Steeled for 500% growth

Michael Zweigbaum squeezes more profit from bales of scrap.

High-tech scales snap digital photos of the scrap.

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(FORTUNE Small Business) -- When Michael Zweigbaum took over as CEO of Alliance Steel Services in Minneapolis three years ago, the 40-year-old scrap-metal company had grown rusty.

Prices were rising, thanks to increased Chinese and Indian demand for recycled metal from the U.S., but Alliance wasn't equipped for growth. The former owners had controlled the company using pencil and paper, says Zweigbaum, 34. "There was no evolution - it was a legacy business."

Zweigbaum had a bold vision for changing that: Acquire other local scrapyards and create a regional network of recycled-metal providers.

"Every town in Minnesota with at least 1,000 people has a scrapyard," he says. "I wanted them to work in conjunction, and I mapped out new locations for us."

There was no way Alliance could manage multiple yards without entering the Digital Age. But the company didn't merely upgrade to a couple of PCs and a business-software suite. It made a great leap forward with a system that weighed, tagged, and snapped digital photos of every batch of scrap metal that entered the yard. Customers could buy in confidence - and Zweigbaum was able to grow his revenues 500% in three years.

For that, he can thank one key hire: his father, Larry, a 30-year veteran of the software business. (Alliance is a family affair: Zweigbaum bought it from his father-in-law and hired his sister, Marly, as CFO.)

Larry, 60, was about to retire when his son asked him to be CTO. But he couldn't resist the chance to transform an industry.

"We used to vie with other small businesses, but now we're going against huge conglomerates," Larry says. "We had to gain a competitive edge."

The Zweigbaums hunted for a system that would let them oversee their stock in real time. They chose Recycling Operations Manager, created by 21st Century Programming, a small business in Long Beach, Calif. ScrapWare in Rockville, Md., and BuyBackPro in Woodland, Calif., make similar systems, but Alliance felt ROM best fit its needs.

ROM starts working the moment a truck enters Alliance's yard and dumps a load of metal onto a trailer-sized scale. An employee eyeballs the load and selects one of 80 grades of metal on a touch-screen. The software notes the weight on the scales, and a camera transmits a picture, which reveals any contaminations (because the metal is recycled, it's rarely perfect).

All of that information is filed in a database from which the Zweigbaums can also access their trade receivables, shipping and billing documents, and inventory. The management system does more than streamline internal operations - it enables Alliance to run the business transparently.

"There's always been a great deal of distrust in the scrap industry," says Zweigbaum. "Manufacturers depend on how the scrap vendors weigh the metal, how they value it. We wanted to eliminate that subjectivity."

Since Zweigbaum bought the company in 2005, annual revenues have jumped from $18 million to $100 million. Alliance now owns five yards throughout Minnesota.

Much of that growth is due to rising commodity prices and shrinking steel supply. But Zweigbaum credits the new system's precision for allowing Alliance to sell more nonferrous scrap metals, such as brass, copper, and titanium. Demand for such metals in developing countries has soared in recent years. Their contribution to Alliance's profits has risen 50% since 2005.

Because nonferrous metals are more valuable, Alliance used to have to sell them through a middleman. Today buyers trust the company enough to purchase nonferrous scrap directly from its yards. Complaints about contaminated shipments can be dealt with far more smoothly than before.

"We always have visual evidence," says Zweigbaum.

Alliance was an early adopter of Recycling Operations Manager. At an implementation cost of $300,000 across all the Alliance yards, that could have been a risky bet. But Zweigbaum says he effectively recoups the investment every three months in profits. Now 21st Century Programming's system is spreading to scrapyards across the country.

The Zweigbaums aren't standing still. They've dropped another $200,000 on two new trials: a software dashboard displaying the company's two leading indicators - how often and how efficiently they move inventory - and a website that gives Alliance customers limited access to its database.

"They'll have the ability to go online and see their metal's movement," says Larry. "If they have a load coming, they can look up its price and weight - even to the point of seeing where it is in the yard."

Adds his son: "The scrap-metal business has always been 50 years behind corporate America. But we're ready for change."