A Publication of WTVP

Jim Kauffman, President of Keystone Steel & Wire Co., began his career with a public accounting firm, then worked for a private investment company in Houston, Texas, which owned a number of different businesses, some of which were in wire and wire products. He later moved to Dallas to work for Harold Simmons, who owns the controlling interest in Keystone Consolidated Industries, Inc., the parent company of Keystone Steel & Wire. In 1991, when Bob Singer, who at the time was president of both Keystone Consolidated Industries and Keystone Steel & Wire (he is currently still president of the parent company) wanted, for personal reasons, to move his family back to Dallas, Mr. Kauffman moved to Peoria to become president of the local operation. The Peoria operation represents approximately 80-85 percent of the revenues of Keystone Consolidated Industries.

The Bartonville operation has been productive and profitable over the past few years after facing some tough times in the early 1980s. What factors helped turn things around?

There are several things that have been key to the success of Keystone. In the early 1980s there were some very difficult times. Many of the employees who are still here today made a great contribution at that time. They agreed to wage concessions which probably saved the company.

We have many very fine, loyal, longtime employees here who know their jobs very well. Our average employee has been here 25 years. We have approximately 1300 union-represented employees and some 300 management employees.

In 1987 and 1988, Harold Simmons and a number of financial institutions supported an investment of slightly less than $50 million in Keystone here in Peoria, to modernize the rod mill. Up until that time, the rod mill was a producer of what was essentially a non-competitive product. Our own wire mill could use the product, but with difficulty, causing many inefficiencies in product manufacturing. In 1988 the new rod mill was completed with the capital investment of approximately $50 million. That substantially increased the capacity of wire rod produced, and greatly increase the quality. As a result, not only did Keystone have a product that was competitive on the open market, it also made our wire mill much more efficient and productive because of the quality of the product used to make the finished goods.

Approximately what percentage of the steel rod produced here is used in Keystone’s own product manufacturing as opposed to being sold to other manufacturers?

We produce, in round numbers, 700,000 tons of wire rods per year. We consumer internally approximately 300,000 tons. Affiliates of Keystone Consolidated Industries consume an additional approximately 100,000 tons. We sell the balance in the open market.

How much of the amount of wire rod produced and sold in the open market is exported?

None. We haven’t exported wire rod in several years. We do, however, exports some finished goods including some small package nails, field fence and lawn and garden products like small wire netting.

What are the main steel products produced at Keystone? Are there any plans for further product diversification?

We have the wire rod market. We also have industrial and construction wire products. There are sold to other manufacturers who take our wire rod and make products that we compete against in our industrial areas – such as wire racks that you might see in grocery stores – and a wide variety of shelving and other wire products. Nails are also a big product for us. Then we have the lawn and garden products which are generally smaller rolls of lighter gauged materials that an average person would use in and around their homes and gardens. Then we have the agricultural products which are the more substantial, heavier gauged agricultural fencing materials.

One product that is very popular now is fencing for emus and ostriches. We have a proprietary product which is the preferred fencing for those animals. We have sold out of that product for several years and are building additional capacity to produce it. As far as we can see for the next couple of years we will be sold out of that product, running it year round. It’s a great product and a great market for us. We really have the preferred product for that industry because of the characteristics of the fencing. We can’t make enough of it; which is a nice problem to have.

We don’t plan any substantial diversification outside of our current markets. Our markets are widely diverse, giving us a good flexibility in moving products from one to the other; when one area is not so strong, we are able to concentrate on another area. The strategy of having five or six diverse markets has worked out very well for us.

The company recently signed a three-year contract with members of the Independent Steel Workers’ Alliance, many of whom took substantial pay cuts in the 1980s to help the plant survive. How are labor relations at Keystone today and how have they changed over the years?

Current labor relations are very good, and it’s hard for me to envision how they could have ever been better than they are now. We are working continuously to improve labor relations. In the early 1980s there were substantial pay concessions, not only by the ISWA but by management people; the whole company underwent a reduction in compensation levels. Since that time we have instituted profit-sharing for all levels in the company, and other cash and non-cash benefits have been addressed.

We have done a lot of work in the last three or four years to involve all of our employees in more and more of the company business discussions and decisions. That has resulted in an unprecedented sharing of information about our company – who our customers are, what kind of profitability certain of our product lines share, how we’re doing from a production standpoint and how we measure our performance. We are sharing a lot of that information because we have a very senior and experienced workforce. Our workers are very keen on Keystone being successful and competitive.

We talk a lot about being competitive. I think our workers are prepared to help Keystone remain competitive; and that means from time to time we are going to have to change things. The only way you can reasonably expect people to accept change or embrace change is if they understand the rationale for change – where the company has been and why there is a need for a change. We have a lot of improvements yet to make, but we have come a long way in terns of getting our people more involved in discussions about the business, where it’s going and the planning and execution of our business. Our workers are acquainted with the fact that we, like everyone in business, have customers that we have to take care of. If we don’t have customers, there isn’t a need for any of us. We are trying to emphasize to everyone in the company that we have to keep our eyes focused on the needs and wants of the customers.

