While all see change as imminent, not everyone agrees on the impact.
Seated far back to front: Dane Winters, Executive Vice President, OSG Tap & Die Inc., Bradley Teets, Vice President Business Development, Iscar Metals Inc., Joseph Fristik, Publisher, AMERICAN MACHINIST, Thomas Grasson, Editor, AMERICAN MACHINIST, Rick Goulter, Director Sales & Marketing, Valenite Inc.
In an effort to explore how the cutting tool industry is changing and explain the forces impacting it, AMERICAN MACHINIST Editor Thomas Grasson and Publisher Joseph Fristik assembled an elite roundtable of seven executives from prominent cutting tool companies.
It quickly became apparent that the members of the roundtable were not unanimous in their thoughts, especially when asked about the direction of the cutting tool industry over the next five to ten years. However, all were in agreement concerning the powerful influences affecting the industry and the importance of anticipating these forces and planning accordingly.
AM: What are the critical success factors and challenges facing the cutting tool industry?
Maybe the most critical thing facing our industry is how we're going to deal with the impact of the Inter-net and the impersonalization of our industry. Mitsubishi strongly believes that there is still a significant personal factor in the business decision. And, we think it's going to be a challenge for us to deal with the impersonalization of e-mail and buying over the Internet, while keeping a personal touch with customers.
I think one of the things we have to address is how to keep innovation, productivity, and the cost-reduction component alive for our customers. We constantly introduce new products that reduce costs for our customers and increase their productivity. I think that's one of the things we have to continue to do as an industry.
Another thing I think about is that the industry doesn't always recognize what cutting tool manufacturers have to offer. I believe it's important for us to continue to push this message of productivity and innovation and the fact that cutting tools only amount to 3% of the overall cost of manufacturing. And, that a 15 or 20% increase in feeds and speeds will allow a 10 to 15% decrease in the cost of manufacturing.
I want people to know that cutting tools are not just another consumable product. You can save a lot of money if you do the right things with cutting tools. I think most of the big users know this, but the medium and the small customers haven't always gotten that message. It's up to us to bring it to them.
One of the things that I am very interested in is the relatively slow growth out-look for the industry over the next few years. I agree that we need to continue to innovate. But, technologically speaking, we're not looking at revolution; we're looking at evolution and the ability to better innovate existing technologies.
Another aspect critical to our success is the notion of supply-chain optimization. I know that's an overused term and just about every industry talks about it. But the fact is, we are going to have to become much more efficient in all elements of the supply chain. We need to keep driving costs down, while driving up the value for our customers. This involves all elements of the supply chain.
Another challenging area is in simplifying the application of our products. In many cases, it is not only difficult for our customers to understand our products, but it is also hard to communicate through our own field sales organizations and distribution networks. So introducing new technology into a customer base that has many varying and different needs becomes the challenge.
I would like to emphasize that we provide our value by helping customers improve their chipforming operations. This is key, not only to us but also to the future of the industry and as well as America's ability to be competitive.
One of the things critical to our future success is faster turnaround time on special products. Also, I feel we're going to have to develop niche high-tech products to meet the end users' changing needs, and we will need to improve technical assistance.
The need to help end users—from the design stage through even the shipping process—is becoming more of a factor. We will be required to offer a wider range of services and information via the Inter-net and other state-of-the-art systems. End users are already asking us to be a supplier of technical information, knowhow, and application expertise.
AM: How are customer demands changing?
Customer expectations will continue to go up in terms of delivering value. I agree that we are going to have to be much better at providing applications that deliver value. But, I also think of value in terms of order management, forecasting, and working together with customers in the development of specials while driving down costs.
Customers will expect us to work with integrators and third-party sup-pliers. We have to get better about working with other channels, whether we are comfortable with them or not. And that, without question, is going to change the financial dynamics of where we make a return.
We are going to have to do more training because the products are newer, and there are more of them coming out. Also, there are a lot of new people in the industry who don't know how to select tools and don't know how to optimally use them. I think some of this will be classroom training, and some of it will be interactive on the Internet.
One thing I see is that supply-chain issues are really channel issues.
Cutting tools represent just a small percentage of the dollars spent by most customers. But the supply-chain issues cover everything they buy. So I think that most customers over the next two to three years will be preoccupied with supply-chain issues.
