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Supply Chain Management in the Swedish SteelIndustry

Av

Gustav TerlandJonathan Mankowitz

Examensarbete 2008-xxxKTH Industriell ProduktionSE-100 44 STOCKHOLM

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SUPPLY CHAIN MANAGEMENT IN THE

SWEDISH STEEL INDUSTRY

HAS THE NICHE STRATEGY IMPLIED LOST FOCUS ON PRODUCTION PROCESSES INFAVOR OF PRODUCTS?

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ABSTRACT

This research aims to investigate Supply Chain Management in the Swedish steel industry. Morespecifically, how actors in the industry regard their supply chains in relation to their overallstrategy and what implications industry specifics have when the flow of material and informationis to be optimized. Furthermore, this thesis looks into the reasons behind value chain positioning;is it desirable to encompass all the activities in the value chain into the core businesses(integration) or rather focus on a particular field of work? What are the reasons behind a certain

positioning strategy? In order to bring clarity to those questions, in-depth interviews have beenconducted with five of the largest Swedish steel companies. An additional survey has been sent toa selection of other steel companies with a Swedish connection. The interviews and surveys,together with a financial analysis of the companies, constitute the empiric base for this study.

The findings suggest that forward vertical integration is a trend among Swedish steel companiesand that the proximity to the end-user of steel is the main motive for the deployed strategy.Despite the fact that margins are generally lower for the latter parts of the value chain, the steel

producers see financial incentives for encompassing these activities. Stabilized demand andsecured sales volumes are reasons why these activities are taken over by the producers.

The Swedish steel companies have chosen to focus on high value niche products since they cannever compete with low cost bulk producers. The niche strategy has made efficiency efforts lesslucrative than increasing margins by developing leading and customized products.

Furthermore, as an effect of the product focus, delivery accuracy is one of the leading issues for

the industry. Even though all companies are aware of this problem and strive to improve deliveryaccuracy, the absence of a top performer in the industry takes away the pressure for realimprovements. Acceptance by customers, due to the favorable market situation for steel

producers, is further an implication why this matter is currently not critical for survival.

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1 BACKGROUND & PURPOSE ................................................................5

1.1 BACKGROUND ............................................................................................................................................... 5 1.2 PURPOSE .......................................................................................................................................................... 6

2 METHOD..................................................................................................7

2.1 SELECTION CRITERIA FOR STEEL COMPANIES.................................................................................. 7 2.2 SURVEY ............................................................................................................................................................ 8 2.3 IN DEPTH INTERVIEWS ............................................................................................................................... 9 2.4 METRICS ........................................................................................................................................................ 10

3 THEORETICAL FRAMEWORK ............................................................11

3.1 SUPPLY CHAIN ............................................................................................................................................. 11

4 ANALYSIS AND RESULTS ..................................................................15

4.1 INTERVIEWS ................................................................................................................................................. 15 4.1.1 Case Studies ................................................................................................................................................ 15 4.1.2 Case Study Conclusions - Common Characteristics In The Swedish Steel Industry..............................42

4.2 SURVEY .......................................................................................................................................................... 44 4.2.1 Tools Deployed ........................................................................................................................................... 44 4.2.2 SCM-Score .................................................................................................................................................. 48 4.2.3 AHP - Potential Cost Savings And Profit Possibilities ............................................................................ 49 4.2.4 Survey Conclusions – Methods deployed .................................................................................................. 50

4.3 VALUE CHAIN – WHERE IS THE GOLD IN THE STEEL INDUSTRY?.............................................51 4.3.1 Profit Along The Value Chain.................................................................................................................... 51 4.3.2 Value Chain Conclusions - Reasons Behind Value Chain Positioning Strategies .................................52

5 CONCLUSIONS.....................................................................................53

6 CRITICAL REVIEW AND SUGGESTIONS ..........................................56

7 REFERENCES.......................................................................................57

APPENDIX 1 – DESCRIPTIONS & BEST PRACTICES ............................60

APPENDIX 2 – DESCRIPTION OF SCOR AREAS....................................63

APPENDIX 3 – COMPANIES: INTERVIEWED/SURVEYED .....................64

APPENDIX 4 – SURVEY .............................................................................65

APPENDIX 5 – CALCULATIONS & SOURCE DATA................................70

APPENDIX 6 – AHP METHODOLOGY ......................................................72

APPENDIX 7 – SURVEY RESULT .............................................................74

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1 BA C K GR O U ND

&P URP O S E

1 BACKGROUND & PURPOSE

1.1 BACKGROUND

Historically the focus of improvement methods within Supply Chain Management (SCM) hasvaried substantially. This is partly due to new manufacturing technologies and strategies, but alsoa result of the changing state of the world economy.

In the 1980s, as manufacturing strategies such as lean, total quality management and just in timespread to a broader audience, reduced costs became the focus within SCM (Simchi Levi et al.,2007). The intense pressure to reduce costs further contributed to the trend of outsourcing in the1990s, along with the focus on increased availability, and supply chain agility (Simchi Levi et al.2007; Lindh 2004; Christopher & Towill 2000). Recently the risk management factor has beenintegrated to balance the focus on cost (Simchi Levi et al. 2007), and the importance of

optimizing entire value- and supply chains rather than just parts of separate companies - such asinventory, manufacturing or transports - has increased (Lindh 2004; Stadtler & kilger 2005).

Furthermore, it is apparent that the focus lies on costs when the economy is souring, while productivity is prioritized during upturns (Lindh 2004). The effects of capacity restrictions duringupturns can be minimized by closer relationships with suppliers and customers, in other words;integration, which is the most apparent trend within SCM related literature today (Simchi Levi etal. 2007; Lindh 2004; Christopher & Towill 2000). It can also be noted that the past 5 years(since 2003) have been characterized by strong growth in the global steel market, much due to theindustrial investments in China and the rest of Asia (Jernkontoret 2006).

The Swedish steel industry’s characteristics are largely a result of the energy crisis in the 1970s.One of the most apparent reasons for this is that the Swedish ship building industry almostdisappeared. This industry was at the time the second largest in the world and consumed most of the domestically produced steel. In addition the building sector reduced its activities and thedomestic steel consumption shrunk by 50% from 1975 to 1990. As a result of this, the industrywas restructured and the remaining companies specialized the production intensely towards niche

product groups, with more value added than traditional steel. As a consequence, they no longer compete with each other. During this period there was also an intense focus on cost reducingstrategies, which is characteristic for a recessionary industry. (Nyquist O. 1998)

The steel industry in general has distinct characteristics that separate it from other industries. For

example the products have relative long life-cycles, the companies are highly capital intensiveand there is a global overcapacity of steel. This means that low cost production is, in general, a

prerequisite to become a market winner and companies cannot rely on increased prices to ensuretheir profitability (Standard & Poor’s 2007). The Swedish steel industry, specifically, is highlyspecialized and therefore should not comply with the strategies used globally, where volumes andeconomies of scale are the center of attention today (Nyquist O. 1998). This makes anexamination of SCM-strategies in Swedish companies especially interesting.

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1.2 PURPOSE

The main purpose of this thesis is to describe Supply Chain Management from the view of theSwedish Steel Industry. In other words, how do the actors in this industry regard their SupplyChains in relation to their overall strategy and what implications do industry specifics have when

the flow of material and information is to be optimized? The following sections break down themain purpose into more tangible objectives.

• Is there an unequivocal emphasis on certain Supply Chain areas by companies in the steelindustry? And do the companies face the same challenges i.e. are the problems due toindustry specifics or do they exist isolated?

• What are the reasons behind value chain positioning? Is it favorable to be integrated allalong the value chain or is it more attractive to focus on certain activities from a valuecreating point of view?

• What methods are used in the different areas of the Supply Chain and is the purpose of thedeployed methods in-line with the academic research. Do they really aim at increasinginformation transparency and system wide efficiency?

• Are there any correlations between the use of Supply Chain Management methods andKPIs regarding performance and value creation?

• What areas of the Supply Chain are regarded as most strategically important and is thiscoherent with current emphasis on overall business strategies?

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2 ME T H O

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2 METHOD

This thesis contains several sources of information to address the above stated purpose. Thetheoretical part consists of well-known sources complemented with academic articles on the

subject.

The empirical part of the thesis consists of two main sources, in-depth-interviews and a survey.The survey was sent out to get the broad picture of what specific tools are deployed in theindustry, while the interviews have been conducted in order to understand the reasons behindcertain SCM strategies. This material has been complemented by information from thecompanies’ annual reports.

2.1 SELECTION CRITERIA FOR STEEL COMPANIES

Members of the trade organization Jernkontoret have been selected to constitute the market,

which is referred to as the Swedish steel industry. To ensure that the selected companies are a fair representation of the Swedish market, the selection of companies has been complemented withsteel companies listed by Statistiska Centralbyrån (SCB).

Steel companies have been defined as companies producing steel, from steelworks to processedsteel. Hence, excluding the mining industry (raw materials) and the engineering industry(modular production) according to figure 1. The last stage included here encompasses finalactivities such as cutting, bending etc. This is often done by an external part, referred to as SteelService Centers (SSC), often with the responsibility to also distribute the steel locally.

The companies have been selected according to the following criteria:

• For the survey all steel producing members of Jernkontoret and steel companies listed bySCB with revenues larger than 500 MSEK have been selected1.

• For the in depth interviews the six largest steel producers (regarding revenue) have beentargeted. Five of these have been successfully interviewed (Outokumpu Avesta, Sandvik,SSAB Oxelösund, SSAB Tunnplåt and Uddeholm Tooling).

• Additionally well-known, large steel service centers linked to international steel producers have been selected for the survey (e.g. Arcelor, Thyssen Krupp).

• For companies with several units within the same group (e.g. Ovako) the two largestunits have been chosen.

1 This delimitation has been made to ensure some stability in revenues over the years. Too small companies dependtoo much on single customer orders to make a comparison with more stable/bigger companies possible. SCB steelcompanies include following SNI-codes: 24100, 24200, 24310, 24320, 24330, 24340, 24520.

Explorationand Mining Smelting and Slabproduction

Rolling, Hardening

& Finishing of metalCoiling/Coating/-

Formatting

- SSC -

Cutting, Stripping,Welding, Bending of

Metal

Modular Production

Figure 1 - Delimitation of the “steel industry”

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These delimitations have resulted in a list containing 29 selected companies shown in table 1 below sorted by revenue. SSCs are written in Italics and the interviewed companies in Bold. Thecomplete list with excluded companies can be viewed in appendix 3.

Table 1 - Selected companiesCompanies

1 Outokumpu Stainless 16 Lindab Steel

2 Sandvik Materials Technology 17 Erasteel Kloster

3 SSAB Tunnplåt 18 Plannja

4 SSAB Oxelösund 19 Surahammars Bruks5 Tibnor 20 Haldex Garphyttan6 Ovako Steel 21 Scana Steel Björneborg

7 BE Group 22 Burseryds Bruk

8 Ruukki Sverige 23 ThyssenKrupp Materials

9 Acerinox Scandinavia 24 Böhler-Uddeholm Precision Strip

10 Höganäs 25 Arcelor SSC

11 Ovako Bar 26 Structo Hydralics12 Outokumpu Tubular 27 Boxholm Stål13 Uddeholm Tooling 28 Scana Steel Söderfors

14 Fagersta 29 Carpenter

15 Kanthal

2.2 SURVEY

A large part of this thesis consists of investigating the SCM-tools that are used in the steelindustry. As interviewing each one of the companies would have been too extensive, a surveywas conducted in order to understand the great picture. The targets have been either site

managers or managers within logistics or SCM who have been called in advance to increase thenumber of respondents.

The survey answers the following questions: (1) How are steel companies positioned in the valuechain, (2) What parts of the supply chain are emphasized, (3) What tools are used for managingthe supply chain, and (4) Where in the supply chain do steel companies see most potential for cost savings and areas for profit generating possibilities. The complete survey can be found inappendix 4.

In the first part of the survey the respondent is simply asked to indicate the stages in the valuechain that are part of the company activities.

The tools used in (3) are a collection of best/leading practice methods from the SCOR model andother credible sources (see theory). Best/leading practices are marked yellow in appendix 7.Abbreviations are explained in appendix 1, where also the source claiming the best/leading

practice is listed for each method. Furthermore, the questions in the survey are sorted by supplychain area (e.g. source, make) and are constructed as statements where the respondent is asked tofill out to what extent the statements coincide with the supply chain activities taking place at

present.

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SCM-ScoreRespondents are asked to rank to what extent each method is used, from “strongly disagree (1)”to “strongly agree (4)”. This allows for a simple computation of a SCM-Score. More specifically,

the SCM-score has been calculated as the sum of all best practice methods multiplied with thedegree of usage (1-4) and then divided with the total possible score (the sum of all methodsmultiplied with 4) to receive the percentage.

The SCM-score is an indicator of Supply Chain Management maturity and is used in comparisonwith other metrics to reveal if there exists a correlation between the use of Supply ChainManagement methods and performance.

Representation of methods deployedFor the representation of the survey results the answers 3 and 4, for each Supply ChainManagement method, have been characterized as used to a “high extent”. The percentage of high

extent users per method is shown in tables for each SCM area.

To bring clarity and stringency the companies have been divided into two categories; steel producers (Stage 1&2) and service centers (Stage 3). This is due to the fact that the former is very production intensive while the latter is rather a middleman.

AHPThe final part of the survey consists of a pair-wise comparison of the supply chain areas, wherethe respondent is asked to rank each area in regard to potential. Information from this part is usedin order to do an analytical hierarchy process (AHP)2, where the degree of potential for each areais revealed for the industry in general.

For the evaluation of the survey the companies have been divided into two groups, producers andservice centers. The reason for this is that a clear distinction can be made as the activities differ significantly, and thereby also the supply chain management strategies.

2.3 IN DEPTH INTERVIEWS

The purpose of the interviews was to get a more detailed picture of how the supply chain for eachcompany is outlined and the strategic reasons behind choosing a certain approach. The in-depthinterviews have been carried out with the five of the largest steel producing companies in regardto revenues.

In order to reach out to people with knowledge in the supply chain processes, the interviews have been carried out at the factory sites. Steel companies usually have several industrial unitsscattered throughout the country and for this thesis the major plant that encompasses steel

production has been selected for the interviews.

2 Description can be found in appendix 6

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To be able to cover the whole supply chain from a strategic perspective, managers from market, production and logistics have been interviewed at each site. This grants a total of 15 interviews.

The interviews were carried out with open-ended questions based on the survey, but from a moreexplanatory angle. In other words, the respondents were given space to speak freely in order to

extract as much relevant information as possible.

