Thursday, December 19, 2013

The True and Timeless Value of Customer-Supplier Relationships

by James M. Terhune, President/CEO

The Merriam Webster Dictionary defines the word “relationship” as “the way in which two or more people, groups, countries, etc., talk to, behave toward, and deal with each other”. With the ascendency of technology in the arena of business and commerce, some pundits foresee a future where personal relationships will be as passé as the teletype and the Dictaphone. The soothsayers of business trends read the digitized tea leaves and prognosticate that the instantaneous and virtually continuous exchange of data will make human interaction all but unnecessary. The customers’ requirements for goods and services will be posted to “the Cloud” and the suppliers will, in turn, respond with their offerings and the marvel of electronic procurement will be supported by digital sales and silicon chips. With all due deference to the techno-business gurus, that scenario may seem efficient but it is far from effective. While e-commerce may be acceptable for retail commodity purchases, it is an undeniable fact that industrial procurement will continue to require and highly value solid customer-supplier relationships. The validity of this statement rests on these four essential tenets; flexibility, responsiveness, trust and creativity and these catalysts of a successful buy/sell transaction can only be supported by a person-to-person business relationship.

In the course of industrial procurement, the purchasing agent will most probably be tasked with buying non-standard components or standard products with “special” variations or specifications. Or the buyer will be expected to procure standard items but the shipment of the product must be made in five days, not the typical lead-time of five weeks. In all of these circumstances, negotiation will be called upon to try to reach the desired result. Any successful negotiation requires flexibility. People have the capacity to be flexible; to negotiate through the gray areas of such procurement challenges. Software systems and business algorithms tend to deal only in black and white.

We all seek responsiveness in our business dealings, whether personal or professional. If that were not true, companies would not be toting the promise that when you call them you will speak to “a real person” or making the claim that “customer service is our only business”. But the responsiveness required in a successful customer-supplier relationship transcends these slogans and marketing punch-lines of the retail world. Responsiveness in this context requires active listening to each other to truly understand the requirements that define the purchase and the perimeters that govern the supply. Responsiveness requires a willingness to probe and question to insure that each participant has a complete and clear understanding of the other’s position. Responsiveness requires a sharing of information and acquired knowledge to prevent an oversight or miscalculation. Responsiveness requires mutual empathy which encourages a mutual acceptance of the shared benefit of a successful buy/sell transaction; the iconic “win-win”. Rows of high-speed servers and wireless routers do not engender empathy nor do they excel at active listening.

Trust between buyer and seller is the keystone of the transaction; it is the element that nourishes confidence and security. Trust promotes and encourages future business opportunities. Charles Green in his book “Trusted Advisor” reminds us that “…actions, not words, are the only language of trust.” Green suggests that trust in the business realm is earned when “…you are perceived as working to achieve your goals through helping others achieve theirs.” and when “…you are seen as focusing on the longer term relationship rather than the immediate transaction.” Trust must be earned over time and the development of mutual trust and professional respect is a journey, not an event. People are best equipped to make such a journey.

It was Shakespeare who offered the saga advice that applies to writing plays (and perhaps to writing blogs), “Save the best ‘till last.” Creativity is arguably the most important benefit that all parties, in the customer-supplier relationship, bring to the effort. It is an acknowledged fact that many of the major product innovations and refinements introduced by the industry-leading manufacturers started out as the brain-child of one of their suppliers. A well-established supplier-customer relationship creates a safe and trusting environment that fosters that creative exchange of ideas and “what ifs”. Having the benefit of the talents of your suppliers’ engineers and designers, working to make your products better, is a tremendous advantage to the customer. And, being instrumental in the idea generating process to make your customer’s products better validates your value and worth as a supplier. But without the security and trust afforded by a solid business relationship, the creative fireworks will fizzle on the launch-pad.

