as Boeing Co., the majority of its 65,000 clients are small and medium-size companies. Few of them use the Web to place their metals orders, Hannah says. Their orders are generally small--they average $861--and must be delivered within a day. What's more, since sales growth has come steadily for Reliance--mostly through acquisitions--Hannah doesn't feel beguiled by the Net's ability to pull in customers in distant locations.
Meanwhile, other forces are reshaping the metals business. Pending antitrust clearance, the world's Big Five aluminum makers soon will become the Big Three. By the end of June, the world's biggest aluminum producer, Pittsburgh's Alcoa Inc., plans to close its takeover of No. 3 Reynolds Metals Co. of Richmond, Va. A second deal would create a formidable No. 2, via the merger of Canada's Alcan Aluminium Ltd. and Algroup of Switzerland. Although industry consolidation threatens to limit the number of metals suppliers, Hannah welcomes consolidation as it promises to stabilize prices. Hannah spoke recently with Business Week's Chicago correspondent Michael Arndt. Here are edited excerpts of the conversation:
Q: How is the Internet bringing changes to your business?
A: We have two parts to our Internet initiative. We recently signed up with MaterialNet. We're looking at that part to be more of an extension past our typical geographic sales-coverage areas. Our normal sales areas are within a 200-mile radius from each of our service centers--basically, as far as we can get our trucks out and back in the same day. Most of our business arrives when the phone rings today and we're shipping processed metals to the customer's specs tomorrow. So, our association with MaterialNet is giving us some exposure to customers outside those traditional boundaries. The orders that we see coming through MaterialNet are also larger, with slightly longer lead times--not next-day delivery, but two to three weeks out.
Q: What's the second part?
A: The other part of the e-commerce thinking we have is to develop a package where our customers can speak to us directly and enter information and capture information right in our business system. That's a bit more exciting to us because we think there can be some efficiencies there.
Q: Do you hope to do most or all of your transactions via the Web someday?
A: No. We're really looking at the Web as just another tool for our customers. And if customers are inclined to use that kind of device, then fine. We went through a similar process back in the '80s with fax machines. People thought, "Great, we don't have to have salespeople anymore. All those customers are just going to fax their orders in." Well, that's not true. Relationships still mean a tremendous amount. We intend to maintain our relationships and to keep our sales force. If some salespeople find their time gets freed up because we do have some customers who choose to use that communication tool, then they can go out and search out new customers. We're looking at it as just another tool to offer our customers.
Q: What kind of Internet sales are you booking now?
A: Not too much. We expect that's going to improve as MaterialNet does more advertising and they get their name out. And it will improve as people become more familiar or more comfortable with the site. But I expect it will mainly be companies looking for larger orders on longer deadlines. They're going to have a longer planning horizon, because for the reverse auction, a customer has to wait to take bids. So I do expect MaterialNet will lead to more activity, but I don't think it will get to the point where that will represent the majority of our business.
Q: Will you also try a more traditional approach, where you put excess inventory up for sale on a site?
A: We haven't listed any of material out there. But we're still looking at that, because everybody has some slow-moving or excess items in their inventory.
Q: Shifting gears, what effect will the pending mergers in the aluminum industry have on your company?
A: We buy from most of the major companies, including Alcoa, Alcan, and Pechiney. I think the mergers will have a positive impact. One of the things metals service-center companies suffer from is wild swings in the pricing and availability of aluminum. The price goes back and forth in a cycle of overcapacity and tight supply. We prefer it when prices are static or rising slightly. With fewer players, there shouldn't be the same rush to ramp up capacity and we won't have these wild swings.
Q: How significant have the swings been?
A: We've seen price swings of 30% within a year, both up and down. Down swings hurt our inventories--if you don't keep stock, you don't have anything to sell to your customers--but when prices start dropping rapidly, your inventories lose a lot of value.
Q: Are aluminum prices likely to stay at status quo levels for a while?
A: They've come up a fair amount since the low point of last year. Overall demand is still pretty good. There's a little more activity in the aerospace industry, but we don't expect it to rise dramatically and get up to the levels it was at in 1997 and 1998 for a couple more years. But as for general aluminum consumption, the rest of the second quarter looks good. Demand could slow a little and pricing could soften slightly into the fourth quarter. But we're not expecting a plunge again.