2.4 METRICS

For comparison with the SCM-Score and the positioning by the various companies well knownfinancial and Supply Chain Management specific key performance indicators (KPI) have beencalculated. To minimize the effect of specific years, the metrics have been calculated as theaverage for the period 2003-2006. The complete results can be viewed in appendix 5.

EBIT MARGIN (EBIT %) – EARNINGS BEFORE INTEREST AND TAXESEBIT takes all operational profits into account, i.e. exclusive interest payments and income taxes

and is an indicator of a company’s profitability. The reason for the use is that the measurementexcludes the effects of capital structures and tax rates, thereby making cross-companycomparisons possible.3

EBIT % = OPERATING PROFIT / REVENUES

ROCE – RETURN ON CAPITAL EMPLOYED

ROCE indicates how efficient and profitable a company’s investments are, or in other words,how well the assets are used. As the operating profit is related to the investments it requires, this

measurement should reflect more specifically the relative operational success of a company.4

ROCE = EBIT / (TOTAL ASSETS – CURRENT LIABILITIES)

STOCK TURNS

Stock turns, or inventory turns, is used as a measurement of how many times the inventory is soldand replaced in one year. A low value indicates poor sales and excess inventory (in relation to thesales volume). This is also one of the main KPIs used to measure a Supply Chain’s effectivenessand is supposed to improve with the use of best practice methods (Stadtler & Kilger 2005).Revenue and Inventory are measured in MSEK.5

STOCK TURNS = REVENUE / INVENTORY

3 http://www.investopedia.com/terms/e/ebit.asp 4 http://www.investopedia.com/terms/r/roce.asp 5 http://www.investopedia.com/terms/i/inventoryturnover.asp

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3 THEORETICAL FRAMEWORK

3.1 SUPPLY CHAIN

The following section describes the origin of the methods used in the survey, the questions askedin the interviews and the model used for analysis. Abbreviations and explanations to specificmethods can be read in appendix 1.

DEFINITION OF SUPPLY CHAIN AND SUPPLY CHAIN MANAGEMENT

Stadtler & Kilger define the supply chain as “a network of organizations that are involved,

through upstream and downstream linkages, in the different processes and activities that producevalue in the form of products and services in the hands of the ultimate customer ”. The chain

involves two or more legally separated organizations that are linked together by either material,information or financial flows and includes the ultimate customer. Supply Chain Managementhas the objective of governing all parts of the supply chain as a unit, instead of singleorganizational elements, in order to achieve increased competitiveness. (Stadtler & Kilger 2005)

There are two ways to improve a supply chain, i) closer integration of involved companies and ii) better coordination of material, information and financial flows. In order to achieve this,companies must overcome their own organizational barriers and align strategies with the other constituents of the chain. Hence, this is the core of Supply Chain Management and the definitionis as follows:

“The task of integrating organizational units along a supply chain and coordinating material,information and financial flows in order to fulfill (ultimate) customer demands with the aim of improving the competitiveness of a supply chain as a whole” (Stadtler & Kilger 2005)

Simchi-Levi has similar definition of Supply Chain Management with an apparent focus onreducing cost and increased efficiency throughout the supply chain:

“Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers,manufacturers, warehouses and stores, so that merchandise is produced and distributed at the

right quantities, to the right locations, an at the right time, in order to minimize systemwide costswhile satisfying service level requirements” (Simchi-Levi et al. 2007)

Integration is a necessity for an effective supply chain, where the ideal is that information andknow-how is shared openly among the members. Competition along the supply chain is supposedto be replaced by the commitment to achieve increased competitiveness along the chain as awhole. On the other hand market interactions imply that companies can cancel their collaborationat any time for short-term reasons (better prices in other supply chains, etc.). Therefore bondsshould be used to ensure the cooperation among supply chain members. These bonds can beeither technical (common technologies), knowledge (about each others’ businesses), social,administrative or legal. (Stadtler & Kilger 2005)

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Coordination, the second part of SCM, includes utilization of information and communicationtechnology, process orientation and advanced planning. Electronic Data Interchange (EDI) for example is favorably used to achieve instantaneous information exchange among members in thesupply chain. Process orientation refers to the streamlining of cross-company processes to reduce

system-wide costs while enhancing quality and various operations’ speeds (e.g. steel companies performing simple machining operations to facilitate the next production step for customers).Finally, advanced planning incorporates both short- and long-term planning where APS systems(Advanced Planning Systems) exist to complement ERP systems to include inter-organizational

planning. (Stadtler & Kilger 2005)

Collaboration is, in other words, essential to a company’s success and sequential processes oughtto be replaced by global optimization. Therefore collaboration has become the focus of supplychain systems in recent years, resulting in development of standards for collaboration betweensuppliers and vendors (such as Collaborative Planning, Forecasting and Replenishment, CPFR).(Simchi-Levi et al. 2007)

Furthermore a vital issue is that SCM should not be a strategy on its own, but rather an integral part of both each member’s strategy and the supply chain’s strategy as a whole. This can also becomplemented by consolidations among different supply chains, e.g. combining demands for standard parts to increase the purchasing power. (Stadtler & Kilger 2005)

THE BULLWHIP EFFECT

“The increasing amplification of orders occurring within a supply chain the more one moves

upstream. This phenomenon also occurs even if the end item demand is fairly stable”. (Stadtler &Kilger 2005)

The Bullwhip effect is regarded as a classic problem within SCM, that results is unnecessaryinventory, shortage costs and unstable system behaviors. One source for this effect is the use of multiple demand forecasts. The theory states that orders should be based on the ultimate customer demand and not that of intermediaries, which can be achieved by information integration through,for example, EDI-links or VMIs. In other words problems concerning all three parameters of working capital (unnecessary inventory), costs (unstable production) and lost revenues (supplyshortages) can be related to the Bullwhip effect and minimized by better integration. (Stadtler &Kilger 2005)

Other principles to reduce the Bullwhip effect are order batching (consolidating transports), prizestabilization (discounting increases the Bullwhip effect) and elimination of gaming (additionalordering as a result of speculations). These counteractions to the Bullwhip effect are simplified

by the use of timely information, both intra- and inter-organizational. (Stadtler & Kilger 2005)

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SCOR-Model

The SCOR model is a reference instrument, developed by the Supply Chain Council (SCC) inorder to describe Supply Chains and the activities they encompass in a standardized way. As aresult Supply Chains can be benchmarked against each other and best practice methods for

specific processes are shared. (Stadtler & Kilger 2005)

Furthermore the SCOR-model constitutes the base for the analysis model used to position theinterviewed companies relative each other. The SCOR model consists of the process types: plan,source, make, deliver and return (recycle) and includes activities from suppliers to customers.Appendix 2 provides a brief explanation of the different areas.

Figure 2 SCOR-model6

In addition to best practices for Supply Chain Management, there are key performance indicators(KPIs) that are applicable and important for all supply chains. These are delivery performance

(delivery accuracy), supply chain responsiveness (the ability to react to market changes), assetsand inventories (inventory turns) and costs (e.g. cost of goods sold). (Stadtler & Kilger 2005)

One important aspect of Supply Chain Management is demand fulfillment (delivery accuracy).Closely connected to demand fulfillment is the process of order promising, with the traditionalapproach that is standard for MRP systems of promising supply against inventory. If there is noavailable inventory, orders are quoted against production lead-time (backlog) which oftenviolates other constraints, such as available capacity. A better approach to promise orders isavailable-to-promise (ATP), which considers all constraints along the supply chain to give moreaccurate and realistic promises. “ATP is the result of a synchronized supply and capacity plan

and represents actual and future availability of supply and capacity that can be used to accept

new customer orders on”. This method is especially useful in the case of a supply constraint inthe industry, i.e. material and/or production capacity are bottlenecks. (Stadtler & Kilger 2005)

6 Supply Chain Council

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THE ANALYSIS MODEL

The analysis model comprises the operational processes from the SCOR model (Source, Make,Deliver & Return), briefly described in the previous chapter. The model has been complementedwith the dimension of working capital/revenues/costs. This will supposedly explain the use of

certain methods as the focus shifts depending on each company’s state and the steel industry’sstate in general.

To further reflect the importance of integrating suppliers and customers and clarifying thestrategies for this, these two areas have been added to the SCOR processes (to some extent this isincorporated in the excluded “plan” area from the SCOR model). Even though productdevelopment (“design”) is not addressed by the SCOR-model this area has been added as themodel would not reflect the companies’ complete emphasis without it. The Supply Chain Forum,where these three areas are described as integrated processes in Supply Chain Management,further validates this addition to the SCOR model. (Stadtler & Kilger 2005)

Combined, the various sources have resulted in an analysis model shown below (figure 3).

Figure 3 Analysis model

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4 A NAL Y S I S &

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4 ANALYSIS AND RESULTS

4.1 INTERVIEWS

The following sections contain information about the largest steel companies in Sweden. Eachchapter first contains an overview of the company’s strategy followed by more Supply ChainManagement specific strategies. The SCM areas “supplier” and “source” have been merged inthis section as strategies often overlap.

4.1.1 Case Studies

The following case studies are based on the conducted interviews and are interpretations of theconversations with company representatives. In addition to the in-depth-interviews eachcompany’s annual report has been used as a complementary source of information.

4.1.1.1 SSAB Oxelösund – Plate Division

• Revenue: 9.563 MSEK 7 • Production: 586 kt (kilo tonnes)8 • Employees: 25199 • Niche: Quenched heavy plate• Customers: Construction machinery, mining equipment & crane manufacturers• Strategy: Superior product, service & know-how, physical closeness to

customers

SSAB Oxelösund is one of two divisions within the SSAB Group, producing heavy plate with itstwo most recognized brands HARDOX and WELDOX. The facility in Oxelösund is an integratedsteelworks, covering all production from smelting to hardening, quenching and finishing.Oxelösund’s products have better strength and resistance characteristics while maintaining alower weight than competitors’ products. This is a source for competitive advantage, enabling asales price that is often close to double that of other steel producers. Notable is also that by theend of 2007 almost no ordinary plate was produced as a result of the strategy of focusing more onniche products (quenched plate) 10.

The main customers for Oxelösund are construction machinery, mining equipment and cranemanufacturers. These industries have high requirements regarding safety and reliability and

hence enable steel makers to charge more for superior product characteristics. Also the increasedfocus on environmental issues favors producers of lighter materials but with similar strengths.SSAB has very well-known brands in this niche, going as far as being recognized and requested

by end-consumers (for example the buyer of a Caterpillar machine) when buying equipment.

7 Affärsdata (for 2006)8SSAB Annual Report 2007, p. 29 (for 2006)9 Affärsdata - 200610 SSAB Annual Report 2007, p. 28

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Generally the market for quenched plates shows a good growth. This is much due to investmentsin developing regions but also the developed regions have shown continuously increaseddemand11. For Oxelösund specifically, the demand is far bigger than the available productioncapacity, giving the company’s sales organization a highly favorable position. Rather thanactively selling the steel, this is an operation of allocating small volumes to preferred customers.

As a result of the above-mentioned factors Oxelösund has an extremely high EBIT margincompared to most other companies in the steel industry (as can be seen in appendix 5).

Tied to the insufficient production capacity, is Oxelösund’s strategy to supply small customersthat are not attractive to the big players in the industry, mainly due to small order volumes.Examples of this kind of customers are small local after-market service centers with demands for customized products. Going after this kind of customers, means not only supplying unattractivemarkets, but also being almost invisible to bigger competitors. It would be very difficult to findall these small customers to make counter-offers even if they wanted to.12

As it is impossible for Oxelösund to compete with lower prices – volumes are too small – the

company constantly tries to develop products that are difficult to produce with high productivity.In other words they manufacture products that are unattractive to produce for modern flow-optimized factories where maximum tonnage at lowest possible cost is prioritized. This onceagain makes the products unattractive for competitors and is a part of the long-term strategy todig deeper into the niche. 13

The activities with the most unique production knowledge at Oxelösund are the smelting(material recipe) and the hardening/quenching process. These two processes surround the processof rolling, which could theoretically be outsourced. The main reason for keeping this process in-house is to remain integrated with minimal external risk. Another factor is the desire thatcustomers consider the products unique and special, something that would be harder to achieve if

production processes were outsourced. 14

The sales strategy to concentrate on small customers is complemented with a very developedcollaboration with end-customers. Specific about this collaboration is that it goes beyondmarketing and long-term relationships, to have expert knowledge about the customers’ processes.This gives Oxelösund a very favorable position in negotiations and the possibility to sell the exactright steel at a higher price. In other words the products sold contain a high level of service, fromapplication support to long-term relationships. For example Oxelösund has application engineersspecialized in the mining industry where demands regarding safety and product reliability areextremely high.

As a part of the strategy to go after small customers, mainly in the after-market, Oxelösund doesnot sell at all via wholesalers. Instead products are sold either directly to customers, often sub-suppliers to Original Equipment Manufacturers (OEM), or distributed by their own warehouse.The simplified value chain for Oxelösund is interpreted below.

11 SSAB Annual Report 2007, p. 912 Interview with SSAB Oxelösund representative13 Interview with SSAB Oxelösund representative14 Interview with SSAB Oxelösund representative

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Figure 4 Value Chain SSAB Oxelösund

The collaboration with customers in the after-market furthermore creates a pull for Oxelösunds products in earlier stages (OEMs and end-users). Alongside the collaboration with these after-market service centers, Oxelösund owns its own service centers. This is mainly in markets wherethere are few local SSCs and they must have their own in order to create an infrastructure to beclose to potential customers. Owning SSC facilities is especially important when establishingoperations in developing regions due to the lack of existing infrastructures for distribution.Furthermore Oxelösund is ready to buy local centers that are often family-owned and otherwisewould be closed down. Apart from resulting in increased integration and a closeness to customersthis strategy reduces uncertainties in demand.15

SCM-EMPHASISThe fact that demand is far greater than capacity affects lots of different areas of the company,although no apparent SCM strategy is deployed company-wide. Some extra attention should begiven to the fact that most work focuses on increasing revenues, whether it is increased

production or pro-active work with deliveries. As it turns out, it is currently much easier for thecompany to earn more by increasing sales than trying to reduce costs. 16

SUPPLIER/ SOURCE When purchasing raw materials the company uses few suppliers and long-term relationships tokeep the raw material inventory at a minimum. The main raw materials (ore and coal) are bought

at global market prices and conditions and are therefore considered difficult to affect from a SCM point of view. For example VMIs or EDIs are not used and there is a relatively low transparency between supplier and customer regarding demand.17

The sourcing process is furthermore aimed at lowering costs and keeping the inventories as lowas possible. Although the money that can be saved by lowering inventory levels can never be

15 Interview with SSAB Oxelösund representative16 Interview with SSAB Oxelösund representative17 Interview with SSAB Oxelösund representative

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compared to the loss in production due to a lack of raw materials. Therefore costs are not prioritized when it comes to critical input materials, but the main focus regarding non-criticalinputs. 18

DESIGN

Design, or product development, has always been regarded as one of the main drivers for success by SSAB Oxelösund. The unit has a desire to be considered the market leader regarding productcharacteristics and innovation and therefore has to put emphasis on this area. Since therestructuring of the steel industry in the 1970s, Oxelösund has produced products with asignificant quality advantage. Even though competitors are closing in regarding productcharacteristics, Oxelösund still has the leading edge. The strategy is to remain in this position andtherefore the company focuses a lot of attention in this SCM area.19

MAKE Some best practice methods are used in order to create an efficient flow of goods. These methodsare for example “drum-buffer-rope” (optimizing in regard to bottlenecks) and creating a capacity

abundance in final production steps. This only helps to some extent as the factory site is old andthe layout is not optimized to create a flow of products from the start.20

Being able to sell more than can be produced also comes with some problems. The factory atOxelösund has been constantly occupied with orders for more than 100% of available capacity.The slightest problem in the factory therefore creates a huge gap and delivery accuracy has beenvery low in the past. A way of avoiding this problem is to have a close communication betweensales offices and production. The slightest stop in production is immediately communicated tosales offices where allowed sales volumes are reduced correspondingly.21

DELIVER

External transports are constantly being improved and remain an important area within SCM atOxelösund. Transports are being optimized in regard to costs in the long run, but the main reasonfor improvements in this area is that it must not become a future bottleneck. This would be highly

plausible if production capacity would be more in line with demand. In other words the work is pro-active in this case.

