When providing a product like steel to a customer, how important is experience and knowledge of the industry to business success?

CASE STUDY: ASSOCIATED STEEL TRADING, LLC

2013 Philip J. Adelman and Alan M. Marks

Background

Ian Epstein was born and raised in Chicago and attended Southern Illinois University in Carbondale, Illinois. He graduated cum laude in 1973 with a double major in management and public relations and a minor in marketing. Following graduation, Ian went to work for a private scrap steel company that purchased and processed scrap steel from various manufacturing companies in the Hammond, Indiana, area. During his 2-year tenure, Ian learned the basics of the steel business, including purchasing, sales, and processing.

Ian was then hired by Signode Corporation of Glenview, Illinois, to handle all of their scrap. Signode is the world’s largest manufacturer of metal and plastic strapping material. While working at Signode, Ian was in charge of getting scrap from all of their plant locations arranged, sorted, and sold at the highest profit margin. After 2 years, Ian was moved into the purchasing department as an assistant steel purchasing agent and within a year was promoted to chief purchasing agent. He purchased coil and sheet stock and various steel stock for the strapping division from major steel mills throughout the world.

In 1979, Ian became the second person in the United States to qualify as a certified purchasing manager, having passed all of the certification tests offered by the National Association of Purchasing Managers.

Based on this experience and his new certification, Ian believed he was worth more money and was hired by Quality Steel in Bensonville, Illinois, as the assistant to the Vice President for Purchasing. He worked with Quality Steel for 5 years until he had a major disagreement with one of the owners of the company. The company had committed to purchasing a machine that was designed strictly for American Motors Corporation (AMC). Ian believed this to be a terrible idea, because no contract had been provided nor was a market analysis done. He thought that this move could ultimately bankrupt the corporation. Because of this falling out, he was fired. Subsequently, AMC filed bankruptcy and ceased to produce automobiles; as a result, Quality Steel also went bankrupt.

Ian had constantly discussed the errors of the company with his wife Barbara, and most conversations started with, “If I owned this company, I would . . . ” Ian had really spent several years developing a business plan and knew essentially what he wanted to do if he were to have his own business. When he was fired, although he had several job offers, his wife convinced him to start his own steel company. She said that she would get a job working evenings so she could stay with their son during the day and Ian could work out of the basement of their house. At this point, Ian had savings of about $15,000, a mortgage and a 1-year-old son. He formed Associated Steel Sales as a C corporation, purchased a business phone and a fax machine, and began the business out of his home. His original concept was that if he could purchase steel out of a steel mill at a low price and with no overhead or fixed expenses, he could sell the steel to small manufacturing companies in the Chicago area at a price below that of any competitor. Because of his experience in purchasing, Ian knew virtually all of the marketing people at the major steel mills, which typically did not take an order for less that 100 tons (200,000 lbs of steel). Because of this limit, most small manufacturing plants didn’t have the volume of sales required to order directly from a steel mill. Sheet steel is used in everything from steel buildings to cars and trucks, appliances, and even that small bracket that is used to hold shelves. Most small manufacturers require only a few thousand pounds of steel and can’t order from steel mills.

Knowing this, Ian purchased his first five coils of steel from Inland Steel on credit for $25,000 dollars with 30-day terms. A coil of sheet steel weighs up to 25 tons. Ian had the steel delivered to a public processing warehouse where he could have the coil slit into the widths required from his customers. It took him about a week to sell the five coils of steel to many small manufacturing plants. All of his steel is sold with a term of 2 percent net 10 days. This additional discount speeded his cash flow and he collected for his sales before the steel mill payment was due. This system provided him with sufficient cash flow to pay the steel mill and secure another load.

Ian took any excess profit and reinvested it into the company. He did not take any profit out of the company for more than 2 years. His family lived off savings and the salary that his wife Barbara earned. For the first year, Ian concentrated on this system of purchasing coils from the mills and selling it at a discount to small manufacturing plants. This allowed him to establish large lines of credit with the steel mills, which resulted in an excellent reputation and a big customer base. After 2 years, Ian hired two partners and the business really began to expand. One of the partners had different purchasing experience with other mills and the other partner had more marketing experience than Ian. After a couple of years, the marketing partner and Ian bought out the third partner.

The basic model never changed. Associated Steel Trading purchases from the mills directly at prices and in quantities that small manufacturing companies cannot afford. They bring the steel into a processing facility and process the steel for the customer or sell it on an as-is basis. The only thing that Associated Steel owns is steel; all processing, transportation, and storage is subcontracted. By 1996, with the use of computers and his basic customer base, Ian believed that he no longer had to be located in the Chicago area, and he and his family moved to Scottsdale, Arizona. In 1997, Ian bought out his partner and changed the name of the company from AST Corporation to Associated Steel Trading, LLC. He released all of his Chicago employees and hired an outside steel-marketing representative to market his products. As of 2013, Ian runs the company out of his home and he is his company’s only employee. Sales for 2011 were approximately $3.5 million, and with no real fixed expenses, the company has net margins of about 14 percent.