When people think of labor relations in Peoria, they automatically think of Caterpillar and the UAW. What ramifications does that have for you? Do people tend to lump all union workforces together?

I’m not really in a position to comment on the Caterpillar-UAW labor relations and what happens in respect to their union. They are in a completely different situation than we are and have a completely different kind of union and history. We have an independent union which is a lot different. Our union is completely locally controlled. I have to think that is a benefit to us, by comparison. I can’t even begin to comprehend the issues that Caterpillar has to deal with. When we address an issue, we do it with local people, and that’s a big plus for us. Anytime you can sit down face to face with the people who are ultimately going to be in the position of responsibility, you are miles ahead. At the end of the conversation, if people don’t like what they heard, at least they have a chance to sit down and visit with us and understand why some of the things are being proposed.

What quality and management initiatives have been implemented at Keystone over the past few years to improve productivity?

We have officially instituted a process we call K-2000. We have engaged a professional consultant from Southern Illinois University who has helped us for the last several years in an employee involvement and participation process. We have some 65 work teams which work on different projects, problems, and opportunities throughout the plant. All levels of employees are involved in these work teams; and they have been very successful. Approximately 500 employees have gone through special training to be involved in these work teams in such area as identifying problems, problem solving, conducting meetings and managing boundaries. We have done a significant amount of educational training for our employees and we have a lot more to do. Up until about six or eight months ago, these teams dealt fundamentally with work conditions, but we are expanding these work teams and they are becoming more involved in much more substantial projects than in the past.

We have been involved in an experimental project here within the last six months known as “Focus Factory,” which is essentially giving the people within a particular department, both management and union-represented workers, the opportunity to start all over. We essentially say, “Okay, you have this department. It’s your business to run. How would you organize it and lay it out? How would you focus on customers? What kind of measuring tools would you establish to measure how well you are performing?” This program has been very successful in helping us identify opportunities for people to get more involved in the company’s activities. It’s really rewarding to see people respond to that sort of challenges and environment. Some of them used to just come to work and put in their time; now many of them are really anxious to come in and make improvements in their departments. We are probably going to expand that concept quickly throughout the plant.

We also invest regularly in more modern and efficient equipment, which in turn increases the productivity and profitability of our company.

It sounds as if Keystone Steel & Wire has become much more of a flattened organization over the past few years. Was Keystone once the traditional vertically managed company?

Yes, I believe Keystone was once that traditional company. At one time the management group at Keystone was approximately 800 people; now it is 3000 and we have more sales than we did then, and are producing more products and larger volumes. The organization has been flattened both on the management and union sides over the last 10 years.

How has the elimination of steel import quotas in 1992 affected your industry and your company? Does the issues of “cheap foreign steel” need to be addressed further?

Probably the value of the dollar over the past two or three years has had a bigger impact on us than have the quotas. The dollar has been cheap, which gives less of an incentive for foreign companies to export steel into the United States because they don’t get as many dollars.

This year, however, some of our raw material costs have escalated sharply and we are now at a point in terms of the products that we sell – despite the weaker currency – where there are some foreign products which can be competitive. They have some real disadvantages in competing with U.S. products – especially branded products like we have – but nonetheless it is something that concerns us.

It’s no surprise to anyone that U.S. companies are subjected to a great number of federal regulations and benefits that are virtually mandated. The people with whom we compete – the foreign steel producers – don’t have any of those issues to deal with. Our costs increase because of those kinds of regulations.

At Keystone, as in the entire steel industry, we moved to the mini-mill concept a number of years ago, with electric-arc furnaces. Because of the mini-mill concept, steel companies in the U.S. are among the most efficient producers of steel in the world, despite all of the governmental regulations. But it is somewhat unfair for our foreign competition not to have the same costs that we do and for our government not to do anything to equalize the playing field.

The industry has done a great job of reducing costs in the last ten years or so. At Keystone, our production and conversion costs of producing a ton of steel – despite inflation and all of the other things – have gone down every year for the last five or six years. Some of that has to do with the new rod mill we put in, but it also has a lot do to with the mini-mill and electric-arc furnaces. We have spent a great deal of time and effort working on becoming more efficient.

What are your personal thoughts on the NAFTA agreement and how it might possibly affect manufacturing companies in the United States?

We are part of an industry association which is in favor of the NAFTA agreement. We at Keystone think that, over the long term, NAFTA will have a positive impact for us and for other U.S. manufacturers.

There are import duties on our products going into Mexico that the U.S. does not impose on their products coming to us, for example. That leaves us at a disadvantage. To the extent that those import duties are eliminated over a ten-year period, we will have an even chance at competing.