As part of the distribution strategies Oxelösund also develops methods for loading containers for transport and shifting to trains from trucks. Apart from being more environmentally friendly thisalternative allows for fewer transshipments and hence is more effective. 22

RECYCLE Within the factory site, excess material and scrap is recycled and used as input material. When itcomes to recycling material from customers or various service centers, the potential cost savingsare very small. Furthermore the logistics solution for achieving this would have to be established

18 Interview with SSAB Oxelösund representative19 Interview with SSAB Oxelösund representative20 Interview with SSAB Oxelösund representative21 Interview with SSAB Oxelösund representative22 Interview with SSAB Oxelösund representative

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as there are lots of outgoing transports but only a few incoming, i.e. cross-docking solutions aredifficult to achieve. 23

CUSTOMERS One important aspect of the Supply Chain Management theory is sharing information openly.

This strategy is currently not used between Oxelösund and its customers. The reason for this isvery specific, namely that the company does not want customers to view the products in stocks asavailable at wish. This of course relates to the strategy that the sales force basically allocatesvolumes to customers.

On the other hand the company focuses lots of attention on this area when it comes tocooperating, long-term relationships and knowledge about customers’ processes (as described

previously). Hence, it is one of the main aspects of the company’s strategy and helps to reducedemand uncertainties while increasing the sales volumes. 24

ANALYSIS

SSAB Oxelösund does not seem to have a general SCM strategy, although some specific SCMmethods are used in the various sections. Because of the favorable market the company does notfocus on costs at the moment and most strategies are directed towards increasing productioncapacity and short- and long-term revenues.

The emphasis on Supply Chain Management is recapped in figure 5 below. The SCM areas“supplier”, “source” and “recycling” receive by far the least attention. These areas are typicallyassociated with cost reduction and as the company rather focuses on increasing sales, they aregiven less emphasis.

Suppliers Design Source Make Deliver Recycle Customers

Working

Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 5 Supply Chain emphasis SSAB Oxelösund

23 Interview with SSAB Oxelösund representative24 Interview with SSAB Oxelösund representative

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• Delivery accuracy is low due to the over-scheduled production system.

• Focus lies on developing the products rather than developing the production processes.

This is due to the fact that a Dollar in increased sales is easier to achieve than saving aDollar in making the product.

• Customer relationships and collaboration go beyond the end-user to even include theaftermarket, creating a very favorable position that is difficult to reach by competitors. A

pull for the products is created throughout the value chain when end-users demand that products should contain steel from Oxelösund.

• Even though small customers are preferred, global steel consumers constitute animportant part of the total sales volume. These companies demand a global presence bythe steel supplier in order to have a consistent steel quality throughout their production

sites. Hence the global distribution net becomes an important aspect, placing emphasis onimproving logistic solutions.

4.1.1.2 SSAB Tunnplåt – Strip Division

• Revenue: 14.824 MSEK 25 • Production: 2660 kt26 • Employees: 405627 • Niche: Advanced high strength steels (strip)•

Customers: High strength: Heavy & light vehicles, crane manufacturers,Ordinary: Engineering & construction• Strategy: Advantageous distribution net on home market, increased focus on

niche products

SSAB Tunnplåt, the strip products division, manufactures both ordinary and high-strength stripsteel. Customers for high strength steel are mainly in the automotive industry with applicationsranging from containers (hot rolled) to safety components (cold rolled). The main competitors inthis product area are Arcelor Mittal and Thyssen Krupp. Ordinary steel has applications in theconstruction, engineering and automotive industry and competitors are most European steel

producers. In summary, the market for the products manufactured by the SSAB Tunnplåt facility,

is highly competitive (more so for ordinary than high-strength) and the prices depend much onthe competitors. Therefore a strategy that focuses on reducing costs is necessary for this division,although reduced working capital has recently become an important issue. This is the opposite of the SSAB Oxelösund division that basically dictates conditions and focuses a lot on increasingrevenues.

25 Affärsdata (for 2006)26 SSAB Annual Report 2007, p. 10 (for 2006)27 SSAB Annual Report 2007, p. 25 (for 2006)

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Sweden, as SSABs home market, is the absolutely largest market for the Tunnplåt division withapproximately 35% of the total deliveries. The remaining shares are somewhat equally distributedacross Europe completed with small shares in the USA and China. In the Nordic market thecompany sells both ordinary and high-strength steel, whereas the strategy is to only supply high-strength in the remaining markets. Ordinary steel sales in the home market are made possible

mainly by the proximity to customers and a well established distribution net. Environmentalissues and requirements have a positive effect on the demand of high-strength steel as reducedweight can be achieved with similar or higher strength and a longer product life (this is mainlyrelevant for sales in the automotive sector). As the company has also come relatively far in theemissions reduction area (compared to competitors in other countries), stricter, but equal,environmental regulations could be of advantage.28

The strip products division consists of two units; a slab production plant in Luleå and rolling plants and after-treatment in Borlänge. As the capacity in Luleå is not sufficient, the remainingslabs are purchased from the Oxelösund unit. To increase the capacity in the final steps, severalsub-contractors are used for various finishing operations close to the customers. 29

Generally the production sets limits for how much high-strength steel can be produced and sold.The production flow is very complex for the different high-strength products, with many

bottlenecks at final steps. This allows for the remaining production capacity in the first steps(rolling) to be utilized for ordinary strip steel production. Tunnplåt has the same strategy as thecompany as a whole, namely to increase the focus on niche products. Investments in the

production capacity for advanced high-strength steels are in line with this strategy and as a resultthe share of high-strength steel increased from approximately 28 % in 2006 to 33 % in 2007.Compared to the Oxelösund facility, where almost only niche products (quenched steels) were

produced towards the end of 2007, this strategy still has large potential. 30

The material flows for the Tunnplåt division are shown simplified in figure 6 below.

28 Interview with SSAB Tunnplåt representative29 Interview with SSAB Tunnplåt representative30 Interview with SSAB Tunnplåt representative

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Figure 6 Value Chain SSAB Tunnplåt

As can be seen in figure 6 the products are sold mainly via wholesalers but also directly to sub-suppliers and manufacturers. Especially in the home market, Sweden, the distribution net is veryelaborated including the ownership of distributor Tibnor and building sheet producer Plannja.This distribution net and local presence is also the main competitive advantage for ordinary stripsteel in the home and neighboring markets.31

SCM-EMPHASIS The strip division has no common SCM strategy to increase the company-wide efficiency.Despite this, several improvement methods are used within each of the defined areas that aredescribed below. Generally Tunnplåt strives to improve delivery accuracy, although the main

focus lies on reducing costs and increasing the share of niche products through investments and productivity improvements.32

SUPPLIER / SOURCE Within purchasing there is not so much to do in order to lower the prices because of theindustry’s characteristics. Rather, this is a cash-flow issue where raw material stock levels oughtto be optimized to minimize the working capital. The current focus in this area therefore lies onreducing the number of suppliers in order to increase long-term collaboration, which potentiallymeans advantageous payment conditions.

Also, the stock levels are not optimized at the current, as a result of insufficient inventory

management systems. This area has large potential for savings and for that reason focus lies onoptimizing order sizes and inventory levels.

Otherwise, the raw material prices are regarded as a relatively small problem as the increasesapply to all other global competitors as well. Although there is some lag, the price increases are

31 Interview with SSAB Tunnplåt representative32 Interview with SSAB Tunnplåt representative

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also shifted to the end-price for the customers. This should be compared to environmentalrequirements that vary in different countries and hence distort the competition.33

DESIGN As the strip division manufactures products that are relatively standard, research and

development becomes very important - niche products within this steel area today, often become bulk products within ten years. Therefore the company has to invent numerous new steels eachyear to keep the competitive advantage of being the leader in innovation. For this purpose a“technology-push” way of working is applied, i.e. instead of focusing on customers’ demands theresearch is technology driven.

Most research is conducted within the areas of cold and hot rolled steel as the focus on niche products increases. To sum up, there is a large focus on this area even though no specific SCMstrategies are apparent. This is a result of the recent strategy to focus more on increasing thevariety of products provided instead of expanding globally.34

MAKE As stated above the production can only handle a certain amount of high-strength steel as thereare several bottlenecks in the different flows. All volumes are produced on customer orders(MTO) as the products are highly differentiated and customizable (with restrictions). This alsomakes the batches relatively small (compared to other strip steel producers) and places pressureon reducing changeover times. Therefore this is a focus area in production at the strip divisionand methods like Total Productive Maintenance are used to improve the efficiency.

As high strength volumes are restricted, the marketing and sales forces reserve volumes uponreceived orders. These volumes are then converted by the production planning units into batchesthat are realizable regarding lead and changeover times. Hence the production sets the limits,regarding high strength steel, for the sales forces whose task it is to keep the sales volumes even.This communication, however, shows great potential for improvements as the information flow

between market units and production is often not good enough. Partly this is due to obsolete ITsolutions, but also focus should be shifted to treating different areas in the company as customers,i.e. the customer-orientation should be exploited internally as well. A better communicationwould lead to better production planning and a significant competitive advantage as the share of niche products could be increased.

Even though production is said to be completely MTO, prognosis are used indirectly for the production planning process. Customers place a preliminary order, weeks or months ahead of

production, with the various sales companies but are not bound to that volume instantly (ordersare bound to the customer in the rolling stage). The same volume is used for production planningand discrepancies occur if customers change their order later in the process. Better forecastswould therefore show a large potential. Once again a more integrated communication systemwould prove useful for this scenario as information could be shared faster and easier internally.35

33 Interview with SSAB Tunnplåt representative34 Interview with SSAB Tunnplåt representative35 Interview with SSAB Tunnplåt representative

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DELIVER

For the delivery process SSAB Tunnplåt uses several large distribution platforms, with the maindistribution center in Rotterdam. The transports are carried out by rail/truck/ship to Rotterdamand then by trucks to the end destination. This end destination can either be a customer or one of the approximately 50 smaller Distribution Centers (DC), mainly in Europe.

The company uses a large service center in Maastricht, otherwise service operations are carriedout close to the customers through an elaborated cluster of partner companies. Although thestrategy is to be as close as possible to the customers, there is not a current plan to own theseservice centers but they are needed as the product range exceeds the own capacity.

For the distribution in general and transports to these local service centers, the strip division has atool for real time control. In other words the products that are currently not in their own

possession can be monitored easily. The system also generates an invoice automatically for thecustomers. 36

RECYCLE This area was not mentioned during the interviews as the area was not perceived as a prioritizedissue.

CUSTOMERS

As mentioned above the strip division has a very close collaboration with customers in the homemarket. For a few large and strategically important customers in the Nordic area the companyuses EDI-links as a way to simplify the order flows. These customers often have extremedemands regarding delivery times and delivery accuracy why this kind of system and somereserved stock is needed. Otherwise the strategy is to increase the number of smaller customers inorder to create barriers. Small customers make it easier to retain a higher price level since their relative bargaining power is lower.

The collaboration with customers otherwise receives large focus as application knowledge isregarded as one of the competitive advantages for the company. A trustworthy and high qualitysales force is vital to the operations On the other hand information is not shared openly regardingcapacities and prognosis outside the companies boundaries. 37

ANALYSIS

Most important areas are R&D, collaboration with, and proximity to customers and superior production knowledge. There is additionally a small focus on reducing working capital, mainly inthe areas of sourcing and deliver. Apart from production, where the focus is directed towards costreductions, the most emphasized areas are focused towards increasing revenues.

36 Interview with SSAB Tunnplåt representative37 Interview with SSAB Tunnplåt representative

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Working

Capital

Revenues

Costs


Figure 7 Supply Chain emphasis SSAB Tunnplåt

• The intense focus on niche products that are highly differentiated implies a production process that is not optimized in regard to material flows. In other words the production process is sub-ordinate to the niche product strategy.

• Apart from enhancing the products’ physical attributes, R&D functions focus onincreasing knowledge about customers’ processes through collaboration. The products’value consists of the physical characteristics and the knowledge provided by the steel

producer. Steel characteristics can only be developed to a certain level while the knowhow still shows a lot of potential.

•

As a result of the desire to have small customers a more complex distribution net isneeded, implying for increased working capital. Increasing raw material cost will further contribute to this rise of working capital. The recent focus on lowering working capitaltherefore makes logistic solutions (Deliver) important to improve.

• Generally Tunnplåt strives to improve delivery accuracy in the production, although themain focus lies on reducing costs and increasing the share of niche products throughinvestments and productivity improvements.

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4.1.1.3 Outokumpu Stainless - Avesta

• Revenue: 20.016 MSEK 38 • Production: 656 kt39 • Employees: 219140 • Niche: 2m wide cold and hot rolled plate - Stainless• Customers: Process industries, e.g. oil & gas, chemical, pulp & paper industry• Strategy: Superior production methods, application know-how, enhanced

SSC network to increase end-user & project customers, customer-orientation

Outokumpu is a global producer of stainless steel with production facilities in Finland, Sweden,the UK, the US and the Netherlands. The production facility in Tornio, Finland is considered to

be the most cost-efficient General Stainless Steel factory in the world, focusing on large-volume production and integration to even include its own chromite mine (chrome used for some steelgrades, reducing price volatility and increasing cost competitiveness). The Swedish mills focuson Specialty Stainless, an area that produces half the volume compared to General Stainless whilecontributing with the same sales value. This gives approximately the double per tonne price(EUR/t) and the double margin for Specialty products41. The biggest Swedish subsidiary, Avesta,represents Outokumpu in this text.

