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ERP Advantages in the Steel Industry Today

White Paper

IBM Global Business Services



What should you do?Let’s say you’re the CEO of a large multi-national steel company, and you’re running a global operation with plants on four continents. You need to make good business decisions, and you rely on your IT systems to provide the data to make those good decisions.

But your IT systems are not well integrated. There are too many different systems, and too many gaps between them, a legacy of the company’s history of mergers, acquisitions, and improvement initiatives. You need a common information backbone. You’ve heard that ERP systems can do that, but you’ve also heard about ERP project failures from years ago.

Can ERP handle the challenges of a steel company today? And will that lead to business benefits for the company? IBM answers are yes, and yes.

The Steel Industry TodayThe global steel industry is enjoying its fifth year of strong growth. Global production of crude steel reached over 1,200 million metric tons in 2006 compared to only about 850 million metric tons in 2001.1 The steel com-posite price is above $500 in 2006, while it was below $300 in 2001.2 The short-term outlook for steel looks bright, but any disruptions in the world economy could slow demand and production growth.

Today’s steel industry is driven by: Moderating demand: Uncertainty about the value of the dollar, trade wars and possible protectionism, the oil price, and security concerns in the Middle East and elsewhere suggest that steel demand growth will almost certainly moderate.

Supply and demand balancing: China and India are expected to maintain strong growth, but the potential of overproduction by China could have a major negative impact on the supply/demand balance.

Rising operating costs: Costs for raw materials and energy have increased significantly, but the corresponding price rise in finished prod-uct means margins remain strong. However, environmental costs in developed regions continue to push up energy prices and could start to erode margins.

Table of Contents

1 The Steel Industry Today3 Information Systems for a Quickly Changing Industry4 ERP Business Benefits5 Six ERP Design Challenges for Steel Companies9 Implementation Approaches for ERP11 ERP Case Study12 Conclusion

Page 1


Those drives have resulted in several important characteristics of today’s steel industry:

Consolidation: Consolidation in the industry has accelerated. Two major mergers – Arcelor-Mittal in 2006 and Tata-Corus in 2007 – have intensified the interest in consolidation. The industry remains fragmented. In 2005, the top 10 steel companies shared about 25% of the market, the top 30 companies shared slightly less than half the market, and the top 80 com-panies shared 2/3 of the market.3

Shifts to lower cost production regions: Many steel companies are shifting towards making steel in lower cost regions, which are also nearer to the growth markets. Leading companies such as Arcelor-Mittal and POSCO are investing in Orissa, India and in China. However, developed countries still lead in finishing equipment and technical know-how.

Operational efficiencies: Steel companies need to refocus on improved scheduling and on optimizing manufacturing execution. Higher prices have put pressure on work-in-progress reduction, particularly with high-end stainless steel.

Increased niche players: Smaller niche players have the potential to make more profits than the less-focused giants. This is especially true when niche players co-operate with customers to develop products and ser-vices jointly.

The bottom line is that today’s Steel industry is changing quickly.

Highlights

The steel industry is enjoying strong

growth but is driven by uncertainty

around the value of the dollar,

balancing supply and demand and

rising operating costs. The bottom

line is that today’s Steel industry is

changing quickly.

Page 2


Information systems for a quickly changing industryIn a quickly changing industry like steel, CEOs need information systems which quickly provide them the data they need. We believe that ERP, especially in its mature implementations today, is the crucial component for a company’s IT data backbone. ERP can play an essential role in:

• Driving accurate and fast decisions (product profitability, procurement spend)

with consistently defined data

• Running broadly known and supported applications

• Harmonizing and optimizing back-office processes across the enterprise that

comply with finance requirements such as

SOX and IFRS

• Enabling best-practice demand planning for supply-chain processes

• Future-proofing global applications that support global enterprises

What is ERP?ERP or Enterprise Resource Planning is IT software that integrates busi-ness activities across an enterprise—from product planning, parts purchasing, inventory control, and product distribution, to order tracking. ERP may also include application modules for the finance, accounting and human resources aspects of a business. SAP and Oracle are the two ERP leading vendors.

From a business perspective, ERP today has expanded from simply coordinating manufacturing processes to being the integrator of enter-prise-wide backend processes. ERP has also evolved technologically from a monolithic legacy implementation into a flexible, tiered, client-server architecture.

ERP Project Risks

In the late 1990s many ERP projects started, but more than a few failed. While ERP projects remain challenging even today, most can now be successful because the best practices have been identified and ERP pro-fessionals are more knowledgeable and more experienced with making the projects successful.

