What I Learned About How to Purchase Steel Down in the Bayou

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Ed. note: Jonas Divine currently serves business intelligence leader at Atlas Holdings, a private investment firm based in Greenwich, Conn., that recently acquired Atlanta-based Merchants Metals. He has contributed before to our sister site, Spend Matters, on the topic of blockchain and P2P networks, and we just published Part 1 of his most recent article on SM, titled: Bleeding on the Bayou: Procurement Near-Misses in Times of Price Volatility.

Here is an excerpt:

Fred Farmer’s interminably slow drawl echoed off the rickety galvanized siding of his Louisiana-based hot-rolled steel tube factory, unfortunately located on the banks of a bayou threatened by frequent floods and the occasional alligator infestation.

“2-3/8 pipe…4-1/8 pipe…6-3/8 aluminized…6-3/8 anodized…6-3/8 black vinyl coated…6-3/8 green vinyl coated…”

Farmer’s proud and emphatic articulation of his exhaustive product catalog called to mind a veritable Bubba Gump of the steel tube industry. He was born and raised in a rural Louisiana town called Ponchatoula about 50 miles outside of New Orleans, and rose up the ranks from maintenance to line supervisor and ultimately CEO after his uncle Willy succumbed prematurely to a heart condition (most likely brought on by decades of fried alligator and beignets consumption).

In his second-quarter-of-2008 earnings conference, Farmer introduced his third-generation family business to its new owners, an investment company represented by a team of Boston-based former management consultants with a strong affinity for 2×2 matrixes, Porter’s Five Forces diagrams and Starwood rewards points. The acquisition had barely closed a month before this distressed middle-market enterprise with flagging sales experienced a precipitous rise in raw material costs, driven largely by China’s insatiable appetite for iron ore.

After Farmer finally exhausted all possible combinations of product sizes and features, he “saw a 4% decline of topline year over year combined with rising operating costs leading to a 15% decline in EBITDA.” The tone and content landed as nothing short of a death knell to those of us responsible for turning this ship around, and one of the most critical concerns for the remainder of the year was when to purchase raw materials given that rising commodity costs had contributed significantly to Farmer’s margin compression.

Over the course of my time spent advising on supply chain matters at this new acquisition, I learned how important it is to resolve questions on how to purchase as much as or more than those dealing with when to purchase.

Read the full article on Spend Matters here.

Before joining Atlas Holdings, Jonas managed supply chain and procurement departments at some of the largest mining and metals processing companies in the world, and led business transformation projects involving technology upgrades, new ERPs, and procurement platforms. He holds an MBA from MIT Sloan School of Management and a BA from Columbia University. Contact him at jonas[dot]divine[at]alum[dot]mit[dot]edu

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