Customers for the Specialty Stainless area are typically in the oil & gas, chemical, nuclear power or pulp & paper industry. These industries typically demand tailored solutions for their projectorders and have high requirements regarding product properties. This increases the importance of the R&D function and collaboration with customers through application engineers and sales

personnel

42

.

Recently, there have been major investments in Avesta, totaling about EUR 550 million, toalmost double the production capacity and enable increased focus on Specialty Stainless. Todaysome General Stainless is produced as well but the strategy is to produce higher shares of Specialty Stainless in the future. This shift will decrease productivity but the total value added issupposed to account for the productivity losses.43

The Stainless pricing mechanism works differently than that of normal steel. The price dependson the global steel price but with an addition for alloys (for example Nickel), which makes theend-price44 and thereby the demand very dependent on the alloy prices45. This increased exposure

to financial institutions’ trading adds volatility to the end-product price. This means that even if the underlying demand for products is stable and in line with production capacity, the sales

38 Affärsdata (for 2006)39 Outokumpu Annual Report 2007, p. 25 (for 2006) - aggregate figure for Specialty Stainless division40 Affärsdata (for 2006)41 Outokumpu Annual Report 2007, p.22 & 2542 Outokumpu Annual Report 2007, p.25 & 3843 Interview with Outokumpu representative44 Transaction price = base price + alloy surcharge45 Nickel accounted for 75% of raw material costs for the Group in 2007, Outokumpu Annual Report 2007, p. 34

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volume will vary substantially, creating extreme Bullwhip effects for Outokumpu. As anexample, quarterly EBIT for the Outokumpu Group, varied from approximately EUR 400 millionto negative EUR 280 million due to changes in Nickel prices46.

Avesta’s production facility is adjusted to produce high quality Stainless from a lower quality of

raw material (mainly scrap) and works with material recipes that contain smaller amounts of alloys than competitors but with similar material properties. This, of course, gives a competitiveadvantage while reducing volatility for the own company’s margins. Furthermore Avesta

produces 2m wide slabs as one of only 3 factories in the world, a differentiation that further reduces dependence on the world’s trading markets.47

Outokumpu Avesta considers its main strength to be competence in the areas of sales, productionmethods and applications for their products. The advantage in production has been partially

pointed out above, but an area that is especially important in the Special Stainless industry isapplication know-how. It is impossible for Outokumpu Avesta to compete with prices and thefocus is shifted to selling better products than competitors. Therefore a big task for the sales force

is often to explain the superior material characteristics to customers, both for existing andrecently developed products. At the same time this collaboration with customers providesinformation about their real needs.

Outokumpu Avesta currently sells approximately 50% of its products via internal distributors anddirectly to sub-suppliers, while the rest is sold to external distributors48. Simplified the mainflows in the value chain for Outokumpu Avesta are shown below in figure 8.

Figure 8 Value Chain Outokumpu

A company-wide strategy for Outokumpu is to increase and invest in the service center network in order to increase the share of end-user and project customers49. By buying service anddistribution centers the company is often able to increase the center’s share of Outokumpu steel.

46 Outokumpu Annual Report 2007, p. 8-947 Interview with Outokumpu representative48 Interview with Outokumpu representative49 Outokumpu Annual Report 2007, p. 4

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This means that an investment in service centers indirectly means taking over production to end-customers and increasing the demand for the company’s own products.50

Distribution centers in general make large profits by speculating on material prices and therebyincreasing the volatility of Stainless products. In other words they build up large stocks when the

prices are low and sell of stock when prices increase. This is a main reason for the varyingdemand during 2007. Therefore another aspect of the investments made in this area, is that theyreduce the volatility for Outokumpu’s products by smoothening the demand, which is a centralstrategy for the Avesta facility.51

SCM-EMPHASISOutokumpu has launched a program called OK>1 to increase focus on SCM in the entirecompany. This company-wide introduction combined with emphasis from top management onSCM constitutes a ground for successful implementation. The main idea of the program is tocreate a “customer-oriented supply chain thinking with end-to-end management” of the internalvalue chain52. Combined with some other strategies this program is described for each SCM area

in the following sections.

SUPPLIERS/SOURCE

Apart from ferrochrome Outokumpu uses external suppliers for all input materials. The generalstrategy is to enter long-term contracts, but also the company has changed its pricing model for the alloy surcharge in order for the end-price to faster reflect the changes in supplier contractsand prices (this is mainly due to the volatile Nickel prices).53

The increased scrap prices have increased the attention on invested capital in inventories, but themain focus in sourcing is still reducing costs (inventory accounts for a very large part of theGroup’s total costs54). An explanation for this is that production cannot be allowed to stand stilldue to empty raw material inventories, i.e. they must not be bottlenecks.55

As part of OK>1 Outokumpu has established a new category organization within procurement inorder to leverage the Group’s size and thereby buying power. This means that all contracts aremade at company level by the Supply Chain Management function to guarantee lowest possible

price across different business units. This improvement work alone has resulted in savings of EUR 10 million (for the entire Group).56

DESIGN R&D is an area within Outokumpu’s work that achieves some extra attention. One of the

advantages Outokumpu has over its competitors is that the steel produced has a similar, or better,quality but with a lower quality of scrap as input material. Also, a smaller amount of alloys per tonne Stainless is used, which is a result of thorough research. To keep this advantage the

50 Interview with Outokumpu representative51 Interview with Outokumpu representative52 Outokumpu Annual Report 2007, p. 3453 Outokumpu Annual Report 2007, p. 36 & 4554 Outokumpu Annual Report 2007, p. 3455 Interview with Outokumpu representative56 Outokumpu Annual Report 2007, p. 36

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company focuses a lot of attention on this area with an R&D center in Avesta, mainly to increaserevenues and margins.57

There is also a linkage between the R&D functions and the Production Excellence program(OK>1) at Outokumpu, to ensure system-wide efficiency at all levels. While research at Avesta

in concentrated on developing new grades, there is a constant parallel development of productiontechnology to keep up with the pace. Furthermore the R&D experts with Outokumpu are the link to sales departments and customers, providing both advice and valuable feedback.58

MAKE Some areas in the internal supply chain attract some extra attention, with production (“Make”) asthe most outstanding part. In production the focus lies mainly on reducing costs while constantlyimproving processes and lead times to secure delivery accuracy in the long run. The major key

performance indicator (KPI) for this area is OEE, or Operational Equipment Efficiency, whichhas improved continuously since the program was introduced. The value of the KPI itself is notas important as the drive it gives each employee to achieve improvements. The financial

implications are difficult to see, but the program is a pro-active approach to meet potentiallyhigher future demands when it comes to delivery accuracy and lead times.

Furthermore approximately 90% of the production volume at Avesta is produced and tied directlyto a specific customer (MTO) after leaving the steelworks (Stage 1). This means that internalstocks are kept at a minimum to reduce working capital in later stages. Interesting is that thesteelworks run at a fairly constant speed, while later activities, like rolling, are adjusted directlyto demand and thereby highly flexible. This is possible because the steelworks can supply for other Outokumpu units but also sell of material as General Stainless bulk steel. It is apparent thatthe bottleneck lies in later stages at the present, but the investments might shift the bottleneck

back to the steelworks making it possible to produce more Specialty Stainless.

Although most of the production is made to order (MTO), the company uses prognoses for production planning in the longer run. These forecasts are based on collaboration betweensalesmen and their customers. When an actual order is made it is entered into an MPS system butstill not visible to all separate facilities in Avesta. The steelworks for example downloadinformation from the general MPS system twice a week after it has been processed by production

planning.59

DELIVERThe main thing that has come up within the distribution area is that Outokumpu continuously

invests in local distribution and service centers. Apart from smoothening the demand this ensuresreliable distribution channels to chosen markets. Also this area is part of the responsibilities of the SCM function at a corporate level, ensuring system-wide efficiencies 60. Locally there is awell established information flow regarding production capacity and stock levels and some of the

best practice methods regarding transports are used (for example wave picking). Despite this

57 Interview with Outokumpu representative58 Outokumpu Annual Report 2007, p. 3859 Interview with Outokumpu representative60 Outokumpu Annual Report 2007, p. 34

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“deliver” does not give the impression as one of the most prioritized improvement areas for thecompany.61

RECYCLE Similarly to “deliver”, recycling is not one of the most focused areas within SCM at Outokumpu.

Having a close collaboration with its customers in the home market although enables the Avestafacility to have an elaborated recycling strategy. For example rest products are taken care of internally and there is a logistics solution for reusing excess steel from the customers. At thesame time this area is regarded as having the least potential regarding profit generating and costsaving possibilities.62

CUSTOMERS Outokumpu has a strategy to increase collaboration with customers through a structure that isvery similar to SSAB’s application engineers (as described in the “design” section). Thecompany has a very good understanding of both end-customers’ and distribution centers’ needs.

Furthermore Outokumpu has a very well established distribution net in the home market (Nordicregion), partly through ownership but also through long-term relationships with distributioncenters. This combined with the fact that Outokumpu is often the single largest provider gives alarge competitive advantage, which has to be built on in order not to lose market share whenother global players enter this market. Therefore collaboration with customers is an importantarea for the company’s future success. 63

ANALYSIS

Generally Outokumpu gives the impression of focusing more attention on Supply ChainManagement than other interviewed companies in this report. The reason is a company-wideimprovement program that has come up at all interviews and permeates all levels of the Avestafacility when interviewed. The focus within SCM appears to lie mainly on cost reduction andstabilizing demand. This is achieved through increased integration, increased customer collaboration and implementation of well-known production methods.

The results are visualized in figure 9 below.

61 Interview with Outokumpu representative62 Interview with Outokumpu representative63 Interview with Outokumpu representative

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Working

Capital

Revenues

Costs


Figure 9 Supply Chain emphasis Outokumpu

• The improvement program, OK>1, permeates all levels of the organization with mostsignificant impact within the production (Make). General KPIs are broken down intospecific measurements for each sub-division, creating a coherent way of working withimprovements throughout the organization.

• The overall most important KPI for Outokumpu is “delivery accuracy”. Althoughimprovements have been initiated there is still work to be done in order to meet higher customer expectations in the future.

•

By investing in the service and distribution center network the company increase thesales volumes, although the main reason for these investments is to reduce the volatility.Thus the effect from speculating distribution centers is decreased.

• So far, the Supply Chain Management initiative has not implied any significant financialimprovements, nevertheless the work is part of a pro-active effort for future potential

benefits.

• Close collaboration, knowledge about customers and an effective distribution net aresignificant barriers for the home market.

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4.1.1.4 Sandvik Materials Technology

• Revenue: 19.337 MSEK 64 • Production: not relevant, too different steels and grades• Employees: 858565 • Niche: Advanced Stainless Steel• Customers: Petrochemical, medical, paper, oil & gas industry, knifes & razors• Strategy: Few and big customers, increased focus on niche products,

customer-orientation, enhanced production efficiency

Sandvik is a global industrial group divided in three major areas, steel tools for metal workingapplications, equipment and tools for rock-excavation and stainless high-alloy steels. In thisthesis the latter product area which is organized under the unit Sandvik Material Technologies(SMT) has been studied and referred to as Sandvik 66

Sandvik is a highly integrated stainless steel producer, which includes all activities from steelsmelting to finished products. The strategy is to produce advanced value-added products whereSandvik has a possibility to become the market leader. SMT’s products are divided in three

product groups: wire, tube and strip. Typical customers are found in the petrochemical, oil, gasand power industries as well as producers of applications with a need for special alloy grades,such as razor blade and knife manufacturers. 67

Like Outokumpu, Sandvik is very dependent on the various prices of alloys (Nickel, Cobalt &Tungsten) used in Stainless Steel production. The Nickel price fluctuation for example resulted in

estimated losses of approximately 450 MSEK during 2007

68

. As for Outokumpu the Stainless price depends on the steel base price plus an alloy surcharge, but the effect of increased alloy prices is not immediately transferred to the price of Stainless. This lag impacts Sandvik’s resultnegatively and enhances demand variations as customers adjust their orders to the current alloysurcharge.69

With the intention of being a provider of a complete range of products in the niche of StainlessSteel, additional steel products are purchased from other steel producers. Sandvik’s strategy is toconcentrate the production in Sandviken on high margin products and to complete the assortmentof less specialized steel from external producers. This is a part of the enunciated plan to increasethe share of high-margin steel, a shift that aligns with the strategy to move away from bulk-like

products. Manufacturing products that are difficult to produce with a maintained productivity in bulk-producing factories, is used as a strategy to avoid competition.70

64 Sandvik Annual Report 200665 Sandvik Annual Report 2006, p. 1266 Sandvik Annual Report 200667 Sandvik Annual Report 200668 Sandvik Annual Report 2007, p. 1269 Interview with Sandvik representative70 Interview with Sandvik representative

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Branding is an important area and like “Intel inside” has become a phenomenon in the computer industry, Sandvik strives to create a similar perception among the users of Stainless Steelcomponents. By aiming at the end-customer Sandvik tries to create a pull for their productsthroughout the value chain, where the end-user demand Sandvik’s steel.71

Most of the products are produced when an order is placed and only 20 % of the products are produced to be stocked. When products are ready for delivery they are first shipped to a main DCin Rotterdam and then distributed to local steel service centers (split points). From these servicecenters the steel is finally delivered to the customers. When large volumes are shipped they areoften transported directly to the factory, instead of going via a distribution center.72

Transportation from the factory to the main DC is managed by well-known Third Part LogisticsProviders (3PL), while transports from service centers to customers are handled by various localdistribution companies. This structure is efficient from a transport logistics viewpoint but impliesvast amounts of different invoices and thereby difficult handling (i.e. which transports correspondto which invoices). An EDI-broker is used for this purpose, which is further described in the

SCM section “deliver”. 73

A simplification of the product flows from Sandvik to its global customers is shown in figure 10.

Figure 10 Value Chain Sandvik

SCM-EMPHASIS As for many of the other steel producers in this study, Sandvik suffers from problems with lead

times and delivery accuracy. The people working at the factory are well aware of the problemsand the two most important KPIs that are measured and displayed at every site are “deliveryaccuracy” and “the number of accident-free days”. A program was started in 2003 to improveoperational performance under the name “SMT Business System”. This program affects some but

71 Interview with Sandvik representative72 Interview with Sandvik representative73 Interview with Sandvik representative

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not all of the defined areas within Supply Chain Management, but with the common intention toincrease customer orientation and improve lead times and delivery accuracy. 74

SUPPLIER/ SOURCE

Purchasing is one of the areas that is emphasized in the SMT Business System. Despite this thearea was not mentioned as a prioritized area during the interviews and the reasons might besimilar to those for the other steel companies, the dependence on world market prices. Thismakes it difficult to affect the price by introducing certain SCM methods.

