Many HVAC distributors didn’t waste time passing along price increases that they blamed on the new 25 percent tariff on imported steel entering the U.S.   

 How can contractors deal with these increases in steel prices and the domino effect it will have on other products? The obvious answer is to raise prices like everyone else. Raising prices is easy to implement and defend. It also has a risk. What if you raise your prices higher than your competition?

There is an alternative for contractors to consider. It has a risk, too. This approach will require management to work with all employees to achieve something special, but possible. The return can be greater because your prices will be lower than the competition and will still generate sound profits.

Applying lean construction techniques may not seem like a way to address the challenges of steel tariffs, but consider the possibilities. Lean seeks to reduce the seven basic wastes common in all work, especially in construction.

steel prices

One specific waste is defects and re-work. Regarding steel, defects are most clearly demonstrated by scrap. Scrap metal is already minimized through the software for running the coil line and plasma cutters. But scrap due to damaged product or other forms of re-work occur when assembling, shipping and installing duct. Damaged metal can be reduced using lean techniques.

Re-work can also be reduced by not performing duct fabrication too early. Early fabrication followed by storing the duct at the job site causes the product to be moved several times before being installed. Moving and storing duct often causes damages. The lean approach is to analyze the processes for ordering, assembling, packing for shipping, unloading, stacking at the job site and installing.

steel prices

When contractors look into the current practices of handling duct, they can find ways to keep their scrap costs down and use less metal.

Inventory is another waste. You need inventory to keep doing value-added work, but excessive inventory ties up cash and space. Lean tools can help contractors do a better job of planning the work so less inventory is needed.  Lean seeks to reduce the batch size of work fabricated and installed, keeping inventory to an as-needed level.

One may argue that buying metal at the current price in anticipation of rising prices is a hedge against higher costs. But this is playing the market, not construction. One may win — or lose. It’s a financial risk decision; not a fabrication role.

steel prices

Workers doing “treasure hunts” are still way too common in sheet metal shops and at job sites. While steel prices are going up, the major expense of contractors remains labor costs. By reducing the level of treasure hunting and increasing the value-added time that work is done, contractors can keep prices lower in the face of rising metal costs. The lean tools of “Five S” (see “Getting in shape: Five steps in manufacturing lean manufacturing,” April 2009) and the Lean Construction Institute’s Last Planner System are especially effective in reducing workers walking around looking for things. These tools require that managers work with supervisors and workers to implement effectively.

Study special job fabrication and installation orders in advance to improve the fabrication process. The lean tool of value stream analysis (see “Back to school,” May 2009) can be most effective.

One mechanical contractor agreed to fabricate two types of large metal tanks. Sixty tanks were ordered. The contractor had committed to deliver one of each size tank each week for 30 weeks. They started fabrication and found they could fabricate and deliver two tanks a week, but at a cost much higher than budgeted. They did a value stream analysis and made improvements. They were soon able to deliver three tanks per week and under budget. They performed so well they won an additional order. They bid 5 percent under the original price and still made a good profit.

Another lean tool is to perform “muda walks.” Muda is Japanese for “waste,” and doing a muda walk regularly will allow managers to see waste that occurs every day and to team up with the front-line workers to find ways to improve.

There are many problems that happen on each job. The workers see these problems more often than managers ever see them. Workers want to get the job done, so when they encounter problems, they figure out work-arounds. These work-arounds are the hidden bloodsuckers of the company’s resources and cash. If management will go to the work site daily or at least several times per week, and not “walk the job” but go watch the work, they will see improvement opportunities.

steel prices

This must not be spying or done in a way to cause the workers to think managers are trying to catch them doing something wrong. Managers should watch for the seven wastes and ask the workers about the problems they see and ideas about possible countermeasures. Managers should show respect and ask for ideas, not try to solve everything themselves. They must especially avoid jumping to conclusions before they truly see and understand the situation. This means managers should spend upwards of an hour observing the various work areas, not just walk by.

Some senior managers may read this article, scoff at the ideas and just raise their prices as steel prices go up. They may do well or lose market share. Managers who seek more effective solutions and who want to capture more of their market, even during rising steel prices, will give lean a try. Lean is counter logical to the ways many have always done things, yet has proven that it works well in construction. It takes managers and employees to make it work. 

You can raise prices or become lean. Each way has its risks and rewards.

Things that waste time and effort come in many different forms

There are seven basic types of waste commonly encountered in manufacturing.

Defects: When you fabricate and/or install the product incorrectly, you make waste. The punch list highlights the detected defects, but the source of each defect could be at any point in the fabrication and installation process. Defects cause re-work, and re-work always wastes resources.

Overproduction: Fabricating or ordering material too early and stockpiling material either in the shop, in a warehouse or at the job site is waste. Fabricating material at a rate faster than it can be installed also causes waste. Overproduction is the cause of most other waste, including inventory, transportation and motion.

Inventory: Any material not yet installed and being used by customers is inventory. It is also waste. This includes unfabricated material, work-in-progress and finished fabrication. It also includes spare parts, unused tools and consumables. Employees’ personal stockpiles of tools or ductwork are very wasteful. Overproduction by the shop causes inventory, no matter if fabricated parts are stored at the shop or on the job site.

Inventory is very costly, though many of the costs are hidden. Inventory ties up working capital and space. It must be controlled and continually monitored and audited. Inventory often leads to additional handling, especially around the shop.

Some inventory is usually needed to ensure that the work is performed in a timely manner to avoid the waste of waiting. This is called strategic (or necessary) inventory. While this type of inventory is still waste to be reduced as much as possible, it is necessary. Any additional inventory is excess and should be eliminated as soon as reasonable. The challenge is to differentiate between “excessive” and “strategic” inventory. Seek to get rid of the excess inventory, then seek to reduce the strategic inventory as long as it never impacts the shop’s ability to deliver product to its customers as promised.

Overprocessing: This includes overengineering, requiring additional signatures on a shop requisition and multiple handling of material. Any step in a process that is not value-added is overprocessing and is wasteful.

Motion: “Treasure hunts” happen when shop workers go looking for tools, cut metal sheets, material or information. This happens all the time. No value is added while walking around. Movement is not work. You add value with your fingers, not your feet.

Transportation: This happens when material is moved around the shop, loaded on the truck or trailer, hauled to the job site and unloaded. Though moving material is necessary, it is not value-added and needs to be minimized.

Waiting: Any time workers wait or work waits for workers, it’s waste. This happens when employees wait for instructions, inspections, change orders or for material to be fabricated.