Page 3

Highlights

CEOs need information systems which

quickly provide them the data they need

…… ERP can provide that data.

ERP today has expanded from simply

coordinating manufacturing processes

to being the integrator of enterprise-wide

backend processes.


ERP Business Benefits ERP is an enabler of business benefits, and should not be viewed as a stand-

alone initiative with the requirement to pay back its implementation cost.4 The

most immediate ERP benefits include (1) improved visibility of procurement

spend and savings from improved sourcing policies, (2) decrease of work-in-

progress and days-of-sale-outstanding, and (3) improved productivity through

better sales order handling, better procurement operations and more efficient

planning.

However, the most important business benefits will often be delivered after the

ERP backbone is established, by other initiatives that use the ERP backbone:

• Integrated supply chain: from network planning through scheduling and

Manufacturing Execution Systems (MES)

• Easier integration of business processes with business partners

• Shared services and outsourcing of support functions

• Increased information transparency to enable better decisions

• Agility in acquisitions and “carve-outs” or divestments

• Increased regulatory compliance

• Robust and future-proofed backbone systems

There are cost savings on the IT side, often around 10-15%, especially when

different ERP implementations are being harmonized. These IT savings include:

• Reduced ERP implementation costs due to a common template

• Reduced application maintenance costs

• Lower integration cost due to standard interfaces

• Lower infrastructure costs

With an awareness of the best practices and a good understanding of ERP

project complexities, the risks in an ERP implementation are usually outweighed

by the benefits. The ERP discussion on investment return is one of mindset more

than one of standalone business cases.

Page 4

Highlights

ERP is an enabler of business benefits

and there are cost savings on the IT side,

often around 10-15%, especially when

different ERP implementations are

being harmonized.


Six ERP Design Challenges for Steel CompaniesA steel company presents six industry-specific design challenges for implement-

ing ERP, as described below. A successful ERP project will start by analyzing

these challenges in detail across all of the company’s integrated processes.

This analysis will result in the basic decisions that will be the foundation of the

ERP project.

Challenge 1: More than one planning strategy

Steelmakers often use a combination of production planning strategies. Typically

the flat or strip products are make-to-order, whereas the long products are make-

to-stock. Depending on the existence of a “de-couple point”, finish-to-order could

be a relevant planning strategy as well. Such a combination of planning strate-

gies affects the design of most ERP processes, including supply chain processes

as well as the financial/cost control processes. Cost control in make-to-stock

tends to go for standard price approaches, but in a make-to-order environment

costing happens on an individual order cost collection and forecast basis. ERP

systems today can handle this kind of complexity.

Challenge 2: Complex product variations

A steel product is made up of a large number of characteristics, making the

product difficult to configure when entering it in the ERP system. Configuration in

the make-to-order entries is typically done while entering the order, whereas for

the make-to-stock entries, configuration is done in the product definition, that is,

on the “material master”.

This burdens the early discussions during the design phase of an ERP imple-

mentation. Fundamental decisions need to be made very early in the project

about how many (finished product) materials should be defined: one extreme

is to define by material group which needs to be configured completely in the

order, or the other end of the spectrum is to define all possible/feasible charac-

teristic combinations which can possibly explode into an extremely large number

of finished product definitions.

Page 5

Highlights

A steel company is a complex arena

with six design challenges that can be

addressed by today’s ERP systems.


A steel product tend to explode towards the end of production processing; in

other words, the bill of material “stands on its head” or is “v-shaped,” as shown

in Figure 1. This means that the later in the process you define a product, the

higher the number of products to be defined becomes.

ERP solutions today can readily handle the complexities this of the V-shaped

bill of material. They allow “characteristics based product configuration” with au-

tomatic deduction of characteristics, characteristic value inheritance from sales

order header to item level, entry of multiple order units such as pieces, tons,

dimensions, and so on. Characteristics then drive production, shipping and pur-

chasing processes across the supply chain

Page 6

Gauge: .025

Finished

CRC

HRC

Slab

Figure 1: V-shaped bill-of-material

Gauge: .020 Gauge: .015 Gauge: .010

Gauge: .25 Gauge: .15


Challenge 3: Flexible planning

Planning for steelmaking often needs to happen on short notice, with unstable

production processes and unplanned outputs. This requires continuous re-as-

signment of products to processes and orders dependent on the characteristics

described above. ERP systems today allow re-assigning flexibly to handle these

situations.

