Steel industry laggards are heading for the scrapyard

Steel building armature

Not much thought has gone into the steel industry over the last few years, as the markets instead focused on the more financially promising iron ore. But reality has caught on. With iron ore now at historical lows, many downtrodden steel companies are not able to struggle back off their knees. Why is that?

Simply stating, production output of marketable steel has shrunk because of diminishing need. Short of a prolonged upward demand in steel consuming industries, the downward trend can only continue. Research and development into new uses of steel is attempting to slow down the downward demand curve, but at the other end of the market, aluminum is trying to carve out a piece of the traditional steel pie. Not because it is easy to replace steel with aluminum, but because aluminum producers themselves have been pushed out of their traditional markets by versatile composite materials.

The steel company hierarchy: An unbalance of power

Today’s steel market resembles a very off-balance wedding cake.

At the base of the cake, there are a few steel companies tightly bound to and trusted by their long-term customers in select industries. In this group, specific supplier-to-customer partnerships provide reasonable long-term stability for a select group of well-established producers. Weakening partnerships is driving some of these companies into the middle layer.

The middle layer consists of a myriad of steel companies competing for commodity steel orders. Predominantly, they fight by offering the lowest possible, sometimes outright impossible, price – a sure way to drive themselves and one another over the proverbial cliff.

At the top of the cake is the smallest group; manufacturers whose high quality products quickly fulfill large numbers of smaller orders with short lead times.

R&D and agility to re-plan and re-schedule production distinguish top-layer manufacturers. And in all three layers and under the current market conditions, winners are separated from losers by their ability to change how they optimize their end-to-end operational processes.

MES – from solution to problem

Here I have to point out that MES-based end-to-end planning and scheduling of steel production is destined for the scrapyard. Yes, the trusty Manufacturing Execution System, the workhorse of the steel industry, is becoming an obstacle to the survival of its users. Basically unchanged over the past 15-20 years, lacking flexibility to address upgrading and modernization of the production lines, short of complex interfaces to advanced planning systems, and failing if tasked with tactical planning job, MES hinders change at the time when change is most needed.

In my work throughout Asia, where most of the global steel production happens, I meet countless customers facing the same dilemma when deciding to modernize their production area: Should they only upgrade their MES and tie it to their legacy planning system OR buy and implement an advanced integrated production planning & scheduling system and tie it to their legacy MES. It is a hard choice indeed, but delaying such decisions is out of question, given the reasons outlined earlier.

What we see amongst Quintiq clients and prospects is that implementing an advanced integrated planning & scheduling system and tying it to the existing MES works better. It produces significant gains in productivity and reduction in costs faster than upgrading MES and continuing to use the legacy planning system. This is hardly surprising, as Quintiq has pushed the envelope of mathematical optimization far beyond what was available from legacy software vendors 10-20 years ago. The most rewarding decision is the “big bang” approach of implementing both, new production planning & scheduling and new MES solutions. However, complexity and cost of such projects overwhelms IT capabilities and budgets of many Asian steel producers who are either in red or barely profitable.

Don’t scrap your chances

No steel company can adopt the “let’s wait and the market will surely recover” attitude. No steel producer, whether large or small, is immune from necessary change. Any company falling into the “laggard” category will not have the time to get out of that. The only way is to the scrapyard.

Keep and strengthen your competitive edge. Discover how AcelorMital, ThyssendKrupp Steel, Severstal and other top-layer manufacturers are doing things differently.

CATEGORY

Manufacturing

AUTHOR

Kris Kosmala.

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Kris Kosmala

About Kris Kosmala

I enjoy the challenge of employing information technology as an accelerator of business growth. Of all business operations, I find supply chains provide the most fertile ground for creative re-thinking and transformative change. I find that frequently, new technology is not aligned with a company’s business strategy. I help companies address this critical issue, ensuring that the right technology is harnessed – and used correctly – to advance their organizational goals and turn it into true competitive advantage.