The cultivation and nourishment of a meaningful and enduring business relationship between buyer and seller is a challenging and laborious task, and your efforts must be continuous throughout the life-cycle of the relationship. The demands are considerable; tell the truth, truly listen, offer your best advice regardless of who benefits, share your knowledge, practice civility and consider compromise to promote a mutually beneficial outcome. It is hard work to be sure. But if you begin to question the value of the effort required to maintain your business relationships, whether you are the customer or the supplier, remember the saga advice of successful businessman, celebrated columnist and author of the bestseller, “Swim With the Sharks”, Harvey Mackay who observed, “The quality of your life is determined by the quality of your relationships. The quality of your business is no different.” Indeed!

Monday, June 3, 2013

The Future of the US Steel Industry

The Metallic Backbone of Our National Defense
by James M. Terhune, President/CEO

“And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department.” One wonders if Andrew Carnegie, the 19th century industrialist who so dominated the steel industry in his time, would still be so sure of the wisdom of his statement if he were observing the state of US steelmaking in 2013. It is an undeniable fact that the United States is no longer the world leader in steel production. Indeed, most industry pundits see no viable scenario for American producers to regain their past dominance in the foreseeable future. China has eclipsed all other nations in steel production and is projected to increase production by over 4.5% in 2013, reaching a record 7.5 million tons. While this growing dominance in steel production by China may be of no concern to some, to those engaged in the defense industry this trend is disconcerting at best.

While the public interest has been captured by the emergence of the “smart technologies” that support our military sector like stealth and drones and robotics, the reality is that steel continues to be the metallic backbone of our defense. And, a parallel reality is the proven importance of the steel industry to the general economic health of our country. A growing number of economists and political scientists have warned that the single most important threat to America’s standing in the world community is our anemic economy and our unsustainable debt. The American steel industry directly employs over 150,000 people. Economic research confirms that for every one job directly attributable to steel production, seven support jobs are created. It is estimated that the US steel industry will contribute well over $100 billion in value added and over $250 billion in gross output in 2013. But this level of production and resulting economic benefit is by no means assured. One need only look to the current malaise of the European steelmakers; most notably ArcelorMittal. With the European demand for steel down over 8% in 2012 no robust recovery predicted for 2013, ArcelorMittal announced plans to permanently close its plant in Liege, Belgium.

So, there are two pivotal questions that need to be addressed by those whose business success and professional careers are inexorably tied to the defense industry. Are the vital interests of the United States military critically dependent on the health and economic well-being of the American steel industry? And, if the answer to the first question is a resounding “Yes”, then the second question is obvious; “What can be done to insure the long-term success of the US Steel industry?”. Here are three suggestions.

1. Accelerate the use of natural gas as the primary energy source for steel production. Steel production is critically dependent on energy for the melt and manufacture process. The recent discoveries of natural gas deposits in North America have begun to be utilized by steel producers as a less expensive fuel source. More needs to be done to safely access these deposits and thereby reduce the industry’s energy costs to produce.

2. Increase the research and development efforts of new steel alloys and expand the sustainability of steel products. One of the key factors in the resurgence of the US auto industry has been the development and incorporation of advanced high-strength steels. These high-tech steels provide vehicle designers a combination of high strength, superior formability, dent resistance and improved crash energy management and, perhaps most important, reduced weight resulting in improved MPG. This type of metallurgical research should be supported and expanded, by a partnership between the public and private sectors. As to sustainability, all steel is 100% recyclable and statistics for 2012 show that more steel was recycled than aluminum, copper, paper, glass and plastic combined. Innovative applications for steel in both the civilian and military sectors will improve the product sustainability and will reduce both the unit cost and the environmental impact of production.

3. Enforce fair trade law to insure a level playing field for all steel producers and insist on compliance with the spirit and intent of the Specialty Metals Amendment. The Berry Amendment USC, Title 10, Section 2533a, requires the Department of Defense to give preference in procurement to domestically produced, manufactured, or home-grown products, most notably food, clothing, fabrics, and specialty metals. The Federal Government must confront the unfair trade practices of foreign competitors and insist on aggressive enforcement of the prescribed trade remedies.