"Maybe the most critical thing facing our industry is how we're going to deal with the impact of the Internet and the impersonalization of our industry."
First, you have to identify your customer. Those of us selling through distribution channels face different challenges and problems than those selling directly to the end user. We've all seen how end users pressure distributors and manufacturers to eliminate redundancy in the supply chain.
One of the things our customers request is improved test-tool programs. Customers want us to come into their facilities, spec out the proper tools, run them, and then document the information. And of course, the main thing our customers want is service.
AM: Where is the cutting too lindustry headeding the next five to ten years?
Innovation and change is going to drive the partner-ship activity between the end user and the cutting tool manufacturer as well as between the cutting tool manufacturer and the machine tool builder. I think this accelerated rate of change and innovation is going to drive us closer together, or at least I hope that's what it is going to do.
By being another substantial channel, we are going to see the Internet play a bigger role. We are going to machine more exotic materials. And we are going to see more stainless materials and more aerospace materials like Inconel and titanium. We're seeing a transition in the automotive industry now from cast iron and steel to aluminum and aluminum with cast iron liners—the so-called bimetal material.
All of these changes are going to accelerate. We are not only going to have to offer cutting tools for these materials, but we will also need to be the partner that provides all the service and all the knowledge as to how to use them.
Change tends to be evolutionary, not revolutionary, in our industry, and there still is a huge installed base out there. In some cases, we have products that are 20 years old and are still the best products for a particular application. There will be a lot of change, but I think it will move along on a more evolutionary-type basis.
There is an erosion of the older technology. For instance, high speed steel continues to erode, whereas carbide and advanced materials are taking up a larger share of the chipforming-type market. We all talk about how, in the last three years, the Internet has caused changes. I don't think in three years we're going to have that type of change in the cutting tool industry.
There are revolutionary changes going on in the channel. But, in terms of product development and the application of products, change is more evolutionary because of the large installed base.
Concerning the evolutionary, not revolutionary, rate of change in the industry, I disagree with Mr. Belden on one point. I believe the Internet is going to have a greater impact on the industry, and sooner than we think. The Internet is going to change the way we do business, and it is not going to be ten years from now. It is going to be within the next five years.
I think one of the things that is going to happen is the soft savings from procurement programs will start to disap-pear and customers will be looking for hard savings. With machine tools doing multiple tasks, we will see a lot more tooling doing multitasking. Twenty years ago, everyone said, "We want to go standard." Today, to cut costs and cut time, we are getting more into altered standards and specials. Although we will continue to have standard products that will go through the standard supply chains, there will be a definite need for the multitasking tool.
Within the next ten years, we will see the market for cutting tools shrink. Because of overcapacity, I think competition will be more fierce than it is now.
Also, new technologies that focus on areas such as coatings, coolants, machining practices, near-net-shaped parts, machine tool design, and composite materials will have a major impact on the perishable cutting tool market.—
I don't know if I agree with Mr. Winters. There is a push in the industry to make tools go faster and machine more exotic materials. This compensates for any loss that we have due to overcapacity or the fact that people can regrind tools more than they have in the past.
A carbide cutting tool should last about fifteen minutes. If it's lasting a lot longer then that, you are probably running your product too slow. In order to improve overall productivity, it needs to go faster. So, I would argue the overcapacity issue. I really think new materials and machine speeds are going to use up those products.
The high-speed steel market is decreasing at a rate of three to four percent every year, and carbide tends to be the beneficiary of that decline. But I don't see the overall market shrinking. I just think we'll be much more efficient in how we do things. Some of the changes in the technology impart significant advantages to customers, but they take a significant amount of resources to develop.
Even though the use of high-speed steel is declining, I don't think it will ever go away. On the other hand, it wasn't very long ago when turning tools and milling tools were high-speed steel. And I think we're going to see drills and end-mills go down that same road.
From my point of view, there's one aspect that is particularly attractive. That's the notion of environmental sensitivity. If it increases, and it seems to be in Europe and clearly in Germany, then tools will be consumed a little faster than they have been.
The other aspect I think will continue is industry consolidation. There are a number of large companies at the top, but there are also a lot of small privately owned companies in niches developed over time. So consolidation is likely to continue.
I believe training is very important, especially with regard to advanced materials, higher spindle speeds, and dry machining. We need to be at the fore-front regarding this kind of training. If we can focus our customers on higher velocity applications, we're going to see an increase in carbide and advanced materials usage.
