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By Rajesh Ray and Abihshek Kaul | July/August 2013 | 23 | 4

Mastering 10 important lessons from the metals industry
The metals industry is one of the oldest in human history. Even today, in several countries, industrial growth is measured
by the growth in metals, demonstrating the significance. While most traditional supply chain concepts also apply to metals,
there are some notable differences. In the following 10 areas, we explore some of these differences and include examples
and real-life case studies to illustrate the concepts. Each section concludes with a takeaway that can be applied by supply
chain practitioners across all industries.

1. Vertical integration matters more than virtual integration.

In most modern systems, the wisdom is its better to do what you do best and own a very limited asset. Nearly
everything is outsourced but the brand and distribution processa virtual integration with supply chain partners.
However, in the metals industry, vertical integration still is an important supply chain strategy. The primary
example comes from Henrys Fords Model T system, where every part of the manufacturing process was owned
by the company. Nowadays, a steel company might own coal and iron ore mines, and an aluminum manufacturer might have its own bauxite
mines. These types of companies are known as integrated producers. Having this level of integration historically has paid dividends for metals
companies in terms of cost control and availability of key raw materials.

: The concept of vertical integration can be extended to other industries that depend heavily on one or two key raw materials. Examples
include thermal power, with a key ingredient of coal; cement, which needs dolomite; and petrochemical, requiring a lot of oil. On the other hand,
vertical integration is not an option for industries such as automotive and consumer goods. Its important to have a good understanding of your
industrys structure: One size does not necessarily fit all.

Historically, steel companies placed themselves at the origin of their raw materials, primarily iron ore. However, through globalization, production
locations have dispersed. The reasons for this include the introduction of low-cost competitors into the free market and increased specialization
among steel companies to serve niche markets. However, access to raw materials remains a key factor in investment decisions.
South Korea-based POSCO, one of the worlds largest steel manufacturers, planned to set up a 12 million-ton facility in Paradip, Indiaa $12
billion investment. India was chosen as the raw material source due to its high-quality iron reserves. The plan was to produce primary steel in
India, where the raw materials are cheaper, and transport the semi-finished product to facilities in Koreaa process known as split integration.
The initiative would help POSCO compete more effectively with its biggest rivals in the Southeast Asian market, although the project has stalled
due to local protests.

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: The cost of inbound and outbound transportation plays an important role in location. All factors need to be analyzed in detail before
committing to investment. This is especially important for industries where transport expenses are a significant percentage of the costs of
material, such as metals, mining, cement, and heavy engineering.

Producing only what is needed by the customer or the next workstation is the fundamental philosophy of Just-in-Time production that
revolutionized the manufacturing world in the 1980s. However, in the metals industry, the upstream supply chain is a part of the continuous
process. For example, in the steel industry, iron ore is formed into different shapes, sizes, and grades of steel and sent for further processing via
different finishing routes. This is referred to as a V-shaped bill of material, where raw material diverges to multiple end products. To lower
inventory and energy costs, continuous and discrete production must be planned simultaneously and all alternate finishing routes loaded.
: While managing operations with low inventory is an indicator of supply chain efficiency, the benefits must be balanced against setup
costs. In certain cases, it may make sense to create additional inventory up to a point if shutdown and restarting a particular operation are
prohibitively expensive. This is particularly the case for process industries, including petrochemicals and metals.