DESIGN The aspiration to produce more high-value products makes “design” an important area. Sandvik wants to be associated with quality and regarded as a market leader in innovation. Not only arethe product characteristics important to improve, but also the knowledge of how the products can

be used in end-user applications must continuously be elaborated75. The R&D function acts asthe link to the customers, extracting information about needs but also as a provider of technical

services and material advice. The emphasis on R&D is confirmed by the ownership of one of Europe’s largest stainless steel research centers.76 This function is also under the influence of the“SMT Business System” with the intention to increase focus on customers’ real needs.

MAKE

With the introduction of the “SMT Business System” many of the methods within Lean production have been implemented at Sandvik. Examples of these are Kanban, continuousimprovements and customer-order driven production, which is supposed to have improved lead-times significantly.

One of the big issues is to decrease the working capital in the production and concepts like WIP(Work In Progress) seem to be permeated throughout the entire organization. This is also a reasonfor the focus on reduced lead-times in the production, which would decrease working capital.

Another method that is used at Sandvik is the concept of letting bottlenecks set the pace for the production. Much like at SSAB Oxelösund, the production is currently utilized to 100% of capacity, which calls for bad delivery accuracy in case of any minor problem. The companytherefore focuses on bottlenecks in combination with customer-driven production. Instead of fully booking the production there is a close communication with sales & marketing and in caseof a lack of capacity the efforts are shifted to increasing prices immediately. 77

DELIVERSandvik uses an external service provided by an EDI-broker in order to increase control over theshipping process information and invoice handling etc. The broker furthermore works with all the3PLs and brings together information about where the trucks containing Sandvik’s products are atany time. This information is only available for the routes populated by the large 3PLs.

74 Peter Gossas presentation – SMT – Capital Markets Day 200775 Interview with Sandvik representative76 http://www.smt.sandvik.com77 Interview with Sandvik representative

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In order to increase the service offered to customers, a track and trace system might be introducedthroughout the transportation system. This would be equivalent to when private individuals

purchase goods over the internet today where they can monitor the delivery process and track the parcel all over the world in real time. One aspect that makes this solution difficult to implement is

the low IT-maturity by many of the transport companies, on the other hand successfulimplementation would mean a substantial competitive advantage.

From a Supply Chain Management perspective Sandvik uses many best practice methods.Examples of these include the above-described EDI-solution, Wave-picking and Cross-docking.By using these strategies, and thereby filling trucks, the company optimizes the transport cost. Inaddition the setup with local distribution companies, that transport the goods to the customers,ensures a high service level.78

RECYCLE The area of recycling has received little attention at the Sandvik interviews. As for many of the

other interviewed companies the volumes that could be transported back to production facilitiesare relatively small and therefore make out low potential for savings. Nevertheless this area couldallow for improvements as environmental demands will become stricter in future. 79

CUSTOMERS

The customers are few and large and have often been faithful buyers of Sandvik’s steel for several years. There is an apparent emphasis on relationship management with a focus oncustomers’ processes and applications. The market organization has recently switched from beingorganized by product area to a market segment grouping, a step in order to ease the procurement

processes for customers. With the new organization buyers only need one contact person at themarket unit for all products that are purchased, instead of one contact person for each productcategory. This is an action taken, as a part of the company-wide process, to increase end-customer relationships. The global sales organization has direct contact with the steel plant andno intermediaries are used, a step to further increase and maintain the close connection with thecustomers.80

ANALYSIS

The emphasis on SCM areas is visualized in figure 11 below.

78 Interview with Sandvik representative79 Interview with Sandvik representative80 Interview with Sandvik representative

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Working

Capital

Revenues

Costs


Figure 11 Supply Chain emphasis Sandvik

Design, Make and Customers are areas that are emphasized by Sandvik. Although Deliver is nota part of the improvement program it is another area that is prioritized and very well elaborated.Many SCM methods are used in addition to and under surveillance of this program, although itdoes not permeate the organizations units to the same extent as during the interviews withOutokumpu. There is a large focus on decreasing working capital in the production as part of the

program, but the general objective is to increase revenues through larger shares of niche productsand customer collaboration.

• Low delivery accuracy is one of the main problems. Furthermore lead times need to beimproved and work-in-progress (WIP) minimized, in order to decrease working capital in

the production processes.• Focus on collaboration with end-customers through close cooperation between R&D

function and consumers. Application engineers ensure that the right materials aredeveloped and in later stages sold and used correctly.

• With the aspiration to be a market leader in innovation and associated with the latesttechnology a lot of attention is placed on the developing new products, making design anemphasized area.

• Distribution process is well elaborated to optimize transport costs. A high service level is

reached by the usage of split-points in order to even out local demand variations.

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4.1.1.5 Uddeholm Tooling

• Revenue: 2.220 MSEK 81 • Production: 70kt82 • Employees: 84083 • Niche: Tool steel• Customers: Tool makers, automotive industry, OEM• Strategy: service, global presence, quality

Uddeholm Tooling is a leading producer of tool steel for industrial tools and dies used to producemillions of products, such a cars, CDs, computers and cell-phones. Since 1991 Uddeholm is asubsidiary to the Austrian company Böhler-Uddeholm AG, a global producer of tool steel with amarket share of 34 %. Customers range from larger OEMs to small local producers of steel tools,and no customer constitutes more than 2% of the total volume sold. The most important segmentis automotive, that accounts for around 50 % of Uddeholm Tooling’s production and sales.84

Like many other Swedish steel producers Uddeholm Tooling possesses a strong brand that standsfor quality. There might be other producers that can make steel with superior characteristics, butUddeholm’s strength is the unvarying quality. When customers buy steel from Uddeholm theyalways know what to expect and can be certain that the steel will behave the same, regardless of when the steel is purchased.85

There is also a tendency to increase the forward vertical integration. Uddeholm holds a factorywith machinery to enable some modular production. By making the products more sophisticated

the next performer in the value chain, the tool producers, can decrease the lead time for their production. At the same time as Uddeholm strives to increase the integration, a strategy todistinguish themselves, they are keen not to integrate too far and be perceived as a competitor bythe customers. The level of integration also depends on the country Uddeholm operates in. Ingeneral more processed steel is requested in the north of Europe where manual labor is moreexpensive.86

The trend to produce more value added products is apparent at Uddeholm Tooling. Products areclassified into three categories depending on the value of the steel and there is a shift of the

product mix into the more sophisticated grades. Nevertheless, the increased alloy prices haveresulted in a higher demand for more bulk-like steel.87

As more of the modular industries, such as mobile phone production, is outsourced to low costcountries Uddeholm needs to be present locally with stocks and services in those regions. Finding

81 Affärsdata (for 2006)82 Rolf Stålberg83 http://www.jernkontoret.se84 Sweden Today, no 3 2005, Steeled for global growth 85 Interview with Uddeholm representative86 Interview with Uddeholm representative87 Interview with Uddeholm representative

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other segments where the high quality steel can be used is another attempt to retain salesvolumes.

Collaboration with other steel companies is further a part of an attempt to increase sales. For example, a new tool steel has been developed in joint venture with SSAB to live up to the

specific requirements when processing the new high strength steel (by SSAB). Customers areguided to pick the best tool steel from Uddeholm when buying steel from SSAB.88

SCM-EMPHASIS

SUPPLIER/SOURCE

Scrap and alloys are the two most important inputs in the production process. When purchasingscrap Uddeholm turns to JBF (Jernbruksförnödenheter), a cooperative organization that providesinput material to several of the Swedish steel producers. The organization was established in the

beginning of the last century by the leading steel producers with the intention of bringing order tothe shaky scrap market. The scrap allocation has always been the main task for the organization

even if other sourcing duties have been assigned to the organization over the years (e.g. other rawmaterials)89.

When purchasing raw materials Uddeholm uses fixed order points. It is necessary that the production at Uddeholm never halts due to a lack of resources; a stop in one of the bottleneckswould be far more expensive than the cost of keeping some extra inventories.

About 20% of the products sold by Uddeholm are produced at other facilities. Sub-contractors areused when there is an insufficient capacity in the steel plant and some products are purchased dueto lack of capability. These complementary products are sourced in order to provide a completeselection of tool steel. 90

DESIGN

Uddeholm aims at presenting two new steel products every year. The emphasis on design isregarded as one of the competitive advantages held by the company and there is an extensiveinvestment of capital in this field.91

MAKE The most commonly used production method at Uddeholm is the drum-buffer-rope practice i.e.the production line is adjusted after the bottlenecks, with buffers in front of critical operations.The production philosophy deployed at Uddeholm aims at running the production with full

capacity at all times, even if there is a cut in demand. This way of managing the productionresults in increased inventories during less busy periods. Increased working capital due to stocked products is less expensive than an eventual lack of steel later on when demand might increase. Alost hour in the production could never be retained and therefore bottlenecks are run regardless of

88 Interview with Uddeholm representative89 http://www.jbfab.com/omjbf.html 90 Interview with Uddeholm representative91 Interview with Uddeholm representative

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the real demand. As long as there is no need for excess cash due to approaching investments, thereduction of working capital will not be a highly prioritized area.

Orders in the production are executed as they arrive by the “first in first out” policy, although products assigned to customers are given priority to orders made to be stocked. Products are not

held for important customers nor saved for more lucrative markets; if the steel is available whenrequested, the sales unit who has placed the order receives the goods.

Running production is on the one hand about maximizing the filling degree in each operation andon the other hand about minimizing the total lead time for each product. Some operations takeseveral hours and launching small series, to increase the individual products’ lead time, willoccupy the equipment. At the same time, waiting for sufficient material to fill up operations willincrease the non-value adding time for products that are waiting to be processed. One rule of thumb that is deployed is to never produce more than what can be consumed by the nextoperation during one shift. 92

DELIVERThe distribution net is regarded as one of Uddeholm’s competitive advantages. Few other tool-steel producers have a global presence and can provide steel for all markets. Even if the salesorganizations manage all the cooperation with the customers, the physical transportation of thesteel is transferred directly from the steel plant out to the consumers, as can be seen in figure 12(for Europe only).

All the transportation by land is managed by 3PLs and the overseas shipments are handled by a partly owned shipping company.

Delivery accuracy is an important area, although not as big of a problem as for other companiesin this study. The delivery accuracy KPI is measured in two ways, how many orders that aredelivered on time and how many of the standard products that are available at a given time.93

Figure 12 Value Chain Uddeholm

RECYCLE

92 Interview with Uddeholm representative93 Interview with Uddeholm representative

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Even if recycling mainly takes place in-house today, there is a potential in encompassing end-users in the reverse flow of material. The characteristics of tool steel makes it favorable to recyclesince the steel is kept intact in the tool and is not mixed with other materials when it is used inapplications. Locating the steel is a complex issue because the end-consumers of the steel are notthe customers directly supplied by Uddeholm and therefore difficult to locate. Another issue is

the way scrap is treated. When the steel is to be thrown aside at a factory, it is often bunchedtogether with the rest of the steel scrap that is sourced and therefore difficult to distinguish. 94

CUSTOMERS When Uddeholm became a part of Böhler Uddeholm AG a new organization was outlined. Thesales organizations were separated from the production unit and they now act as differentdivisions, with decentralized responsibility for profits.

By implementing the reorganization the board tried to make each site more efficient and toeliminate waste. One problem that has occurred because of the effort to make the company more

efficient, is the lack of transparency.

The production unit only controls its own inventories and is only supposed to serve the sales unitswhen they place an order. This breakdown, into decentralized organizations, implies that one

product can be available at one sales unit and short at another. No one has the overallresponsibility to communicate and even out these misallocations and the result is sub-optimization.

The decentralization of the organization has also increased the bullwhip effect throughout thecompany. The production only receives information of how much the sales units intend to buy,not how much steel that will actually be sold to the customers. This gap of information leads to a

perceived variation in demand that is greater than the variation among the end consumers of toolsteel.

Another implication for increased bullwhip effect is the unsynchronized optimization of inventories. At the end of each year the sales units try to minimize inventories in order to showgood financial results. Larger orders are then placed at the beginning of the next year tocompensate for the lack of products. This makes scheduling in the production more complicatedand harder to forecast, with amplified variation as a result.

Although this way of outlining the supply chain makes no sense from a logistic point of view, the

decentralized responsibility has forced the sales units to be more careful and not waste capital.The benefits from a decentralized organization are regarded, by the board, as more important thanthe upside of an optimized communication between sales and production units.

Although the sales units are treated as customers the real consumer of the steel is the tool makers.The collaboration with these end consumers is an important part of the sales and marketingfunction for Uddeholm Tooling. Application engineers are used to help customers and developtheir processes. A pull strategy is used to create a demand for Uddeholm’s products by focusing

94 Interview with Uddeholm representative

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marketing operations on the user of the tools. A great bargaining position arises when big toolusers like Nokia and Volvo demand their tool makers to use steel from Uddeholm. 95

ANALYSIS

The three most important areas are Design, Deliver and Customers all focusing on increasedrevenues in priority to working capital and costs.


Working

Capital

Revenues

Costs


Figure 13 Supply Chain emphasis Uddeholm

•

During the past years Uddeholm has experienced increased revenues and profits althoughthe supply chain focus has been put aside. Instead of system wide flows of informationand goods, processes are regarded as autonomous entities where sub-optimizations occur.

• Possessing a strong brand and providing high quality products are more important than to be perceived as a cost leader. Therefore the design process is regarded as highlyimportant.

• The distribution net (deliver), with global presence, is regarded as a necessity in order toreach out to all the customers and is one of Uddeholm’s competitive advantages.

• Tool producers are historically small companies. This has put Uddeholm in the positionwhere they can sustain high prices due to the low bargaining power of customers. At thesame time collaboration with end-customers is an important aspect of the marketing pull-strategy.

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4.1.2 Case Study Conclusions - Common Characteristics In The SwedishSteel Industry

The following characteristics are common findings among the companies that have beeninterviewed for this thesis.

A summary of the emphasized areas within the interviewed companies is presented in figure 14 below. “Design” and “Customers” are the two areas that receive the most attention, followed by“Make” and “Delivery”. The most prioritized areas are unanimously focused towards increasingrevenues. One should bear in mind that focus on revenues might be a result of the flourishingeconomy in the past years, and a shift to more cost effective approaches is likely when theeconomy sours.