Challenge 4: Specific Customer Service Requirements

To cope with high-demanding customer segments such as automotive and con-

struction, tight integration with business partners on forecasts, electronic custom-

er orders (EDI, internet etc.) are typically needed. ERP systems today support

electronic integration with partners.

Challenge 5: Complex production scheduling combining both continuous and batch production

Figure 2 below illustrates the flow in a typical steel mill. While the blast furnace

and converter work in batches, the caster works continuously and the finishing

lines work in batches again.

Page 7

Figure 2: Process flow in a steel mill


The batches need to be selected based on characteristics during production,

preparation and shipment planning. This means that the planning process needs

to be able to derive batches with characteristics inheritance and history tracing.

Finally, the scheduling part of the planning system needs to be able to work

with multiple and dynamic bottlenecks – that is, bottlenecks which can change

based on incidents such as production problems in certain process steps. ERP

systems today can handle all of these situations.

Challenge 6: Detailed margin analysis

In today’s steel industry when prices are high and capacity short, margin analy-

sis becomes the essential method to tell what money is being made on which

customer/product segments. On top of segment analysis, it is also essential to

differentiate between “strategic materials” (cokes and ore, Ni and Cr for stainless)

and the other cost elements that may be easier to control. ERP systems provide

the tools to support these decisions.

The ERP system will also need to work closely with the company’s Business

Information Systems (BIS) to optimize the business benefits. Working together,

the ERP and BIS systems can, for example, improve inventory allocation to late

orders.

Page 8


Integrated IT Model for SteelAn integrated IT model as in Figure 3 is important because it lets you see the

systems involved in planning and production. A typical flow would be:

• The Supply Chain Management (SCM) application provides the rough-cut

planning in “Demand Planning.” The result is planning blocks of similar

products which are then handed over to production planning.

• When orders are being entered, availability checks assign the order to a

block (unless inventory already exists that meets the order) and feeds back

a promise date (at the end of the block to allow for the flexibility of possibly

moving to an earlier date).

• The mill optimizer then typically would re-shuffle orders in between the blocks,

and feed results back into the SCM application in order to optimize the load

balancing.

• Right before production starts, planned orders from the SCM application are

converted into production orders and, via the ERP system, are transferred

into the MES layer. It is at that time when quantities are being translated into

pieces (slabs, coils etc.).

• Detailed scheduling then takes place, sequencing and combining pieces

from various orders throughout the mill into lots for optimization.

• Production completion then posts an updated status of the orders into the

ERP system, including stock receipts of finished products, and so forth.

IBM Business Consulting ServicesPage 9

Highlights

A typical gap occurs between the ERP

and MES (process control and machine

control) systems, where the “system”

is actually combination of custom-built

applications and manual spreadsheets.

“Bridging this gap” properly is essential

for realizing the business benefits on the

IT investments.

ATP PP SNP

Process Control

Machine Control

FIN

, HR

,..

ATP PP SNPFIN

, HR

,..

ERPSales Orders

ManufacturingInventory

QM

Figure 3: Steel Company Application Layers

SCMDemand Planning

ATP PP SNP

B/WKPI

Balanced ScorecardReporting

Leve

l 4&

5Le

vel 3

Leve

l 1&

2

Inventory Allocation

Slab & Plate Design Melt Shop Scheduling Hot Mill Scheduling Finishing Line Scheduling

MES Melting Shop MES Rolling Mill MES Finishing Line

Execution, Tracking Roll Management

Process Control

Machine Control


Figure 3 is also important because it lets you identify gaps among a

company’s different IT systems. A typical gap occurs between the

ERP and MES (process control and machine control) systems, where

the “system” is actually combination of custom-built applications and

manual spreadsheets. “Bridging this gap” properly is essential for

realizing the business benefits of the IT investments.

If the applications in Figure 3 are to provide true value, they need

to be robust, integrated and cost efficient. A recent IBM survey

indicates that steel clients process control and MES systems are

custom-built applications 66% of the time, and that these custom-built

applications usually differ from mill to mill.5 Clearly, this risks creating

sub-optimal processes and leaves the company open to all the prob-

lems of maintaining custom-built, legacy applications.

Implementation Approaches for ERPThe key element for ERP success is to know how to implement an

ERP project. Past experiences recommends best practices such as:

• Rapid/realistic project timelines due to external pressures

(acquisition synergies, legal reorganization)

• Command-and-control approaches from a central project

management office

• A global business process owner who has the authority and

credibility to approve process designs and business model/

organization changes

However, there’s much more to it than these few general principles.

