By all accounts, the global steel industry has lagged behind in the adoption of enterprise-wide information technology (IT) not just compared with the service sector or discrete manufacturing, but even when compared with other metals, oil and chemicals, too.
To be sure, there are islands of automation, and some facilities even whole companies have made significant advances in such areas as business intelligence and reporting, data-quality analysis, sustainable cost-reduction, consolidation of critical systems and e-commerce.
But overall, analysts and vendors concur, the industry has far to go. And silence renders consent: AMM contacted a half dozen steelmakers of all sizes, as well as industry organizations, and none was willing to discuss the topic on the record, although a few were willing to talk on background. What is clear is that while some industries are born tech-savvy, others have technology thrust upon them and thats what is starting to happen in steel on at least two fronts.
First, the increasing connectedness of the supply chain means that order and inventory management, as well as logistics, are increasingly automated from the final customer back up the chain. Second, steel prices are becoming more volatile as contract lengths are shortened at the behest of larger customers. With comfortable and familiar multiyear contracts giving way to quarterly and even monthly arrangements, the industry must address the need for hedging, which requires a minimum level of automation and sophistication; spreadsheets just dont cut it anymore.
The global steel industry is definitely a follower in adopting IT, and not even a fast follower, said John Lichtenstein, managing director of the global metals practice for Accenture. While based in Beijing, in early January he participated in the installation of an enterprise resource planning (ERP) system at a major mill in India. He sees that project as another indication that the global steel sector is coming to terms with IT, albeit slowly and reluctantly.
The level of IT maturity in steel worldwide is many years behind other resource-based industries, he said. Energy and chemicals adopted IT 20 years ago; even mining and forest products are now well down the road. Steel has been quite slow.
Lichtenstein is technology-agnostic, favoring neither the two major global technology vendorsÑSAP Group and Oracle Corp.Ñor any of the more specialized suppliers, such as Aspect Enterprise Solutions Ltd. and Triple Point Technology Inc. The true competition, he said, is not so much among the vendors but between commercial solutions and homegrown ones. There are still a very large percentage of proprietary solutions out thereÑmeaning systems cobbled together using spreadsheets.
Lichtenstein is willing to cut mills a little slack in their recalcitrance. Compared to copper or aluminum, where there has been greater adoption of IT, steel has infinite grades and types. It is inherently a much more complicated manufacturing process and supply chain, he said. Also, the industry has been broke for several of the recent few years. Consolidating from many small companies to fewer, larger players present many other obvious efficiencies, such as layoffs, facility rationalization and other capital avoidance. Still, the industry has been slow to evolve from a production-oriented mentality to a modern, enterprise mentality.
The early-phase benefits did not require much IT sophistication, but now those have been mostly realized. As the synergy curve has begun to flatten, Lichtenstein said, the world has become a more complex place. Commodity prices, both for raw materials and for finished products, are much more volatile than they were just a few years ago. E-commerce means that mills of every size on every continent are in global competition. Some steelmakers are realizing that they now have to take the next step. Its a big step, he acknowledged, but once taken, it allows for understanding of granular costs with real-time accuracy. That means commercial decisions can be made quickly and confidently regarding purchasing, pricing products and prioritizing customers and orders.
There generally are three avenues from which steelmakers approach IT. The most sweeping is top-down with ERP. The bottom-up approach often starts with commodity trading and risk management (CTRM), which usually comes out of the logistics, supply or financial departments; at many companies, not just steel mills, those areas tend to be tech-friendly. Still other initiatives come from sales and marketing, where customer relationship management (CRM) software is well-established.
On an even more granular level, there are two applications that are getting a good deal of attention in the steel sector, according to vendors. One is advanced planning and scheduling; the other is supplier-relationship management. Both represent important tactical pushes from specific operating groups within the steelmaking companies. That situation often means that needs can be detailed, and strong returns on relatively modest investments can be documented.
In all cases, analysts and vendors said, there is a trade-off. The bottom-up approach has the advantages of lower initial costs and complications. The top-down installations are expensive and can be disruptive in the short term, but their breadth generates wider gains. In most cases, the over-arching platforms are readily compatible with CTRM and CRM systems, but that level of commitment is rare in any segment of the economy.
The challenge is not the technology, it is the mentality, Lichtenstein said. Systems can be very elegant, but if they come out of the engineering-driven culture they may not be able to solve real problems and show returns. Every whiz-bang solution is not necessarily so great. It has to be effective. On the other end, if top management has the philosophy that we make it, the market buys it, then they are going to have a hard time seeing the value in any system. Fortunately, those two extremes are evolving toward each other, he said.
