Bacon's Rebellion

James A. Bacon



 

The Anti-dot.com

 

As a start-up company in the old-economy aluminum industry, Service Center Metals hopes to build its competitive advantage through quality, service and lean operations. 


 

When Scott Kelley sealed the funding for his Richmond start-up company, Service Center Metals (SCM), he celebrated the next day by driving up to Washington, D.C., to take in a Bruce Springsteen concert. Not long after, as coincidence would have it, co-founder Chip Dollins scrounged a ticket from an old frat brother to see “the Boss” play in Las Vegas. Kelley confesses to being a serious Springsteen junky. “I’ve seen him 40 times – at least.”

 

Another of Kelley’s icons is Mark Borchardt, who made a documentary, American Movie, about his two-year effort to produce a low-budget horror flick. An autographed poster of the cult serves as an office totem for Kelley, who took almost as long to get his company off the ground. Says the clean-cut Kelley of the scraggly haired, independent filmmaker: “He’s been an inspiration to me.”

 

Upstart Service Center Metals is busting into an old, worn-out industry – aluminum – dominated by aging giants like Alcoa and Kaiser, and beset by low-cost competition from Russia and China. But Kelley, 42, and Dollins, 41, believe they can prosper as a small, nimble firm in an arena where the massive, integrated manufacturers stumbled. Bringing different values and fresh perspectives – you didn’t see many pictures of either Borchardt or the Boss in the old Reynolds Metals headquarters -- these young executives may provide a model for the revitalization of Virginia’s hard-hit manufacturing sector.

 

As Dollins says enthusiastically, SCM has been given a chance to build a manufacturing operation “with a clean slate.” The company gets to install state-of-the-art equipment designed for a lean, flexible manufacturing process. It gets to start fresh in labor relations, cross-training employees to work multiple jobs and compensating them for performance. The company, unencumbered by legacy quality controls, gets to build ISO standards into the manufacturing process from the beginning. Focusing on core strengths – metal fabrication and customer service – it gets to out-source tangential tasks such as logistics and distribution to those who do them better.

 

None of these concepts are particularly radical. But they had difficulty penetrating sprawling, hierarchically organized aluminum giants like Reynolds in Richmond, and the Pittsburgh-based Alcoa, which took it over. Unions, corporate politics, antiquated equipment, legacy management systems and a conservative corporate culture all made it difficult to implement change. The beauty of American capitalism – and the hope for a rebirth in Virginia manufacturing – is its ability to spawn new enterprises like SCM with total freedom to put the new thinking into practice.

 

While Kelley and Dollins bill SCM as a new-style company, they haven’t gotten caught up with “new economy” jargon. Unlike ephemeral Internet start ups, they will make a tangible product: aluminum rods and bars. They’ll sell their products for a profit. And they will have real customers, many of whom they have lined up before the plant construction is complete. Says Dollins: “We’re the anti-dot.com.”

 

The aluminum industry is highly competitive worldwide. Since the fall of the Soviet Union and the collapse of military demand for aluminum, Russian industry has glutted world markets with the metal. Aluminum is a major industry in Latin America, and China has become a significant player in global markets as well. The primary advantage of foreign firms is cost – they can produce aluminum ingot and primary aluminum products cheaper than plants in the United States can.

 

Kelley is targeting a slice of the aluminum market – distributor service centers -- accounting for nearly 17 percent of pounds shipped. Distributors serve as middlemen between the companies which refine the bauxite ore and cast it into ingots, and the manufacturers who transform the metal into auto parts, electrical switches and window frames. Due to short lead times and the high cost of shipping extruded bars and rods, this segment has proven difficult for foreigners to penetrate. Imports account for only one percent of the U.S. market.

 

SCM plans to purchase aluminum in cast aluminum logs and extrude it, initially, into 350 or more standard shapes for further processing by a distributor or the final manufacturer. Product integrity is crucial. The extrusions must adhere to specifications related to chemistry, tensile properties and surface quality. Customers, who set up their machine tools to work within a narrow range of tolerances, place a premium on consistency. Quality is a mantra at SCM.

 

So is flexibility. The company is building a production line designed for short runs and rapid re-tooling – as many as 15 different products per shift – so it can respond quickly to orders. By cross-training employees to work at each production station, SCM will have far more flexibility to move people where they’re needed to eliminate bottlenecks. The big companies debated endlessly how much initiative to allow their employees, Kelley says. At SCM, the issue is settled. “Empowerment won’t be an option -- work like you’re empowered or you’ll be replaced!”

 

Dollins, former director of quality at the former Reynolds Metals, wants to build a team-oriented culture geared to achieving specific goals for productivity, quality, safety and shipping performance. Borrowing a common practice among steel mini-mills, the company plans eventually to make bonuses a significant part of the compensation package.

 

Instead of grafting state-of-the-art quality controls onto an antiquated management structure, Dollins will build procedures to be ISO certifiable from the beginning. Likewise, he plans to employ six-sigma methodology, a disciplined, statistics-based approach to problem solving. “It won’t be the management flavor of the day,” he says. “We’ll build that into our production process from Day One.”  

 

The layout of SCM’s aluminum micro-mill is designed to tear down barriers. The open-office environment will offer no special perks for the bosses. “One size cubicle fits all,” says Kelley. “There won’t be any debate over the size of the office.” The goal: no egos, no turf, no kingdoms, no politics. The unremitting focus of the back office will be providing fast and responsive service. “You’re on the phone [with the customers] all day long.”

 

Such goals should be relatively easy to achieve in the start-up phase when the company starts production with a single production line and 50 employees. But Kelley vows not to expand the plant beyond two production lines. If the company grows beyond that, it will build a new facility at a different location. Size and hierarchy are the enemies.

 

Aluminum distributors excel at logistics and inventory management, so SCM will let them handle that end of the business. The company’s mid-Atlantic location southeast of Richmond, with easy access to three interstate highways, makes it superbly positioned to supply its customers.

 

The company has begun construction of its manufacturing plant, located in the SouthPoint Industrial Park in Prince George County; hiring should begin in May 2003. SCM expects to avail itself of the outstanding pool of industry talent in the Richmond area left by the closing of the Reynolds Metals headquarters.

 

Virginia's economic development community was indispensable in putting the $13 million financing together, Kelley says. Private funding came from Envest in Hampton Roads, but a $1 million loan from the state’s revolving loan fund was a critical piece of the financing; without that subordinated debt, the company might never have swung a $2.4 million bank loan. The company also plans to take advantage of the state’s workforce training program.

 

The SCM experiment bears watching. As factory production increasingly moves offshore, it’s getting more and more difficult to recruit new manufacturing investment. Companies that do come here are branch-plant operations with a dubious long-term commitment to the Commonwealth. If Virginians want a viable manufacturing sector, we need to figure out how to grow and build our own.

 

At SCM, the crucial ingredient is human capital. What makes the company special is neither proprietary technology nor access to huge piles of investment capital. It's the entrepreneurial zeal and industry experience of the senior management team. What will make the company successful, if it does succeed, is the application of widely known but hard-to-implement management strategies and the recruitment of a highly skilled, super-productive workforce. Instead of steering scarce state resources into site-location incentives to recruit outsiders, Virginia’s policy makers should focus on the development of human capital and the dissemination of state-of-the-art manufacturing methods that make Virginia enterprises more competitive.

 

-- October 21, 2002