Implementing ERP is complex and takes a team of knowledgeable

and experienced ERP professionals to successfully implement an

ERP project.

Highlights

Implementing ERP is complex, and

takes a team of knowledgeable and

experienced ERP professionals to

successfully implement an ERP project.

Page 10


ERP Steel Case Study: A South American Steelmaker and SOA. Service Oriented Architecture (SOA) is the most recent technology step for ERP.

SOA breaks applications into smaller, granular software components which use

industry-standard methods to communicate and inter-operate.6 SOA moves

away from the “one size fits” all approach to one that fits more industry specifics

and customer specifics, all on a more productive development environment. SOA

makes it easier to incorporate new and innovative business processes and gives

more deployment flexibility.

A recent steel industry example for SOA is the IBM project in 2005 with a stain-

less steel company based in Brazil. The SOA architecture provides the company

with real-time views of critical cost and profit information for every key decision.

They now have an integrated solution that can provide real-time cost and profit

information online. This is essential in times of soaring raw material costs, espe-

cially for stainless steel manufacturers where Nickel and Chrome costs need to

be analyzed separately.

The steel company designed and implement the new ERP system based on core

“mySAP” modules (which are pre-SOA architecture), plus several SOA-compliant

software components. The ERP modules are integrated with the client’s asset

management, production planning and packaging systems. The “Integration

Message Broker”, which is part of IBM’s Websphere software, allows important

transactional data such as materials consumption and purchase orders to be

freely exchanged from the Oracle database to all of the company’s systems.

This platform has proven to become the glue providing management online real-

time cost and margin information which is needed for robust decisions in the

volatile stainless steel market.

Page 11

Highlights

Service Oriented Architecture (SOA) is

the most recent technology step for ERP.

Properly implemented, SOA architecture

can provide real-time views of critical

cost and profit information online.


ConclusionERP is a key backbone application for companies in a fast changing industry

like steel. Given an awareness of the best practices and a good understanding

of the project complexities, the risks in an ERP implementation are usually out-

weighed by the benefits. The ERP discussion is often one of mindset more than

one of standalone business cases.

While implementing ERP can be challenging and demands sustained commit-

ment from top executive levels, it is fundamental to enhancing the competitive

position of a company in the dynamic environment of the steel industry today.

About the AuthorDirk Claessens leads the IBM global industry practice for metals, a key industry

for IBM with dedicated research and development teams and nearly 200 profes-

sionals worldwide. He has been with IBM since 1994 and has worked since the

beginning of his career on assignments with metals companies, delivering strat-

egy work, process redesign and application implementation, and automation as-

signments. Recently, he addressed steel conferences in Helsinki, Tokyo, India and

Moscow on various metals-specific topics such as supply chain and IT. He is a

Commercial Engineer by education and holds an MBA from the Catholic Univer-

sity of Antwerp. Dirk can be reached at [email protected].

References1 International Iron and Steel Institute (IISI), http://www.worldsteel.org 2 MEPS World Steel Prices, http://www.meps.co.uk/allproducts%20steel%20price.htm 3 International Iron and Steel Institute (IISI), http://www.worldsteel.org 4 Aberdeen estimates ERP implementation costs to be approximately $5,000 to $6,000 US per user external costs (except infrastructure) for large implementation (more than 1500 users, using Oracle or SAP). “The Total Cost of ERP Ownership”, October, 2006 5 IBM, Global Business Services analysis, 2006 6 An audio-video (AV) system, for example your home TV-stereo system, is a good analogy for the idea behind SOA. The individual SOA services are like the individual components of the AV system that can be cabled together. Many people own an AV system with components that have been purchased over the years. Let’s say you want to add a new DVD-video tape recorder to the system. You already have the TV monitor, the CD player/burner, the amplifier, and the radio tuner. You can add the new DVD-video tape component with cables to the rest of the system, although you might need to recable some of the components. Over time, you can replace each individual component as th need arises, and as technology improves.

Page 12

IBM Global Business ServicesPage 13

© Copyright IBM Corporation 2007

IBM Business Consulting Services Route 100 Somers, NY 10589 U.S.A.

Produced in the United States of America 08-07 All Rights Reserved

IBM, the IBM logo and the On Demand Business logo are trademarks of International Business Machines Corporation in the United States, other countries or both.

Other company, product and service names may be trademarks or service marks of others.

References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates.

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