There are already certain products, because of quality and other issues, with which we can be competitive in Mexico. We currently export products to Canada, since we are fairly close from a transportation standpoint. In our business, it is the transportation costs that are usually the limiting factor in exporting. Even with the transportation costs that we incur in getting our products to Mexico, there are certain selected product lines with which we can be competitive right now. The problem is, in our business, you need to be a supplier of a well-rounded group of products before you are really a very attractive supplier. We are working on that, and are looking to expand our business in Mexico.

Quite frankly, some of the Mexican producers have started producing pretty good products. Historically that has not been the case, but in the last five years they have invested a lot of money to produce a quality product. That is something with which we are going to have to reckon. If we can get to the point where the import duties are eliminated from our products going into Mexico, then we feel like we will be able to compete.

What has Keystone done to control healthcare costs?

For a number of years we have had a preferred provider agreement with local hospitals. In this last contract negotiation, we negotiated a cost-sharing arrangement with out employees. Philosophically, until the individual consumer has some financial involvement in the cost of healthcare, there won’t be an incentive to control healthcare costs. Economic incentives to control cost – which produces intelligent, selective consumers – is the only chance we have to successfully address the healthcare issue. Our new contract, which was effective July 1, includes some of these features, with participants sharing in the cost of their healthcare. We think that in the long run that will help us.

We have a number of other initiatives – wellness programs, an EAP which is very well-recognized in the community, and a new preferred provider agreement. We have asked our employees to become participants in our healthcare, but it is incumbent upon us to help them become better customers. We have some initiatives which we believe will help them do that. Approximately 40 of our people are currently going through an experimental wellness program of diet, exercise, and supplements. We are monitoring the general health benefits such as cholesterol levels and also the employees’ feelings about their health. Obviously the long term view is to reduce absenteeism and reduce medical expenses by keeping our workers from getting sick. Everybody benefits by these initiatives.

Could the proposed Clinton healthcare plan help a company like Keystone?

To the extent that the Clinton proposals and the other proposals from congressional leaders might reduce cost-shifting, it could benefit us. The cost of medical services to those who cannot pay gets distributed among those of us who do pay. I’m a firm believer, however, that the only way to drive healthcare costs down is for the individual to have a vested interest in controlling those costs. The more the government gets involved in those personal decisions and activities, the less control an individual has. It will probably be a number of years before all of that is resolved.

The current Clinton plan would place a company like Keystone in a health alliance, prohibiting a self-insured insurance program. What are your thoughts on that?

It’s hard for me to see how the government can run our program better than we can. Nobody is as interested in my problem as I am; and nobody is as interested in our employee’s problems as they and we are. I just fail to see how the government can do that better and more efficiently than we can. It’s not only a cost issue; it’s a quality issue as well. Having inexpensive healthcare is not the same as having effective healthcare. Price is not the absolute issue.

As a manufacturer, what will be your keys to success into the year 2000?

Like every other company, we will have to become much more attuned to our customers. We will have to pay attention to what their needs are. We will have to provide quality products, on time and at a price where our customers can realize a profit. The world is becoming a smaller place all the time, so we have to remain competitive from a cost standpoint, and we feel like we are addressing those issues.

In order to drive costs down and take care of our customers, we are going to have to get our employees more and more involved in the business so that everyone understands what the mission of the company is and what it takes to be successful.

What are your general feelings and thoughts about the Peoria economy? Are there significant advantages or deficits to being a manufacturer in Peoria?

Our business is not impacted much by the local economy. We sell most of our products outside this area. However, throughout the last few years some of out strongest markets have been in the Midwest. Some of that is because we have been located here for so long and we have very strong brand identification. The Midwest and Peoria have been good for us over the last few years.

This area is a great area for us in terms of transportation. We get a lot of our scrap material by barge, and we ship out a modest amount of our product by barge, which gives us a big cost advantage over those companies who have to truck their raw materials in. We have very good rail and truck transportation, and this is a nice area in which to do business from that perspective.

We do have a little difficulty in the air transportation area, in getting customers, representatives and salesmen in, so if we have a preference, we would like for the air transportation to be a bit more diversified. The other strong points more than offset that, however. It is a little cumbersome to get back and forth to Chicago as well; a new four lane highway from Peoria to Chicago would be a good deal for us.

Are there any particular business issues or concerns about which you feel strongly that you would like to address?

I don’t think I am much different from a lot of other people in business. We are going to have to be competitive on a global basis, control our cost and retain and increase our customer focus. If we could reduce or eliminate much of the governmental regulation it would help. Many of our ultimate customers at Keystone are farmers and ranchers. To the extent that governmental regulations hamper their activities, they hurt us.

In the medical area, some sort of tort reform would positively impact us, as it would the whole country. It seems to me that we are much too litigious these days. We have a great legal system, but it needs from adjustments in that area.

We need governments, on the national, state, and local levels, which encourage private investment and savings and removing barriers that discourage those activities. IBI