I think companies in the U.S. have to start looking more at the economics of machining and realize that tools are the cheapest way to get higher productivity and compete globally. That will increase consumption and lower real costs.
AM: How is globalization affecting your company?
The notion of uniformity is key. You need a presence; you have to be there to provide the services required. If you try to keep control centralized as you globalize, you are going to have problems because you can't make fast decisions and quickly execute them. You have to be in a position to trust your local organizations, and you have to give them the authority to act. You also have to be willing to make investments in other parts of the world. Sometimes, making those investments will put you at odds with your local operations from an economic point of view.
On the issue of supply chain, I think you have to ensure you improve your supply chain. You just can't make everything in every part of the world in which you operate.
Concerning the Internet, customers can go shopping, and they can use search engines to find the lowest price for a particular product. If one operation is using a different price booklet than another, customers will realize this once you are on the Internet. So, you have to be much more in tune.
Clearly, more manufacturing is starting outside of North America than within it, so you have to reposition your investment priority and be in places like Asia and Latin America.
All that introduces a certain dynamism in the organization. And if the organization is not inclined that way, it's a tough thing to manage. Like the Internet, globalization forces you to re-define the way you do business.
What we do globally and how we authorize local markets to handle local issues are not local issues anymore because our customers are also global. So when we make a local decision, say in Thailand, it affects us in Chicago.
AM: How will the Internet and, more specifically, websites affect business practices?
In the near term, I don't think the Inter-net will have much impact. Really, those who jumped in early and invested a great deal of money have reaped few benefits. Long-term, however, I think it is going to have a major influence.
Once the Internet is perceived as filling the same needs as catalogs, reaching people as easily, and being as user friendly, users will gravitate toward it. Younger customers, especially, don't want to order a catalog; they want to use a CD-ROM or a website.
The Internet has the potential to be a completely new channel to the market. It is becoming a source of technical information and is a communications vehicle that can be both internal and external. It can be used internally to communicate with your salespeople and your distribution network, and it can be used to provide 7 day/24 hour technical information to end users.
We are investing heavily in the Inter-net with MilPro. Right now, it is more of a technical tool, providing a lot of hits, primarily technical applications. However, the sales are starting to come through.
People like catalogs because they are easy to use and provide everything in one bundle. And that's going to be the key to selling on the Internet.
I don't think there's any denying that the Internet is going to be a big deal. The question is, will it be another channel or will it change the game? It seems that everybody, sooner or later, will have the ability to do business over the Internet.
There is a big difference between being in the business of conducting e-commerce and having the facility to transact the buy-sell application over the Internet and to integrate it with your ERP systems. I think sooner or later everyone will do that.
Through the web, we can take a lot of cost out of the supply chain, allowing us to be more efficient, but it won't be pure end-user Internet. In fact, an end user would still have to go through a distributor to buy the products that they normally buy today.
The Internet forces companies to think globally, be more responsible, and focus on the customer. Instead of focusing on specific countries or markets, cutting tool manufacturers are going to focus on one-to-one relationships. It is a fundamental shift in marketing.
AM: From both an industry and company perspective, how is the role of distribution changing?
Distribution has taken on different strategies to compete. Distributors have consolidated and formed alliances and consortiums. They have looked at ways to reduce their costs to be more competitive with more efficient supply channel approaches. Distributors will no longer buy inventory and hand-deliver products. They are going to become less of a delivery person and more of a consultant. With these other competing channels, distributors will have to prove their worth. I think the current 3,000 or so cutting-tool distributors in the U.S. will shrink to probably half that number. Those left will either consolidate and roll-up companies through acquisition, partner with manufacturers, or become more technical. The market will decide the ones bringing value to the customer.
In spite of all the problems, the increased role of distribution has been driven by end users wanting to reduce their acquisition costs. The challenge for distribution is going to be more difficult because of e-commerce and the Internet.
Apparently, the number of distributors with fewer than 500 people has grown in the last few years. It is really at the upper end where we see consolidation. I see a continuing future for the distributor, but not in the same way that they are today. It's going to be difficult for them because margins are definitely shrinking. Manufacturers cannot cover every end user and provide the answer to every type of need. So, I believe there is a need for a value-added distribution channel. But it's not clear how they will transform themselves and deliver more value to be competitive at a much lower margin. Margins for today's distributors are in the mid-20% range and up. However, margins are going to be very difficult to sustain at this level.