It is true that metals have not been as progressive as other industries in terms of IT, said Robert McCutcheon, industry product leader for PricewaterhouseCoopers, but the advantages of better dataÑreal-time dataÑenabling better decision-making is starting to be realized. There have been cyclical, macroeconomic factors, and also behavioral factors holding back development. But for whatever reason, metals do lag other comparable industries.
McCutcheon said that during the last boom cycle the industry got itself on the road, but then the recession hit and many projects were canceled or put on hold. We are only now just starting to see some of those come back, he said. The ones that are moving ahead tend to be basic blocking and tackling, data management and so forthÑnothing overly exotic or sweeping.
Some of that sticking to basics, McCutcheon said, is due to a lack of profitability for supporting wider initiatives, but there also is still a good deal of institutional inertia to overcome. There is a mentality within the steel industry that says, We have always done it this way, and it is hard to change that at any level. The blast-furnace operators still dont see much value in any of this.
McCutcheon said that while todays global operators can be proud of the job they have done consolidating, modernizing and creating efficiency, that same process would have been a wonderful opportunity to implement ERP. Far from being a complication, it could have been a template for consolidation.
There was a real case for enterprise-wide solutions, he said. From shared-service centers to fundamental shared systems, IT becomes the commonality among all these disparate operations. Still, he recognizes that many department heads and managers were able to keep some development going through the recession. There were some IT initiatives that were kept running because they had strategic importance. The industry did not completely lose momentum, he said.
It is coming back now, but slowly. There is a push from customers back upstream. That push is very important, because one of the long-standing arguments against IT from the mills is that their industry is too complex, with too many different products. I understand that, but the chemical industry has just as many different types of products, and those manufacturers went big for IT a long time ago, McCutcheon said. If steel buyers now want to do business electronically, then the market diffusion argument of the mills evaporates.
IT development will eventually become a competitive issue, he said. Given the overall state of the industry, there is still time for the early moversÑrelatively speakingÑto gain an edge. Now might be the right time to invest.
Robert Hamilton, global sales director of London-based Aspect Enterprise Solutions, said CTRM is not so much a component of an enterprise-wide platform, but rather a different view of the same information. ERP is the physical supply chain. It can tell you where something is and where the value is being added, he said. CTRM is the financial view: how much you paid for it, what the mark-to-market value is, what the forward curves look like.
Hamilton said that the aluminum and coal industries adopted CTRM software more readily than steel because those global markets already included short-term and spot transactions, while steel stuck to 12- and 24-month contracts. With the introduction of shorter-term contracts in steel, the volatility in the market has risen, he said. Tracking that takes more sophistication than anyone can handle on paper or with a spreadsheet. You need an industrial-strength solution. There are just far too many variables.
Risk management is the driver, Hamilton said. Many steel executives are uncomfortable with ideas like hedging. They like to determine their own prices, and not leave it to some guy in red (suspenders) with a (cell) phone. They equate hedging with gambling. But the fact is, in a volatile market, hedging is risk management. Not hedging is gambling. You are betting 100 percent that the price will go up. The steel industry is loath to admit that, but it is true. And such a position is fraught with danger.
Acknowledging the unease that steel managers have with the trading element of CTRM, Michael Schwartz, chief marketing officer at Westport, Conn.-based Triple Point Technology, said his company prefers to use the term commodity management. But no matter what the software is called, the alternative is a spreadsheet with advanced macros and multiple access, Schwartz said. Within the mill, risk managers, finance, marketing, managementÑeveryone needs access, but they need it for different reasons.
Gary Taylor, executive vice president of global field operations for Triple Point, concedes that steel is indeed different from other commodities, but said the core needs of good practice in procurement, trading, management and sales are essentially the same. The market developments of increasing volatility are causing steelmakers to sit up and take notice. We are in discussions with a large steel company in the U.K. that would be moving from in-house spreadsheets.
A few companies do come in for praise: Brazils Gerdau SA was lauded for making progress on enterprise-wide initiatives while making multiple acquisitions, and Luxembourgs Tenaris SA was recognized for using IT to maintain rigid global standards in its oil country tubular goods business.
And Luxembourgs ArcelorMittal SA was credited with making a good effort at global integration, but as one expert put it, It is such a challenge to roll up so many different operations around the world, the sheer complexity forced them to back off and take a more regional approach. That was probably a wise move at present. Optimization can be achieved at many different levels.