While it is impossible to know what Andrew Carnegie would think about the current state of the American steel industry, I suspect that he would have a great deal to say upon learning that in 2013, the United States’ share of the world’s crude steel production is 6% and the People’s Republic of China’s share is 47%. Perhaps Mr. Carnegie would sum up his reaction to the current state of steel by pointing to a quote from a 20th century titan of industry, Jack Welch of General Electric fame who said, “Control your own destiny or someone else will.”

Friday, December 7, 2012

Budget Sequestration & Defense Spending

The Federal Budget Sequestration & Defense Spending Repercussions
It’s Not the Fall that Will Kill You…It’s the Sudden Stop.
by James M. Terhune, President / CEO

While the highly-toted budgetary experts employed by the national news media and their Internet and Twitter based brethren continue to crank the warning siren of impending doom, the American public tries to sort out the truth from the hyperbole about our fiduciary woes.  From the perspective of this observer, there is one very significant budgetary segment that is being largely overlooked in this shrill and frantic reporting on the impending “fiscal cliff”. As the media maps out the road to the cliff, there are two drivers each behind the wheel; President Obama who will not compromise on raising the tax rates for those earning $250,000 and above and Speaker Boehner who insists on significant reductions in entitlement programs. But what about the drastic reductions in Defense spending that will result from sequestration? In the current reporting, if this topic is mentioned at all, it is but a footnote to the “headline” issues of tax rates and entitlement reform.

If your only conduit to the news is the main-stream media than you may not be aware that the Senate did pass a defense spending bill this past week. The Senate bill supports the budget request for many major investment programs including:  CH-47 and UH-60, and AH-64 Block III helicopters; Army’s Ground Combat Vehicle and STRYKER programs; and F-35 (JSF), F/A-18E/F, EA-18G, and C-130J aircraft.  The bill approves multiyear procurement authority for V-22, Virginia-class submarine, and Arleigh Burke-class destroyers.  But what about sequestration?

At the December 5th press briefing, Mr. George Little, spokesperson for the Department of Defense responded to a question about the approaching “cliff”. He revealed that, “We are consulting with the Office of Management and Budget and have been instructed to pursue internal planning on sequestration.”  So, does this directive from OMB signal the Defense Department’s budgetary Armageddon? Probably not. William Hartung from the Center for International Policy noted that while sequestration is bad management, the Pentagon – and the private industry supporting it – isn’t necessarily facing the drop-off in spending that some are painting it out to be. “Many of the Defense Department’s prime contractors have large backlogs; the Pentagon has $100 billion in unobligated dollars,” Hartung said. “There’s no fiscal cliff for the Pentagon. It’s more of a gradual slope.”

And what about the budgetary “cost savings” that typically occur at the end of military combat? Recent history verifies that the United States has cut its military expenditures by about 30% at the end of major conflicts. President Dwight Eisenhower cut defense spending by 27% after the end of the Korean War; President Richard Nixon reduced the budget by 29% as we withdrew from Vietnam, and Presidents Ronald Reagan, George H.W. Bush, and Bill Clinton combined to cut military spending by more than 35% as the Cold War came to a close. So is it reasonable to expect a 30% reduction in military spending as we bring our troops home from Iraq and Afghanistan?  Probably.

But what about the impact of the anticipated Defense Department budget cuts to weapons systems, aircraft, ships and troop levels on American business? From my vantage point as an owner of a small business that provides raw materials to the military and their prime contractors, here are my predictions. Reductions of uniformed troop levels will not be dramatic. Perhaps some reduction and/or consolidation in the number of high-ranking command officers. Some delays and/or cancellations of weapons programs will occur, but the strategy will focus on delays from development to production, or on reduction of quantities to be produced, verses outright cancellation. What I do believe will occur is a significant reduction in the military’s civilian support staffing, which will precipitate an increase in the demand on their supply chain vendors to provide more technical, administrative and logistical support for defense procurement.

Recognizing that it is inevitable that budgetary reductions will be made at the Pentagon, I believe the successful strategy for suppliers to the military is to insure that you are capable and prepared to shoulder more of the procurement support functions that are required. Those companies that demonstrate that they can successfully fill the void left by the civilian staffing reductions will be ones left standing after the sequestration storm makes landfall.