Managing products as commodities at both the input (coal, ore) and output (finished metals) ends poses a challenge for the metals supply chain.
This situation is familiar to industries such as tobacco, which puts tremendous effort in branding to differentiate its end products. In the
automotive industry, some inputs are commodity (metal, plastic, leather) and some are branded (tires, batteries), but end products are mostly
differentiated.
Commodity prices vary based on demand and supply, and some commodities follow standard boom-and-bust cycles. Recently, for example, coal
prices hit the roof, and every steelmaker felt the sting. Problems arise when the company has to supply finished goods against a contract. While
many contracts have a price variation clause to combat this effect, it often is difficult to pass on increased prices of raw materials to high-volume
customers, and thus higher input costs eat into profits.
Some metal companies own captive mines to have better control of inputs. However, building capacities or owning mines during boom periods
may result in problems during downturns, when buying from the outside is the cheaper option. Additionally, some metals companies derive part
of their earnings from financial instruments in order to hedge against price fluctuations.
Takeaway: Managing a commodity-based supply chain is a specialized skill, requiring expert knowledge in certain tools and concepts, including
contract management, commodity pricing, futures, and hedging. Careful navigation through boom-and-bust cycles is crucial to the health and
survival of the organization.
5. There is a near-infinite number of end product options.
While every organization wants to provide more options to their customers, this can lead to product and stockkeeping unit (SKU) proliferation.
Pharmaceuticals, retail, and consumer goods may carry the highest number of SKUs, but the issue is also significant in the metals industry. In
steel manufacturing, a product can be classified into one of hundreds of grades; rolled into almost any combination of width, thickness, and
length; finished to any number of specifications, such as 60-micron coating or blue in color; and, finally, cut and shaped to any customer
specification.
For the steel supply chain, most planning is performed across three horizons:
1. Sales and operations planning. The forecast is made for a horizon of two years at the aggregated planning level and agreed-upon supply to ensure a
product mix that maximizes contribution per hour on resources.

2. Master planning. This is part of order-based planning across the entire production network, including upstream, rolling, and finishing, and generally at
three months ahead. This ensures campaign formations, managed inventory levels, running of resources, productivity, and order commitment.

3. Detailed planning. This piece-based line scheduling, done for the short-term horizon within the next couple of shifts, keeps the rework and production
realities synchronized.

Takeaway: Managing a huge number of end products requires a focused supply chain strategy. One technique is to build around a supply chain
decoupling point, also known as an order penetration point. This can enable a company to produce intermediate inventory to forecast and then
commit orders for priority customers from this intermediate inventory and finish to order.

Jack Welch, former CEO of General Electric, said that if you are not among the top few companies in your area, its only a matter of time before
youre taken over. While many other industries see consolidation at some point of their life cycles, it is practically the norm in the metals
industry.
The worlds biggest steelmakers are continuously investing to buy smaller competitors to gain market share. Notable examples include Kawasaki
and NKK of Japan forming JFE Steel, Thyssen and Krupp of Germany merging into Thyssen-Krupp, British Steel and the Netherlands Royal
Hoogovens becoming Corus, and three major European steelmakers consolidating into Arcelor.
However, nothing compares to how Lakshmi Mittal built his steel empire, aggressively acquiring poorly performing steel plants in 14 countries
across the globe and turning them into money-making ventures. In October 2004, his company, Mittal Steel, acquired the International Steel
Group for $4.5 billion to become the largest steel producer in the world. He then made the largest-ever steel acquisition in 2006 when he took
over Arcelor for $33 billion, becoming ArcelorMittal.
: Mergers and acquisitions can alter the landscape in terms of new factories, distribution centers, and stocking points. They may require
shifts in effective supply chain strategies; the questioning of flows, such as which factories should supply which distribution centers or
customers; revisiting stocking norms across the network; and even complete supply chain redesigns.

The original equipment manufacturer model is the traditional B2B

enterprise. This requires long lead times and buying decisions that are based on quality, price, delivery schedules, and terms. Meanwhile, B2C

