In many ways, big metal companiesespecially steel and primary aluminum producersare proud to be distinct from other heavy manufacturers, even other process industries. But being sui generis also means that many aspects of information technology, especially enterprise resource planning (ERP) systems, often have to be custom-made or developed internally rather than bought off the shelf from big vendors, such as SAP AG, Microsoft Corp. or Oracle Corp.
That is now starting to change, and at an accelerated pace, due to forces both inside metals and in the broader economy. Most notably, the normal capital investment cycle post-recession is now turning, favoring upgrades. As that happens, vendors have added capabilities that better fit the making of metals. In addition, formerly tangential areas of managementespecially supply chain and risk management, which have their own specialized solutions and platforms that can be readily linked to ERPhave become more a part of senior executives daily responsibilities.
There definitely is a rise in ERP and other technology systems in the metals market, said Gavin Lavelle, president and chief executive officer of Brady Plc, a provider of commodity trading and risk management (CTRM) software. There are several reasons for that. The most immediate driver is that after the economic crunch of 2008-09, there has been unprecedented volatility in commodity prices worldwide. That is especially true all along the metals supply chain. We saw prices drop 80 to 90 percent and then shoot back up. So all the playersmines and mills and fabricators and service centersare much more aware of, and focused on, risk management.
That can include stress-testing portfolios, better understanding counterparty risks from suppliers to customers and service providers, and reviewing capital and operating assets. The world has changed, Lavelle said. When prices are rising or declining steadily in long cycles, managers have time to adapt. But when they get rapid shocks, they need better tools. That is not just true in metals, but in all industries.
Lavelles company is a collaborator in a market as a CTRM supplier, not an ERP competitor. With recent installations at Xstrata Plcs copper concentrators in the Middle East and South America, as well as a series of projects with Corporación Nacional del Cobre de Chile (Codelco), Brady has seen a run of activity in the metals sector. In many cases, its CTRM initiatives have been in coordination with ERP systems or projects.
Senior executives in the software sector recall that as far back as the late 1980s and early 1990s, other process industries, especially the petrochemical sector, were early adopters of ERP. SAP and Oracle were among the top providers at the time. Based on that strength, Oracle won some early metals contracts like Alcoa (Inc.) and Worthington (Industries Inc.), one software insider said. SAP was another Tier 1 competitor, based on the strength of its reporting engines. It was No. 1 worldwide in all industries.
Microsoft vaulted into the top tier in the early 2000s when it acquired Dynamics, he said. That had the advantage of being built over the SQL server, keeping integration simple over the whole Microsoft stack. That makes for simple interfaces to the user and lower costs to implement.
Still, metals proved a coy market through the boom of the mid-2000s. Then came the shocks of 2008-09. That, Lavelle said, explains how the upswing in ERP and other system installations and enhancements was the result of the natural procurement cycle. At the bottom of the financial crisis and the recession, people were concentrating on just keeping the lights on. Once things stabilize, they have their meetings and consultations and bring in the analysts, he said. That can take a year or more. Once they make a plan, the requests for proposal go out to the vendors and service providers. Another six months for replies and selection, and here we are. The cycle takes two to three years from crisis to deployment of new platforms and solutions.
Beyond the core drivers in ERP that have arisen from the recent recession and recovery, there are two other factors that serve to accelerate the trend, Lavelle said. One is increased regulation and oversight, both internal and external. There is an increased compliance burden all around and many more financial regulations.
The other outside driver to increased ERP adoption in metals is the marked shift to electronic business overall through commodity markets, the actual supply chain, and futures and options. Historically, trading on commodity exchanges had been in the ring or on the phone, Lavelle said. Trading is now mostly electronic. It is faster, cheaper, more accurate and has a better order trail.
Lavelle recalled one debate in the metal markets. Trading on the London Metal Exchange had been going for something like 150 years, all in the ring and then also on the phone. There were so many arguments against moving to electronic trading, he said. But once the change was made, within two years 80 percent of the front-month contracts were being traded electronically. Adoption was very fast and very broad.
Looking ahead, Lavelle sees cloud-based solutions as the next big thing, in which software and databases are not physically on the hardware of the company, or even at the vendor, but on a remote, secure server. The idea of secure, log-on access to ERP or CTRM systems from anywhere is very powerful, he said. We think that is very much the way forward.
If the cloud is indeed the way forward, then metal makers might actually benefit from not being early adopters of ERP.
The metal companies did not generally go in for the first few rounds of ERP, said Perry Zalevsky, industry principal for mill products and mining at SAP, still one of the largest global ERP suppliers. They have been going along with their legacy systems, even when the companies as they exist today are the result of mergers, acquisitions and spinoffs.
Zalevsky said that given such a status for many operators, the current slow recovery in overall economic and market conditions is a good environment in which to make the jump to light-speed. There has been a recovery from the recession in metals that has not occurred in all sectors of the economy, but metal makers can start to look to the longer term these days.
When times are tough, there is usually not enough capital for ERP and other capital projects. At the other end of the spectrum, when mills are running flat-out there isnt time to make changes and neither is there any sense of urgency as long as the party lasts, Zalevsky said. I was at a pipe and tube company recently, and they were lamenting the hodge-podge of systems they had. Of course, no one set out to have an information technology landscape like that, but often that is where operators find themselves.