Integrated supply programs are changing the role of traditional distributors, making them an extension of the cutting tool manufacturer and its major customers.
Distributors, in turn, should be rewarded for the value they create for the end user in terms of inventory management, cost savings, and technical support.
Distributors have historically processed the transaction and represented manufacturers. The processing of transactions involves accepting the order, placing it with the manufacturer, holding inventory, and carrying the receivable. Most of a distributor's investment is in processing the transaction, and that is where the Internet is a threat. The model that worked for distributors since World War II is really coming under attack.
I think what Mr. Belden said is critical. The distributor model (since World War II) is coming to an end, and these companies are phasing out. In fact, distributors often ask if we know of firms that might be interested in buying them. No one asked this before. This disturbs us because these so-called "Mom and Pop" distributors are a major part of our business. And today, many customers don't want to deal with "Mom and Pop" operations.
AM: Is it necessary to form partnerships fo rthe cutting tool industry to remain competitive?
Seven years ago, our product line could cover only 25% of the applications in a typical machine shop. We stuck to our core competency of developing engineered solutions for highly technical automotive and off-road applications. But in order to enter the distribution channel, we needed to cover the whole spectrum. So, we did that through strategic partnerships with people that manufacture cutoff tools, cutting fluids, boring systems, and adapters. This has been a very good strategy for us.
Our incremental growth this year has been tremendous in advanced materials. Without a good strategic part-nership with our PCD/CBN supplier, with whom we share product and technology, I don't feel our growth would be where it is today.
I don't see partnerships from the standpoint of partnering with other cutting tool suppliers or high-speed steel suppliers. However, we need partnerships with machine tool builders to be able to provide the solutions the customer needs, such as in high-speed machining.
Our company has adopted what we call the "Best Mixed Program" approach. If we can partner with someone to sell each other's products, we'll do it. We've formed some alliances where we buy and some where we sell, and it's worked out great. I think there will always be room for partnerships.
AM: With the advent of high-speed and dry machining technologies, manufacturers of both cutting tools and machine tools are facing new challenges. Who is currently leading the race, the cutting tool industry or the machine tool industry?
Actually, it's a dead heat. There is no point in building wonderful new machines that won't run because the tools don't exist. And there is no need for us to develop wonderful new tools if there isn't a machine available to run them on. New tooling and new machinery have to be developed simultaneously.
I think this whole thing about high-speed machining is overdone. I say that because high-speed machining is an expensive development, and it only addresses a portion of the industry. Turning is the biggest thing that's done in the industry and probably accounts for 60% of the business. By definition, high-speed machining is only milling and drilling; we don't address turning.
I believe high-feed machining, which is possible right now, is a much more advantageous way to go. Cutting tool manufacturers need to do a better job at letting customers know there are ways of feeding the part faster and doubling the speed without compromising surface.
AM: Collectively, the cutting tool industry introduces thousands of new tools each year. What is the tool industry doing to help end users evaluate these products?
Kennametal has introduced a colorcoded product-selection tool—Kennamax—with colors that coincide with the ISO material categories. Customers can select the best tool depending on the material that is being machined. This is available from a Kennametal catalog or from the Internet. In fact, all our new advertisements and product literature will be categorized according to this Kennamax color scheme. We believe this is something that is going to help the customer.
There is more then one way to make a part, and there is more than one tool in the process that can make a part. We try to provide information through case studies that point to the best practices and approaches. That way, customers will be able to select the most appropriate tool. You can do that through the Internet, an interactive catalog, or published manuals.
AM: Due to mergers and acquisitions, downsizing and rightsizing, and a host of other factors, there are fewer cutting tool manufacturers than five years ago. Will this trend continue or will there be new suppliers for the cutting tool market?
There is plenty of room for niche players in the industry — people that have a particular, innovative solution. I think it will be costly for a full-line supplier to enter the marketplace. I don't think we'll see it in the next five years.
For a long time, the cutting tool industry has been a takeaway business. None of the companies at this roundtable could live for long and explain to their ownership why their companies should survive if they only moved ahead at the growth rate of the cutting tool industry. We are all growing faster than the cutting tool industry is growing, and the reason is that we are getting a larger share of the market by taking it away from somebody else.