“Supplier/Source” and “Recycle” receive by far the least attention. Recycling, in terms of reverseflow of material outside the own production, is taken care of by established networks specialized

in this field. Costs related to establishing own infrastructures, outweigh the benefits of anintegrated reverse flow.

Regarding sourcing/suppliers, the raw materials for steel producers are largely bought at worldmarket prices and are hence difficult to affect. Furthermore, stops in production are much morecritical than a slightly increased sourcing cost, especially when capacity restricts the sales volume(more can be sold than produced).

Figure 14 - Summary of Supply Chain emphasis

Other common findings are:

• Low delivery accuracy. Most companies produce on orders (MTO) and battle with lowdelivery accuracy. Although the companies are not forced today by the customers toimprove delivery accuracy, the common idea is that improvements would lead to a greatcompetitive advantage.

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• Product focus rather than process focus - to produce products that are difficult toproduce in an efficient way. The Swedish based steel companies can never compete byefficiency; hence they seek to manufacture products that are too difficult to produce witha high productivity in the international competitors’ (often bulk producers) productionsystems. Most Swedish steel companies strive to produce high margin products, steel used

in applications where a higher quality is requested.

• Focus on Supply Chain Management is generally low. Due to the current marketsituation when demand often exceeds production capacity, cost and capital-savingactivities are less effective than increased sales efforts and therefore easier to neglect.

• Collaboration with end-customers is emphasized as a part of the niche strategyimplying for Forward Vertical Integration. A common service offered by a majority of the steel companies is application engineers, provided to help customers develop products

containing steel or their processes. The focus on service and added value in terms of know-how are strategic moves to differentiate the products. Eventually the steel produced

by companies in low cost countries will be of the same quality and the steel itself will nolonger be a competitive advantage. The knowledge of how the steel can be used inspecific applications will then constitute the leading edge. In order to achieve this highlevel of collaboration with end-customer, presence in the latter part of the value chain(Forward Vertical Integration) is necessary.

• End-customer marketing. The marketing pull-strategy is widely used in the steelindustry. Promotions aimed at the customers’ customer to create a pull through the valuechain are deployed by a majority of the steel companies. Even though steel is acommodity, sold business to business, the marketing and branding activities play animportant role.

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4.2 SURVEY

The results from the survey are summarized in the three sub-sections of this chapter. First themost relevant methods for each supply chain area are presented and analyzed, followed by theAHP analysis and general conclusions obtained from the survey. Altogether the number of

respondents is 16 and they are listed in appendix 3.

4.2.1 Tools Deployed

Following chapters describe methods used within each of the SCM-areas according to theanalysis model described in the theory chapter. For each SCM-area the two most commonly/leastused methods - and additionally all methods with over 70% usage - are displayed in a table withthe percentage of high extent users shown in parenthesis. The complete results from the surveycan be seen in appendix 7.

SUPPLIERSMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Working actively to increase

integration (80%)

• Reduced number of suppliersfor non-critical products(80%)

• Increased suppliers for

critical products (56%)

• Working actively to increase

integration (100%)

• Increased suppliers for critical products (67%)

• CPFR (40%)

Used to a low extent • Compatible MRP (0%)• Open Book (11%)

• Compatible MRP (20%)• Open Book/Target Costing/

Red. Nr. of suppliers for non-critical products (33%)

Working actively to increase integration with suppliers receives great importance among allcompanies, 100% of the Steel Service Centers rate this question “high extent” while the samenumber for Steel Producers is 80%. Despite this fact, most listed methods concerning increasedintegration (information sharing: MRP, open book, etc.) are used to a very low extent.

Methods concerning reduced risk and price (flow of materials: adjusted number of suppliers) for purchased goods are used to a higher extent by all companies.

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DESIGNMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Working actively to make

Design more efficient (67%)

• Customer-demand-driven(90%)

• Design for Environment(56%)

• Working actively to make

Design more efficient (50%)

• Design for Environment(80%)

• Design for Manufacturing(80%)

Used to a low extent • Innovation Blowback (0%)• Open Innovation (0%)

• Open Innovation (0%)

67 % of steel producers are working actively to make the design-process more efficient and 50%of the SSCs are working actively with this. The service centers are more concerned about how the

products are developed in order to ease the own production process (DFM) than the steel producers are. On the other hand steel producers use customer driven design to a much larger extent than service centers, even though the service centers are closer to the end-customers.

SOURCEMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Focus on working capital(89%)

• Costs prioritized for non-critical products (78%)

• Focus on working capital(100%)

• Sourcing solely based on prognosis (83%)

Used to a low extent • Optimization tools for sourcing (0%)

• Merge-in-transit (0%)

• VMI (0%)• Wave-Picking (0%)

Even though both groups state that there is a large focus on reducing working capital, the best practice methods are used to a very low extent.

MAKEMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent•

Working actively to make production more efficient

(100%)

• MTO (90%)• SMED (80%)• Drum-buffer-rope (80%)• Mass-Customization (80%)• Flexible Production

regarding variation in

•

Working actively to make production more efficient

(100%)

• MTO (100%)• Buffers & intermediary

inventories minimized(83%)

• Lean (83%)

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demand (70%)• Muda (70%)

Used to a low extent • MTS (20%)• Buffers and intermediary

inventories minimized (30%)

• Demand-Pull Manufacturing(17%)

• ERP/MRP based production(prognosis)/ Muda/ Mass-customization (33%)

100% of producers and SSCs focus to a high extent on making this area (Make) more efficient.Steel producers use best practice methods to a higher extent than SSCs. Methods deployed by

producers focus more on securing the production and flexibility than minimizing working capital by a lean production.

DELIVER Methods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Working actively to make Deliver more efficient (89%)

• Real Time Inventory control(80%)

• Shelf Ready format (70%)

• Working actively to make Deliver more efficient

(100%)

• Cross Docking (83%)• Real Time Inventory control

(83%)Used to a low extent • EDI-links (11%)

• Cross Docking (22%)

• VMI (33%)

89% of the Producers and 100% of the SSCs focus to a high extent on making deliver a moreefficient area. Control within the company regarding product and information flow is generallyhigh through methods like Real Time Inventory Control.

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RECYCLEMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Working actively to improverecycling (100%)

• In-house Product Recovery(78%)

• Waste products sold to 3rd part (78%)

• Working actively to improverecycling (83%)

• Waste products sold to 3rd part (100%)

• In-house product recovery/reverse logistics (67%)

Used to a low extent • Reverse Logistics (40%)• Production system includes

reverse flow of materials(44%)

• Production system includesreverse flow of materials(20%)

• Package Recovery (33%)

Although recycling is an area that most producers and Service centers regard as important toimprove, very little is done to create a reverse flow of material for products outside the own

production. The reverse flow is handled by existing scrap recyclers and the potential for each producer to locate and bring back their own steel is very low.

CUSTOMERSMethods Steel producers (stage 1-2) Service Centers (stage 3)

Used to high extent • Working actively to increase

integration with customers(80%)

• End user marketing (44%)• ATP (30%)

• Working actively to increase

integration with customers(83%)

• CPFR (40%)• End user marketing (33%)Used to a low extent • Compatible MRP/ERP (10%)

• CPFR (20%)• Compatible MRP/ERP

(17%)• ATP (17%)

More than 80% of the Producers and SSCs rate integration with end-customers as an importantarea to improve. End user marketing receives relatively little attention by the companies

participating in the survey although the area has been highlighted during interviews.

The will to increase collaboration with customers is not about implementing compatible IT-systems (MRP/ERP) but more about establishing relationships and global sales presence.

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4.2.2 SCM-Score

The SCM-score is percentage of best practice methods used by a company. Comparing this scoreto EBIT and ROCE would reveal if there is a correlation between the use of best practicemethods and the value that is created. Calculations of the metrics are attached in appendix 5.

.

0%

5%

10%

15%

20%

45% 50% 55% 60% 65% 70% 75%

SCM-score

E B I T %

producers

SSC

0%

10%

20%

30%

40%

40% 45% 50% 55% 60% 65% 70% 75%

SCM-score

R O C E %

producers

SSC

Figure 15 SCM score vs. metrics

Apparently there is no correlation between SCM-score and the financial metrics, EBIT andROCE neither for producers nor for the SSCs.

The results for a more Supply Chain Management specific metrics, however, indicate somecorrelation. A higher SCM-score often results in higher stock turnovers according to figure 16,

although only for steel producers.

Producers

0

2

4

6

8

40% 45% 50% 55% 60% 65% 70% 75%

SCM-Score

S t o c k

T u r n s

SSCs

0

3

6

9

12

40% 45% 50% 55% 60% 65% 70% 75%

SCM-Score

S t o c k

T u r n s

Figure 16 SCM score vs. Stock Turns

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4.2.3 AHP - Potential Cost Savings And Profit Possibilities

In this section the results from the AHP are shown, i.e. the relative potential of the differentSupply Chain Management areas. For example a potential of 16% (Customers) versus 8%

(Deliver) means that the Customer area is regarded to have twice the potential compared to theDeliver area. Once again, the results have been presented separately for producers and servicecenters (SSC).

Figure 17 Relative potential of SCM areas (AHP)

For the producers the three areas with the most potential are Customers, Make and Design. Thelatter two are regarded as equally important, but more than twice as important as for exampleSource (26% vs. 10%). The SSCs on the other hand rate Customers, Supplier and Design highest,although with a more equal distribution amongst the remaining areas than for producers.

The fact that supplier collaboration (“Suppliers”) receives greater ratings amongst SSCs is muchdue to the nature of their business, this is their core competence. While the steel producers mostlysource their commodities from large corporations at market prices, the SSCs buy more valueadded products. This enables a larger bargaining opportunity for SSCs, which would explain theresults. On the contrary the production is the producers’ main activity, explaining why the areareceives higher ratings than for SSCs.

Furthermore the area “Source” receives higher ratings relative other areas for SSCs than for producers. This could be explained by the fact that speculation constitutes a large part of theservice centers’ business, while the producers strive to avoid speculation by sourcing in levelwith the true need.

SSC - Relative potential of SCM areas

20%

20%

15%

15%

8%

5%

16%

Supplier

DesignSource

Make

Deliver

Recycle

Customers

Producers - Relative potential of SCM areas

9%

26%

10%26%

9%

5%

15%

Supplier

DesignSource

Make

Deliver

Recycle

Customers

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4.2.4 Survey Conclusions – Methods deployed

Below are the conclusions from the survey results.

Tools deployed (from section 4.2.1)

• Generally the methods deployed are rather about directly reducing risks and costs thanabout increased transparency and information sharing (Source and Customers).

• Methods deployed by producers focus more on securing the production and flexibilitythan minimizing working capital. In other words the focus lies on providing customerswith a high level of service instead of offering low prices through a cost-effective

production process. Hence, products are prioritized above processes (Make).

• The steel producers collaborate closer with end-customers than service centers when it

comes to design. In other words the steel producers skip the middle-men and aim directlyat the end–customers when they develop new steels (Design).

SCM-score (from section 4.2.2)

• A correlation exists between the SCM-score and stock turns for steel producers, but whenanalyzing the impact on financial metrics this pattern can not be seen. This would implythat the use of best-practice methods has impact on Supply Chain efficiency, althoughother aspects than SCM are more important for value creation. The independence

between the SCM-score and stock turns for SSCs might be a consequence of the SSC’s business. Since speculation is incorporated, minimized inventories are not necessarilydesirable, thus affecting the stock levels.

AHP-Analysis (from section 4.2.3)

• Areas with most potential, for cost savings and profit generating possibilities, amongstthe producers are Design, Make and Customers.

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4.3 VALUE CHAIN – WHERE IS THE GOLD IN THE STEEL INDUSTRY?

This section explains the reasons behind Steel companies’ positioning strategies in their valuechain. For this purpose the value chain has been divided into three stages that are characteristicfor the steel industry.

4.3.1 Profit Along The Value Chain

One obvious question is whether there is a correlation between value creation and positioning inthe value chain. In other words if there are areas in the steel value chain that are more valueadding and also more profitable than others.

Positioning vs. ProfitCompanies are sized by revenue

0%

5%

10%

15%

20%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

ROCE %

E B I T %

Stage 1, 2 & 3 (5 companies) Stage 1 & 2 (4 companies)

Stage 2 (4 companies) Stage 2 & 3 (6 companies)

Stage 1 (2 companies) Stage 3 (8 companies)

Figure 18 Positioning vs. Profit

There is no clear correlation between either the EBIT-margin nor ROCE when compared to thecombination of activities encompassed in a company (i.e. extent of integration throughout the

value chain). Notable is that the size in terms of turnover seems to be greater for fully integratedcompanies. This could be a given result of the capitalization that takes place when more activitiesare performed. It could also be that growing companies seek to expand vertically rather thangrowing within the existing activities.

Explorationand Mining

Smelting and Slabproduction

Rolling, Hardening& Finishing of metal

Coiling/Coating/-

- SSC -Cutting, Stripping,

Welding, Bending of Metal

Modular Production

STAGE 1 STAGE 3STAGE 2

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Positioning vs. ProfitCompanies are sized by revenue

0%

5%

10%

15%

20%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

ROCE %

E B I T %

Stage 1 (11 companies)

Only Stage 3 - SSC (8 companies)

Others (10 companies)

Figure 19 Positioning vs. Profit

When all companies that encompass stage 1 are bunched together (figure 19) it is evident thatthey appear all over the spectra. Steel production itself does not mean high margins which mightimply that products rather than processes are main drivers for value. The cluster of SSCs, withsimilar margins in figure 19, further underlines this conclusion. As the SSCs distribute severaldifferent products, the product related value is eliminated and factors like global steel and alloy

prices take over as value drivers.

In general a financial comparison between the Swedish steel companies is very ambiguous due tothe extreme differences in size and type of products. Even within the sector containing the largestand fully integrated companies, which have been interviewed, there is a large diversity inmargins. This further underlines the conclusion that integration itself does not mean highmargins. The margins are instead largely a result of the type of products created by eachcompany.

4.3.2 Value Chain Conclusions - Reasons Behind Value Chain PositioningStrategies

• There is no distinct correlation between positioning and value creation.

• Steel production itself does not mean high margins. This implies that products rather than processes are the main drivers for value. The even margins among SSCs’, where thevariety of products eliminates product related value, further underlines this.

• Margins are lower for SSCs than for steel producers, hence there are no obvious financialincentives for forward vertical integration by steel producers. The reason for this might

be that brands belong to the producers while SSCs act more like wholesalers. The nichesteel is not a generic product that can be re-branded by wholesalers like some consumer goods.

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5 CONCLUSIONS

• Positioning – Forward integration is part of a strategic move to secure and stabilizedemand, rather than a hunt for increased margins. In other words the motive for forward integration, among steel producers, is not to buy the margins in the later stagesof the value chain, but rather to secure the own margins through a stabilized demand.