Another outside force driving ERP in the metals sector, according to Zalevsky, is the consumerization of information technology. People have these smart phones and tablets with amazing capabilities, then they go to work and their office or station in the mill has this clunky old system, he said. Many operators dont have any comprehensive ERP at all, just islands of automation.
The instinctive reaction, he said, is that if the devices in our pockets and even in kids backpacks can do all those things, why cant these systems run the company and the plant? If a delivery company can confirm in real time where a package is on the other side of the world, why cant my company tell its customers where their shipment is and when it will arrive?
Zalevsky said there are indeed new platforms and solutions being offered by ERP and CTRM providers that are more easily installed and aligned with each other and a companys other systems. ERP can come top-down or bottom-up, he said. Indeed, CTRM is often the gateway to a wider ERP application.
SAP does a lot of things, but hedges and currencies and interest rates are not a major core strength, he said. What we do very well is tie into treasury or risk management systems. You decide your hedging program, and we can show you how it will affect the rest of the operation out into the future. If a mill or a trader already has a sophisticated hedging program in place, then the tie-in is a natural. Executives need to know that what their trading desk is doing aligns with not just corporate strategy, but also the current business climate.
There has been a gap even for companies with fairly well-advanced systems, Zalevsky said. Risk management has not been tied into financial. He cited a new area called provisional invoicing as an example of whats possible now. If a fabricator takes an order today that will involve the purchase of copper, the order for the copper might not be made for a month or two and the finished order might not be shipped for another month or two, he said. The trading desk needs to know not just that the order has been taken, but the process flow. And sales and accounting need to know how the trading desk is handling any risk management so they can make provisions in the contract if necessary.
SAP recently acquired SuccessFactors, a company that handles cloud-based human resources management. We have seen this coming for a long time, but it has not yet come very much to the metals sector, Zalevsky said. But the ability to check pay stubs or vacation days or performance reviews from anywhere, anytime, is very powerful, although he warned that with anything in the cloud, privacy and security are always major issues.
Zalevsky said that if mills and fabricators are just treading water by patching up legacy systems, they are really being swept out to sea. There are capabilities available now that you are just never going to get with a patchwork system, he said.
Richard Baker, chief executive officer of Cleartrade Exchange, an electronic exchange for iron ore and steel as well as drybulk freight and containers, said mills, traders and buyers can hedge their physical and financial exposures on that or other exchanges around the world. The innovations in futures and options are bringing transparency, efficiency, automation and reliability to all parties, he said. Those who can link to ERP can take full advantage of those trading capabilities.
Traders on the desk are responsible for running the books in front of them, and that is what CTRM is for, Baker said. But ERM handles the link to risk management and corporate strategy. The trader requires strategic direction for tactical activities.
To illustrate, Baker cited a buyer for a major appliance manufacturer. His exposure to steel, specifically hot-rolled coil (HRC), is high, and his access points to the market are multiple. The emerging model is consolidating order books, finding liquidity and automating the workflow to address any pain points, he said. I used to trade in the sheet market, and I remember 10 years ago the buyers would get beaten up by the production managers who were wanting to know Wheres my sheet? Wheres my HRC?
Today, the risk has shifted. Ultimately, the risk manager could easily undo all that has been done in the supply chain without good access to information across the organization, Baker said. A supply engineer may be buying forward 30 days or getting a saving from the forwarder. Is that gain then being netted off by the volatility in the market?
Baker said that according to recent conversations with purchasing managers about ERP, the consensus is that they want to see direct feeds from the exchanges. They want to know where the forward market and the derivatives market are. The anchor for the business is the real-time activity in the spot index. Beyond that, the forward market gives price guidance.
Perhaps the most challenging aspect of ERP in the metals market is that there are so many different trends to consider. Technology innovations, broader economic realities and developments within the commodity markets all help make the argument for accelerating adoption.
But Josh Cole, a principal for manufacturing and distribution consulting services at Crowe Horwath LLP, said that what stands out in a historical context is that metal companies have never believed that an agnostic ERP solution as provided by the major software companies, the household names, would be a good fit for them. Among metal executives, there has been a belief that those platforms were designed for discrete manufacturing.
As a result, Cole said, the metals industry decided long ago to go out on its own with either boutique, custom-designed commercial solutions or home-grown systems. They have mostly worked, but as a result the industry is behind the curve now on research and development, he said. Also, the solutions are in silos for primary producers, service centers and scrap operators.
Boutique, custom-made and home-grown solutions rely heavily, even entirely, on a single vendor or in-house staff, Cole said. They also are reliant on what is now likely to be aging hardware and infrastructure.
What metals needed before was support for their unique process industry. They still need that, but in a way that is flexible rather than ossifying, he said.
Its happening at a time when there are more options and more advancements in solutions, Cole said. That extends to service centers. Service centers are looking to add value, and boutique solutions cant handle the fabrication elements. If service centers want to offer that capability, they really have to look to the major ERP solutions.
That said, ERP is never a turnkey proposition. Crowe Horwath offers a software and services package called Metals Accelerator that Cole said makes a prebuilt ERP platform feel like a boutique application. Other vendors and service providers have different approaches that accomplish similar ends.