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(best represented by retail) requires a healthy dealer distribution network, stocking and storing materials, managing channel partner margins,
and promotions. Metals companies usually operate with both kinds of customers and must consider on which customer to focus in order to
optimize profits.
Spot versus contract. Most metals companies prefer to secure the bulk of raw materials from their own sources or through long-term contracts
with key suppliers to protect against price fluctuations. However, they also may meet some of their requirements through spot auctions, which
can be cheaper in some circumstances. How much to source and from where are important financial decisions.
Direct versus multi-mode transport. The metals industry suffers high transportation costs for both raw materials and finished goods. For coal, a
major input, the transportation can cost more than the material itself. For finished goods, companies can use various transport modes, such as
ship, rail, and truck; whereas, on a per-unit cost basis one mode may be cheaper, the total effective cost must be calculated before making a
decision.
: Similar trade-offs can be seen in many other industries. For instance, automotive components suppliers must decide how to allocate
between original equipment manufacturing, which provides volume, or the replacement market, which provides profit. Likewise, a mixture of
long-term contracts and opportunistic buying is employed in many industries; the challenge is to find the balance that minimizes risk and
maximizes profit.

The metals industry began examining its energy consumption and carbon footprint long before green became a supply chain buzzword. The
primary driver was to keep down operating costs; concern for the environment was a secondary priority. The measures undertaken by the
industry were deep, requiring much in the way of technology innovation, engineering excellence, and facility layout and design.
One way that the steel industry continues to lower energy costs is through the use of integrated steel plants. These facilities contain every
operating unit needed to produce steel, including a power plant, blast furnace, and hot rolling mill, to name just a few. Benefits of integrated
plants include the ability to reuse heat or energy generated in one unit in others and a more efficient internal use of metal, scrap, and waste.
: As a strategy, green business is reshaping tomorrows supply chains. No longer a nice to have, sustainability is a core business
function that is changing the way products and manufacturing processes are designed. Smart supply chain practitioners will keep their eyes and
ears open and continuously evaluate emerging technologies in this area.
Pressure to keep down costs must be carefully managed.

Each operating unit in a metals facility is tasked with reducing costs and increasing yield. However, this can lead to conflict among business functions and
inventory pileups. To manage these conflicting constraints, integrated steel plants employ a central coordination department known as production planning
and control. This group is responsible for the flow of production across individual units, work-in-process inventory buildup, and adherence to order
commitment date. In terms of production flow, the production planning and control department provides guidance on when, what, and how much to produce
in the short term, given the various constraints of the upstream units.

: Managing conflicting constraints among different steps of the manufacturing process requires integrated planning and coordinationa
complex task if operations are performed in different operating units of the same facility. Investment in integrated information systems such as
enterprise resources planning or advanced planning, scheduling, and optimization solutions can make a real difference.

The metals supply chain has unique challenges in the areas of storage and transportation. As a finished product can weigh anywhere between 1
and 25 tons, stacking rules tend to vary depending on the item. Packing efficiency likewise tends to be low. Unfortunately, radio frequency
identification, bar coding, and other solutions used in many industries are difficult to implement in metals due to various limitations.
Simple policies such as storing materials based on customers, standard sizes, stacking height, or various other rules become greatly important
for ensuring smooth operations. One leading steel company reorganized its logistics structure by setting up a single point person for sales
coordination and logistics and yard management, thereby ensuring goods are stored and dispatched based on sales priority.
Takeaway: The final lesson is that traditional warehousing concepts can be applied to large yards or anywhere material has to be stacked, stored,
and tracked. Industries such as mining and automotive also require careful yard management and logistics. Warehouse management demands a
diverse skill set that can be extended to many other areas of the supply chain.
Rajesh Ray is senior managing consultant and product lead at IBM Global Business Services. He may be contacted at [email protected]
(mailto:[email protected]).
Abhishek Kaul is global metals SME at IBM Global Business Services. He may be contacted at [email protected]
([email protected]).
To comment on this article, send a message to [email protected]. (mailto:[email protected])

All comments will be published pending approval. Read the APICS Comment Policy (http://www.apics.org/about/apics-comment-policy).

1.

September 02, 2015, 07:18 AM

Very well explained about in and out of steel supply chain business;Especially the takeaway points after each concepts. Thanks for posting

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this. A must read for all supply chain practitioners.

June 20, 2016, 09:02 AM
2.
The expression and Case is interested and I have got alot, thanks for your contribution for people , I ADVISE PROFESIONALES SEE AND
USE IT.

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