IBM Global Business Services

White Paper

Industrial Sector

ERP Advantages in the

Steel Industry Today

IBM Global Business Services

IBM Global Business Services

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Table of Contents
1
3

4
5

9
11
12

The Steel Industry Today

Information Systems for a
Quickly Changing Industry
ERP Business Benefits
Six ERP Design Challenges
for Steel Companies
Implementation Approaches for ERP
ERP Case Study
Conclusion

What should you do?

Lets say youre the CEO of a large multi-national steel company, and
youre running a global operation with plants on four continents. You
need to make good business decisions, and you rely on your IT systems
to provide the data to make those good decisions.
But your IT systems are not well integrated. There are too many different
systems, and too many gaps between them, a legacy of the companys
history of mergers, acquisitions, and improvement initiatives. You need a
common information backbone. Youve heard that ERP systems can do
that, but youve also heard about ERP project failures from years ago.
Can ERP handle the challenges of a steel company today? And will that
lead to business benefits for the company? IBM answers are yes, and
yes.
The Steel Industry Today
The global steel industry is enjoying its fifth year of strong growth. Global
production of crude steel reached over 1,200 million metric tons in 2006
compared to only about 850 million metric tons in 2001.1 The steel composite price is above $500 in 2006, while it was below $300 in 2001.2 The
short-term outlook for steel looks bright, but any disruptions in the world
economy could slow demand and production growth.
Todays steel industry is driven by:
Moderating demand: Uncertainty about the value of the dollar, trade wars
and possible protectionism, the oil price, and security concerns in the
Middle East and elsewhere suggest that steel demand growth will almost
certainly moderate.
Supply and demand balancing: China and India are expected to maintain
strong growth, but the potential of overproduction by China could have a
major negative impact on the supply/demand balance.
Rising operating costs: Costs for raw materials and energy have
increased significantly, but the corresponding price rise in finished product means margins remain strong. However, environmental costs in
developed regions continue to push up energy prices and could start to
erode margins.

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Highlights
The steel industry is enjoying strong
growth but is driven by uncertainty
around the value of the dollar,
balancing supply and demand and
rising operating costs. The bottom
line is that todays Steel industry is
changing quickly.

Those drives have resulted in several important characteristics of todays

steel industry:
Consolidation: Consolidation in the industry has accelerated. Two major
mergers Arcelor-Mittal in 2006 and Tata-Corus in 2007 have intensified
the interest in consolidation. The industry remains fragmented. In 2005,
the top 10 steel companies shared about 25% of the market, the top 30
companies shared slightly less than half the market, and the top 80 companies shared 2/3 of the market.3
Shifts to lower cost production regions: Many steel companies are shifting
towards making steel in lower cost regions, which are also nearer to the
growth markets. Leading companies such as Arcelor-Mittal and POSCO
are investing in Orissa, India and in China. However, developed countries
still lead in finishing equipment and technical know-how.
Operational efficiencies: Steel companies need to refocus on improved
scheduling and on optimizing manufacturing execution. Higher prices
have put pressure on work-in-progress reduction, particularly with highend stainless steel.
Increased niche players: Smaller niche players have the potential to make
more profits than the less-focused giants. This is especially true when
niche players co-operate with customers to develop products and services jointly.
The bottom line is that todays Steel industry is changing quickly.

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Highlights
CEOs need information systems which
quickly provide them the data they need
ERP can provide that data.

Information systems for a quickly changing industry

In a quickly changing industry like steel, CEOs need information systems
which quickly provide them the data they need. We believe that ERP,
especially in its mature implementations today, is the crucial component
for a companys IT data backbone. ERP can play an essential role in:
Driving accurate and fast decisions (product profitability, procurement spend)
with consistently defined data
Running broadly known and supported applications
Harmonizing and optimizing back-office processes across the enterprise that
comply with finance requirements such as
SOX and IFRS
Enabling best-practice demand planning for supply-chain processes
Future-proofing global applications that support global enterprises

ERP today has expanded from simply

coordinating manufacturing processes
to being the integrator of enterprise-wide
backend processes.