Although there is no distinct correlation between positioning and value creation, atendency among the largest companies is to be integrated. Most steel companies have astrategy to increase control in the latter part of the value chain (service center), by either ownership or strategic alliances. The margins are generally lower for service centers thanfor steel producers but the proximity to end-consumers is essential. Close collaborationworks as a guarantee in order to secure stable demand in the long run. In other words, if the producers lose the connection to end-consumers, a large part of their competitiveadvantage is lost (application know-how etc.).

The strategy to avoid competition by addressing small end-customers requires presencein the latter part of the value chain in order to control the flow of material. If theinfluence over the service centers was to be diminished, the producers would no longer

be able to implement this strategy.

Furthermore, stainless steel producers in particular suffer from the volatility in the nickel price and other alloys. The apparent demand, created by speculating distributors who arestocking or selling of steel, makes forecasting a problematic area. By taking control of distribution centers the demand volatility is reduced and margins are stabilized.

• Forward integration is used as an approach for marketing and productdevelopment rather than as a Supply Chain Management strategy – relationshipsexist but are not used to their full potential. The academic theory argues that a systemwide optimization, instead of regarding each part as independent units, will be beneficialfor all constituents. To achieve this state, it is essential to share information openly along

the supply chain. In general, the steel companies have established close interactions withcustomers, for marketing and development purposes, but the advantages of these closerelationships are not used to the full potential. Information about inventory levels,capacity and demand is not shared as widely as possible to achieve optimal planning andforecasting.

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• Product focus rather than process focus, due to niche strategies. The Swedish steelcompanies have chosen to focus on high value niche products since they can never compete with low cost bulk producers. The focus on developing leading and customized

products has put efficiency efforts aside.

Furthermore the financial analysis shows that steel production itself does not mean highmargins. The vast spread among steel producers when it comes to margins would implythat the superior ones are either more efficient or able to charge higher prices for thesteel. Since the Swedish steel companies are not bulk producers, the latter explanation ismore likely. Compared to bulk producers, where the most cost efficient producer earnsthe most money, the niche producers’ value rather seems to depend on the product’ssuperiority. This implies that products rather than processes are the main drivers for value. The even margins among SSCs’, where the variety of products eliminates productrelated value, further underlines this.

The fact that the product characteristics seem to be the main value driver, implies thatefforts in making the process more efficient are less attractive.

• Delivery accuracy low due to absence of a top performer. The number one issue at allinterviewed companies is low delivery accuracy. Even though all companies are aware of this problem and strive to get better, the absence of a top performer in the industry mighttake away the pressure for real improvements. Another explanation might be theacceptance by customers. It is widely accepted that orders must be placed a long time inadvance and with some uncertainty regarding delivery times.

An underlying reason for the low delivery accuracy might be the shift from a traditional process industry, to an MTO industry with highly customizable products. Processoriented machines are used to produce individual products, thereby not in an optimizedway.

To improve the delivery accuracy larger inventories can be held, on the other hand thisimplies more working capital. Instead of using backlogs in production planning, the useof planning systems that incorporate capacity restrictions along the entire supply chain,

would possibly improve this without the issue of larger inventories.

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• “Design” and “Customers” are univocally the two most important areas for steelproducers, with most potential for increased income possibilities. The case studiesreveal design and customers as by far the most emphasized areas (followed by make) andthe AHP analysis shows that design, make and customers are regarded as areas with the

most potential. Currently, the focus lies on increasing revenues in favor of cost savingsand capital rationalizations. This is probably a result of the current favorable marketsituation, but if the economy should turn down, focus might shift to a more cost saving

perspective. Thereby Supply Chain Management strategies, like increased informationsharing, could become necessary for the steel industry.

• “Source”, ”Supplier” and “Recycle” are less emphasized areas and regarded by thesteel producers to lack potential for increased revenues and cost savings. The rawmaterials for steel producers are largely bought at world market prices and are hence

difficult to affect. Furthermore, stops in production are much more critical than a slightlyincreased sourcing cost, especially when capacity restricts the sales volume (more can besold than produced) and is once again a result of the favorable market situation.

Recycling, in terms of reverse flow of material outside the own production, is taken careof by established networks specialized in this field. Costs related to establishing owninfrastructures, outweigh the benefits of an integrated reverse flow.

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6 C RI T I C AL RE V

I E W

6 CRITICAL REVIEW AND SUGGESTIONS

The major conclusions are drawn from qualitative interviews at the largest steel producingcompanies in Sweden. A minor drawback of such an approach is that some viewpoints are alwaysmissed, although the targets have been chosen to reflect large parts of each organization. Eventhough sourcing questions have been considered during the interviews, a more coherent academicapproach would have included interviews with responsible persons in this area. It can be addedthat initially, during interviews with the Swedish steel trade organization, this area came off assomewhat less important, which has affected the decision to exclude sourcing managers.

Furthermore, for the analysis of the survey, the number of respondents was relatively low,resulting in some statistical uncertainties. The hit rate, with 16 respondents out of 29 possible, is

acceptable and the number of companies is difficult to affect as including more small steel producers would not bring more context to the thesis. It must therefore simply be accepted thatthe uncertainty is part of the nature of this paper.

Supply Chain Management has also become a wide concept with many different meanings. Tostate that this paper constitutes an investigation of Supply Chain Management in the steelindustry is therefore quite ambiguous. Rather, frameworks from SCM theories have been used for the analysis of the companies. Each SCM-method contains too much analysis for a single thesisto cover all of them more deeply than has been made here. This leads up to a general suggestionfor further interesting investigations in this area. For example, an interesting approach would be

to investigate more in-depth the delivery accuracy for any single steel producer and suggest howspecific SCM methods (e.g. VMI) can be applied and the consequences thereof. Another possibleresearch suggestion would be a benchmark between the steel industry and another processindustry regarding delivery accuracy.

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7 RE F E RE N C E S

7 REFERENCES

LITERATURE

Ansari S.L. & Bell J., Target Costing: The Next Frontier in Strategic Cost Management , 1997

Lindh C. Logistik och Supply Chain Management , KTH, Stockholm, 2004

Simchi-Levi D. et al, Designing and Managing the Supply Chain – Concepts, Strategies and Case Studies, McGraw-Hill, New York, 2007

Stadtler H. & Kilger C., Supply Chain Management and Advanced Planning: Concepts, Models,

Software and Case Studies, Springer, Berlin, 2005

Womack J. & Jones D., Lean Thinking - Banish Waste and Create Wealth in Your Corporation,2003

Olhager J., Produktionsekonomi, Studentlitteratur, 2000

ARTICLESAhmadi R. & Wurgaft H., Design for synchronized flow manufacturing , Management Science,1994, accessed 2008-05-12 via http://www.jstor.org

Cachon G P; Fisher M Supply Chain Inventory Management and the Value of Shared Information

Management Science, Vol. 46, No. 8. (Aug., 2000), pp. 1032-1048.Accessed 2008-05-12 via http://links.jstor.org/sici?sici=0025-1909%28200008%2946%3A8%3C1032%3ASCIMAT%3E2.0.CO%3B2-C

Chen F. et al, Quantifying the Bullwhip Effect in a simple Supply Chain: The Impact of

Forecasting, Lead Times and Information, Management Science, 2000, accessed 2008-05-12 viahttp://www.jstor.org

Christopher M. & Towill D., Supply Chain Migration from Lean and Functional to Agile and

Customized, Supply Chain Management: An International Journal, vol.5 nr.4, 2000, accessed2008-05-12 via http://www.emerald-library.com

Hagel J., Seeley Brown J., Innovation Blowback: Disruptive Management Practices from Asia,The McKinsey Quarterly, 2005, accessed 2008-05-12 viahttp://www.johnseelybrown.com/innovationblowback.pdf

Jernkontoret, Det svenska stålet behövs, 2006, accessed 2008-05-21 viahttp://www.jernkontoret.se/informationsbanken/vara_publikationer/pdf_info_utb/jkfakta_svensktstalbehovs.pdf

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Kale et. al, Alliance capability, stock market response, and long-term alliance success: the role of

the alliance function, strategic management journal 23, 2002, accessed 2008-05-12 viahttp://www.jstor.org

Logistics Management, Merge-in-transit yields benefits, Logistics Management Journal, 1998,

accessed 2008-05-12 via http://www.logisticsmgmt.com/article/CA145699.html

Nyquist O., Jernkontoret, The recent restructuring of the Swedish special steel industry, 1998,accessed 2008-05-21 viahttp://www.jernkontoret.se/informationsbanken/presentationer/pdf/restruct.pdf

Potter A. et al, The evolution towards an integrated steel supply chain: A case study from the UK,International Journal of Production Economics, 2002, accessed 2008-05-12 viahttp://www.sciencedirect.com

Supply Chain Council, SCOR Overview version 9.0, 2006, accessed 2008-05-12 via

http://www.supply-chain.org

Smith W. & Lockamy A., Target Costing for Supply Chain Management: An Economic

Framwork, Journal of Corporate Accounting & Finance, John Wiley and Sons, 2000, accessed2008-05-12 via http://www.interscience.wiley.com

Standard & Poor’s, Industry Survey – Metals: industrial, 2007, available athttp://sandp.ecnext.com/coms2/description_RS_MEI_ITM

Sweden Today, Steeled for global growth, no 3 2005, accessed 2008-05-21 viahttp://www.uddeholm.com.ar/files/Sweden_Today3-2005Uddeholm.pdf

PRESENTATIONSPeter Gossas presentation – SMT – Capital Markets Day 2007:http://www3.sandvik.com/pdf/ir/capital/070904/Sandvik_Materials%20Technology.pdf

E&Y, SCM footprint, 2008-01-16

FINANCIAL SOURCESAffärsdata: http://www.ad.se

ANNUAL REPORTSOutokumpu: http://www.outokumpu.com/39836.epibrw Sandvik: http://www.sandvik.se/ar2007 SSAB: http://www.ssab.se/templates/PressRelease____813.aspx?releaseid=337118 Uddeholm: http://www.bohler-uddeholm.com/english/3177_ENG_HTML.htm

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SOURCES TO COMPANY SELECTIONJernkontoret:http://www.jernkontoret.se/informationsbanken/vara_publikationer/pdf_info_utb/foretag_och_adresser_2008.pdf

Statistiska Centralbyrån SCB:http://www.scb.se/templates/Listning2____35024.asp

INTERVIEW SOURCES

Jernkontoret – Interview: 05-02-2008Matthias Ternell (Director International Affairs)

SSAB Oxelösund – Interviews: 20-02-2008

Carl-Johan Wahlgren (Manager External Logistics)Per-Olof Stark (Director Marketing & Sales)

Ola Hägglund (Head of Division & Director Production)

SSAB Tunnplåt – Interviews: 11-03-2008Peter Strandberg & Malin Fridell (Logistics Controller)Riitta Pettersson (Coordinator Warehousing & Distribution)Hans Åkerblom (Business Area Manager, Nordic Market)Göran Hugard (Manager Marketing Communications)

Outokumpu – Interviews: 19-03-2008Tommy Acimovic (Head of production, steelworks)Anette Löfgren (Logistics Director / SCM)

Per Stinessen (Sales & Marketing Manager)

Sandvik Materials Technology – Interviews: 17-03-2008Anders Forslund (Global Distribution Manager)Martin Mueller (Global Product Manager, strip)

Uddeholm Tooling – Interviews: 15-04-2008Rolf Stålberg (Marketing Director)Stefan Sjögren (SCM / Logistics Director)

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I X1

Appendix 1 – Descriptions & Best practices

The various abbreviations from the survey are shortly described in this section according to their use in this thesis, including the source for the best/leading practices.

Alliance & Leverage The concept of cooperating with other companies to achieveeconomies of scale

Kale et. al

Available-To-Promise

(ATP)An availability and feasibility check for customers. The ATP isthe uncommitted part of a company’s inventory and planned

production over time. Customers can retrieve information aboutavailable supply as ATP provides lead-time quotations based oncurrent supply chain status.

Simchi-Levi,Stadtler &Kilger

Backward Integration(vertical)

Increasing the level of control between company’s own valuechain and that of suppliers’

Simchi-Levi

Collaborative Design Collaboration among companies to develop new products E&YCollaborative Planning,

Forecasting andReplenishment (CPFR)

A platform for retailers and manufacturers to exchangeinformation about future sales promotions and past sales trends.CPFR makes it easy for “each side” to retrieve and appendrelevant information in order to make more accurate forecastsand better planning.

Simchi-Levi

Cross Docking To increase inventory velocity and to minimize storage spacethe receiving and shipping processes are linked together in aDC. Every inbound shipment has an outbound shipmentscheduled and the incoming goods are moved directly to theorder pick up area without any intermediate storage.

Simchi-Levi

Customer Driven R&D Products are developed according to customers demands(opposite of “technology-push”)

Womack &Jones

Demand-PullManufacturing

Production is demand driven. Products are produced on internal(or external) orders, no prognosis are used

Womack &Jones

Design for Environment Taking environmental demands into account already in the product development phase

E&Y

Design for Manufacturing(DFM)

The productivity is accounted for in the development phase – i.e. the production of the new product is facilitated

E&Y

Drum-Buffer-Rope The production is managed in regard to bottlenecks (buffersused in front of bottlenecks). The drum (bottleneck) sets the

pace for entire production line in order to maximize throughputand minimize work-in-progress (WIP)

Olhager J

Electronic DataInterchange (EDI)

Paperless communication, where data is transferred betweentwo systems without human intervention.

Cachon G P,Fisher M

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Enterprise ResourcePlanning (ERP)

One unified system with several different data sourcesintegrated. Information about the company’s process can bestored and retrieved from all the departments within the firm.Information systems could be more or less compatible with thecustomers’ systems.

Simchi LeviPotter A et.Al

Ethical Sourcing Considering ethical aspects when evaluating suppliers E&Y

Fixed Order Quantities Using fixed order volumes for refilling stocks Chen et al(not best

practice)Forward integration

(vertical)Increasing or decreasing the level of control between acompany’s value chain and its distributors’/customers’ valuechains.

Simchi Levi

Innovation Blowback The concept of using emerging markets’ demands (e.g. China/India) to establish products in more developed countries

TheMcKinseyQuarterly

(Hagel &SeeleyBrown)

Lean A production philosophy that aims at reducing waste in every production step in order to create a flow of material.

Womack &Jones

Mass-customization The production is adjusted to allow for customized products(within boundaries)

E&Y

Material ResourcePlanning (MRP)

A set of techniques to calculate requirements for material byusing inventory data, product data and master productionschedule. Information systems could be more or less compatiblewith the customers’ systems.

Simchi LeviPotter A et.Al

Merge In Transit The combination of goods from several sources into a singletransport, in order to minimize transports

LogisticsManagement

Make-to-order (MTO) Make to order. Products are manufactured directly upon order from customers

Not best practice

Make-to-stock (MTS) Make to stock. Products are manufactured continuously or inregard to a prognosis and stocked

Not best practice

Muda Actively eliminating all sources of waste (every activity that isnot value-adding). Part of Lean theory

Womack &Jones

Open Book Open sharing of information regarding sourcing prognosis with

suppliers

Potter A, et

al / Towill

Open Innovation The concept of selling/sharing research (e.g. as patents) that isnot used by the own company to develop new products

E&Y

Order up to The filling of stocks with variable amounts but up to a fixed point (desired quantity in stocks)

Chen et al /Simchi-Levi

Package Recovery Packages that can be reused are sent back to the manufacturer. E&Y

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Product Recovery Waste products are either recycled in house or sold to a third part.

E&Y

Real Time Inventory The inventory data is updated continuously when orders are placed.

Stadtler &Kilger

Reverse Logistics The process of moving goods from the destination of consumption back to the origin where remaining value could becaptured. The process involves planning, implementing andcontrolling all activities associated with the procedure.

E&Y

Shelf Ready Format Packing goods in a arrangement that is requested by thecustomer in order to avoid repacking.

E&Y

Single Minute Exchange of

Dies (SMED)Single Minute Exchange of Dies. An approach to reducingchangeover times

Womack &Jones

Supplier Orchestration The use and coordination of several suppliers to decreasedelivery lead times and risks

E&Y

Synchronized source-make The sourcing process depends on actual needs in production,through use of a common electronic interface with suppliers

Womack &Jones,Ahmadi &Wurgaft

Target Costing (productdevelopment)

The end-price of the product (target cost) is taken into accountin the development phase

Ansari &Bell / Smith& Lockamy

Target Costing (supplierintegration)

Here referred to as the concept of setting a target cost for the to be sourced product (depending on end-price) and then helpselected supplier achieve that price. “The allowable amount of

costs that can be incurred on a product and still earn the

required profit”

Ansari &Bell / Smith& Lockamy

Wave-Picking Instead of scheduling orders to be picked when they arereceived, increased efficiency in a DC can be achieved byconsolidating orders in waves. The criteria for consolidationcould be by customer, product, geographical area, or any other criteria that makes sense for the DC.

Supply ChainCouncil

Vendor Managed

Inventory (VMI)The supplier has access to customers’ inventory data and isresponsible for maintaining a predetermined inventory level

Simchi-Levi,Supply ChainCouncil

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Appendix 2 – Description of SCOR areas

The information below is quoted from “Supply Chain Management and Advanced Planning”(Stadtler & Kilger)

(Plan) Plan covers processes to balance resource capacities with demand requirements and thecommunication of plans across the supply chain. Also in its scope are measurement of the supply

chain performance and management of inventories, assets and transportation among others.

SourceSource covers the identification and selection of suppliers, measurement of supplier performance

as well as scheduling of their deliveries, receiving of products and processes to authorize payments. It also includes the management of the supplier network and contracts as well as

inventories of delivered products.

Make In the scope of make are processes that transform material, intermediates and products into their

next state, meeting planned and current demand. Make covers processes to schedule productionactivities, produce and test, packaging as well as release of products for delivery. Furthermore,

make covers the management of in-process products (WIP), equipment and facilities.

Deliver Deliver covers processes like order reception, reservation of inventories, generating quotations,

consolidation of orders, load building and generation of shipping documents and invoicing.

Deliver includes all steps necessary for order management, warehouse management and reception of products at a customer’s location together with installation. It manages finished

product inventories, service levels and import/export requirements.

Return In the scope of return are processes for returning defective or excess supply chain products aswell as MRO products. the return process extends the scope of the SCOR-model into the area of

post-delivery customer service. It covers the authorization of returns, scheduling of returns,receiving and disposition of returned products. In addition return manages return inventories as

well as the compliance to return policies.

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Appendix 3 – Companies: Interviewed/Surveyed

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Appendix 5 – Calculations & Source Data

With exception for Sandvik Materials Technology (SMT), the source for all data is Affärsdata.Affärsdata did not provide separate data for SMT, which is a unit within Sandvik AB, and hencethis data is taken from the company’s annual report.

SOURCE DATA

2006 2005 2004 2003 2006 2005 2004 2003

Outokumpu Stainless AB 1 05 80 00 0 8 07 90 00 7 12 30 00 5 31 90 00 5 05 20 00 2 87 00 00 2 53 60 00 2 11 50 00

Sandvik Mat Tech

SSAB Tunnplåt 4 91 10 00 3 89 30 00 3 99 80 00 4 16 80 00 3 18 30 00 2 88 10 00 2 38 80 00 2 17 80 00

SSAB Oxelösund 3 39 40 00 3 61 80 00 3 22 30 00 3 01 70 00 2 02 00 00 2 17 60 00 1 55 30 00 1 31 10 00

Ovako Steel AB 684780 848932 515464 381922 590871 644716 556800 553034

Ruukki Sverige AB 770853 567787 346642 258396 549942 452495 231502 211678

Höganäs 555000 445000 420000 255000 479000 450000 379000 317000

Ovako Bar AB 317507 345151 416850 262280 372390 320644 401619 304369

Outokumpu Tubular 893300 688600 394100 294700 604100 477300 340600 254700

Uddeholm Tooling 315861 383168 327060 239871 647035 625098 523861 468657

Fagersta Stainless 626000 144900 278700 162400 477200 214300 286700 230500

Erasteel Kloster 270500 303700 228200 112100 300600 272700 301100 183500

Surahammars Bruks AB 154421 132688 103141 107426 119297 105409 77735 66905

Haldex Garphyttan 216073 212876 178634 160014 84903 78361 56664 62749

Scana Steel Björneborg AB241149 200479 199373 211487 128348 92878 79730 66502

Böhler-Uddeholm Precision Strip 275385 233603 253856 187425 114408 142345 138881 128022

Structo Hydraulics AB 190280 170730 156232 168526 70101 60818 46138 46331

Boxholm Stål AB 66519 57220 63819 44699 60874 54485 64391 39111

Scana Steel Söderfors AB 62768 73057 40547 37336 34208 30523 23506 18621

Carpenter Powder Products AB 40462 23719 34629 22369 59620 52142 53830 38666

Tibnor AB 1432400 1283900 1302600 887400 878900 773900 791400 565800

BE Group Sverige AB 677664 543881 504940 236194 409756 293845 333068 243305

Lindab Steel AB 263792 225713 278529 176262 142829 82483 156997 97327

Plannja AB 260500 168400 210800 152300 127000 79200 126500 85200

ThyssenKrupp Materials AB 172245 123853 112509 93681 63878 65971 59611 60606

Arcelor SSC Sverige AB 84383 90446 80453 48611 84830 87497 86902 66477

Acerinox Scandinavia AB 1830458 752801 581561 439138 1151985 686215 657388 360889

Kanthal AB 1109741 609060 380209 280498 711363 435028 392846 338275

Burseryds Bruk AB 152608 79991 101931 75454 49331 42358 27334 40741

InventoryCurrent Liabilities

2006 2005 2004 2003 2006 2005 2004 2003 2006 2005 2004 2003

Outokumpu Stainless AB 20016000 21234000 18688000 13483000 2250000 1129000 1155000 366000 18826000 15925000 15971000 14126000

Sandvik Mat Tech 19337000 17003000 14423000 12467000 2324000 1729000 1354000 750000

SSAB Tunnplåt 14824000 13830000 12384000 10400000 2508000 2993000 2407000 881000 10877000 10170000 9950000 9036000

SSAB Oxelösund 9 56 30 00 8 54 40 00 6 56 50 00 5 28 00 00 2 00 70 00 1 79 90 00 6 92 00 0 3 61 00 0 7 44 00 00 6 89 70 00 6 11 60 00 5 70 20 00

Ovako Steel AB 394 0337 3 546 381 30 577 24 245 729 2 34 5812 152 155 625 43 -333903 2 15 33 73 2 05 68 22 2 05 74 29 1 92 35 21

Ruukki Sverige AB 347 8692 3 109 091 15 505 86 122 432 0 10 3104 82 760 465 03 1 1037 1 611 730 14 432 04 61 737 6 49 4559

Höganäs 3 03 30 00 2 68 60 00 2 35 70 00 2 06 70 00 2 95 00 0 4 13 00 0 3 73 00 0 4 18 00 0 4 69 30 00 4 82 00 00 4 39 10 00 4 48 50 00

Ovako Bar AB 2 45 73 99 2 28 46 92 2 24 27 25 1 73 27 80 3 32 91 7 2 50 19 5 2 19 94 0 9 24 20 1 19 51 12 1 21 68 72 1 28 26 71 1 07 52 95

Outokumpu Tubular 2 34 63 00 1 86 10 00 1 35 48 00 1 09 91 00 4 31 00 -54500 6 57 00 1 86 00 2 04 64 00 1 83 12 00 1 45 77 00 9 70 10 0

Uddeholm Tooling 2 22 03 24 2 28 68 20 1 86 07 44 1 47 01 10 1 80 20 3 1 60 70 0 9 47 93 3 27 73 2 11 61 47 2 17 10 96 2 00 90 05 1 56 43 45

Fagersta Stainless 2026400 1606000 1488300 1138800 190900 56100 76000 1900 1272600 680500 788400 618700

Erasteel Kloster 1535000 1459000 998000 761000 30100 118700 97300 -5000 1 00 66 00 1 03 17 00 9 98 30 0 8 68 00 0

Surahammars Bruks AB 967196 916943 680518 782240 56147 52407 - 15 88 5 - 27 04 563 157 4 932 78 43 014 1 44 6535

Haldex Garphyttan 754708 758364 677974 586396 12515 45930 45895 34332 425212 411350 370933 348575

Scana Steel Björneborg AB 658459 558458 429405 427219 72909 49327 6113 -725 393 592 3 248 61 31 999 7 35 2076

Böhler-Uddeholm Precision Strip 492479 471311 472758 475717 48327 21099 43130 58941 796120 753092 752459 564589

Structo Hydraulics AB 407137 422031 389846 342825 745 3785 16108 -9382 221 196 2 078 47 19 107 0 19 3646

Boxholm Stål AB 333764 305714 278593 215554 23108 20227 39379 3420 147960 134532 127893 108486

Scana Steel Söderfors AB 193325 192443 157141 140144 3001 11359 - 82 2 - 54 07 189 876 1 973 82 19 000 3 17 3323

Carpenter Powder Products AB 169345 154271 115364 112457 19329 21655 4397 11787 154379 106735 110717 93822

Tibnor AB 7 85 18 00 6 30 88 00 5 52 94 00 4 38 85 00 6 78 20 0 3 88 20 0 3 68 70 0 5 72 00 2 90 29 00 2 54 68 00 2 61 49 00 2 05 57 00

BE Group Sverige AB 3 63 90 74 3 19 11 30 3 00 98 05 2 31 55 97 2 75 29 7 1 51 84 6 1 62 25 2 8 45 68 1 18 02 09 1 27 88 66 1 81 23 24 1 37 42 95

Lindab Steel AB 156 2696 1 269 895 11 716 64 104 259 6 22 4035 158 938 1 186 46 6 8880 291 327 2 627 16 38 387 5 28 4362

Plannja AB 995700 854000 758900 684600 63200 42300 34500 23300 467000 358200 401600 351100

ThyssenKrupp Materials AB 51 3075 446 119 3 622 08 39 678 0 -9945 7751 - 15 01 - 39 50 186 212 1 595 85 15 524 1 13 2738

Arcelor SSC Sverige AB 412039 358292 295202 203100 26251 16819 18515 6251 165172 161804 150709 109269

Acerinox Scandinavia AB 3 04 66 81 2 20 21 51 1 72 42 79 1 20 76 98 2 00 41 8 -3306 914 12 3 4591 2 377 853 11 460 27 88 416 0 67 3434

Kanthal AB 180 5207 1 462 791 12 876 49 100 625 3 7 1542 60 257 821 29 9 9548 2 014 679 15 932 99 145 788 2 149 5105

Burseryds Bruk AB 548110 541126 476417 394325 80958 78420 79244 61000 424047 359843 349653 306409

Revenues EBIT ASSETS

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CALCULATIONS

Revenues EBIT AVG ROCE AVG Stock Turns SCM-Score

Outokumpu Stainless AB 20016000 6,4% 14,7% 6,3 73%

Sandvik Mat Tech *** 19337000 9,4% 11,9% 0,0

SSAB Tunnplåt 14824000 16,6% 37,1% 4,9 53%SSAB Oxelösund 9563000 14,9% 35,5% 4,2 62%

Scana Steel Björneborg AB 658459 5,3% 23,0% 5,7 56%Ovako Steel AB 3940337 0,4% 4,6% 5,5 52%

Ovako Bar AB 2457399 9,9% 25,9% 6,3 56%

Uddeholm Tooling 2220324 5,6% 6,8% 3,4

Erasteel Kloster 1535000 4,8% 8,1% 4,5

Fagersta Stainless 2026400 4,5% 13,8% 5,5 57%

Surahammars Bruks AB 967196 2,2% 5,7% 9,3Burseryds Bruk AB 548110 15,3% 29,1% 12,7

Böhler-Uddeholm Precision Strip 492479 9,0% 9,4% 3,7 46%

Ruukki Sverige AB** 3478692 2,4% 10,9% 6,4

Kanthal AB 1805207 6,1% 7,5% 3,0

Haldex Garphyttan 754708 5,1% 17,8% 10,0

Structo Hydraulics AB 407137 0,6% 5,4% 7,1 59%Boxholm Stål AB 333764 7,3% 30,3% 5,2

Scana Steel Söderfors AB 193325 0,8% 1,7% 6,5Höganäs 3033000 15,3% 9,0% 6,3

Carpenter Powder Products AB 169345 9,9% 16,3% 2,7 52%

Tibnor AB 7851800 5,7% 27,5% 8,0 52%

BE Group Sverige AB 3639074 5,3% 23,8% 9,6Acerinox Scandinavia AB 3046681 3,6% 20,2% 3,0 62%

Outokumpu Tubular 2346300 1,4% 2,0% 4,0 58%

Lindab Steel AB 1562696 10,9% 25,0% 11,1 70%

Plannja AB 995700 4,8% 20,7% 8,2 58%ThyssenKrupp Materials AB 513075 0,0% 0,0% 6,9

Arcelor SSC Sverige AB 412039 5,1% 23,2% 3,9 63%

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Appendix 6 – AHP methodology

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AP P E ND

I X 7

Appendix 7 – Survey Result

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