What is ERP?
ERP or Enterprise Resource Planning is IT software that integrates business activities across an enterprisefrom product planning, parts
purchasing, inventory control, and product distribution, to order tracking.
ERP may also include application modules for the finance, accounting
and human resources aspects of a business. SAP and Oracle are the two
ERP leading vendors.
From a business perspective, ERP today has expanded from simply
coordinating manufacturing processes to being the integrator of enterprise-wide backend processes. ERP has also evolved technologically
from a monolithic legacy implementation into a flexible, tiered, clientserver architecture.
ERP Project Risks

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

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Highlights
ERP Business Benefits
ERP is an enabler of business benefits

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

and there are cost savings on the IT side,

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

often around 10-15%, especially when

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

different ERP implementations are

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

being harmonized.

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

better sales order handling, better procurement operations and more efficient
planning.
However, the most important business benefits will often be delivered after the
ERP backbone is established, by other initiatives that use the ERP backbone:
Integrated supply chain: from network planning through scheduling and
Manufacturing Execution Systems (MES)
Easier integration of business processes with business partners
Shared services and outsourcing of support functions
Increased information transparency to enable better decisions
Agility in acquisitions and carve-outs or divestments
Increased regulatory compliance
Robust and future-proofed backbone systems
There are cost savings on the IT side, often around 10-15%, especially when
different ERP implementations are being harmonized. These IT savings include:
Reduced ERP implementation costs due to a common template
Reduced application maintenance costs
Lower integration cost due to standard interfaces
Lower infrastructure costs
With an awareness of the best practices and a good understanding of ERP
project complexities, the risks in an ERP implementation are usually outweighed
by the benefits. The ERP discussion on investment return is one of mindset more
than one of standalone business cases.

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Highlights

Six ERP Design Challenges for Steel Companies

A steel company presents six industry-specific design challenges for implement-

A steel company is a complex arena

with six design challenges that can be
addressed by todays ERP systems.

ing ERP, as described below. A successful ERP project will start by analyzing
these challenges in detail across all of the companys integrated processes.
This analysis will result in the basic decisions that will be the foundation of the
ERP project.
Challenge 1: More than one planning strategy
Steelmakers often use a combination of production planning strategies. Typically
the flat or strip products are make-to-order, whereas the long products are maketo-stock. Depending on the existence of a de-couple point, finish-to-order could
be a relevant planning strategy as well. Such a combination of planning strategies affects the design of most ERP processes, including supply chain processes
as well as the financial/cost control processes. Cost control in make-to-stock
tends to go for standard price approaches, but in a make-to-order environment
costing happens on an individual order cost collection and forecast basis. ERP
systems today can handle this kind of complexity.
Challenge 2: Complex product variations
A steel product is made up of a large number of characteristics, making the
product difficult to configure when entering it in the ERP system. Configuration in
the make-to-order entries is typically done while entering the order, whereas for
the make-to-stock entries, configuration is done in the product definition, that is,
on the material master.
This burdens the early discussions during the design phase of an ERP implementation. Fundamental decisions need to be made very early in the project
about how many (finished product) materials should be defined: one extreme
is to define by material group which needs to be configured completely in the
order, or the other end of the spectrum is to define all possible/feasible characteristic combinations which can possibly explode into an extremely large number
of finished product definitions.

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

other words, the bill of material stands on its head or is v-shaped, as shown
in Figure 1. This means that the later in the process you define a product, the
higher the number of products to be defined becomes.
ERP solutions today can readily handle the complexities this of the V-shaped
bill of material. They allow characteristics based product configuration with automatic deduction of characteristics, characteristic value inheritance from sales
order header to item level, entry of multiple order units such as pieces, tons,
dimensions, and so on. Characteristics then drive production, shipping and purchasing processes across the supply chain

Finished

CRC
Gauge: .025

HRC

Gauge: .020

Gauge: .015

Gauge: .25

Slab

Figure 1: V-shaped bill-of-material

Gauge: .010

Gauge: .15

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Challenge 3: Flexible planning

Planning for steelmaking often needs to happen on short notice, with unstable
production processes and unplanned outputs. This requires continuous re-assignment of products to processes and orders dependent on the characteristics
described above. ERP systems today allow re-assigning flexibly to handle these
situations.
Challenge 4: Specific Customer Service Requirements
To cope with high-demanding customer segments such as automotive and construction, tight integration with business partners on forecasts, electronic customer orders (EDI, internet etc.) are typically needed. ERP systems today support
electronic integration with partners.
Challenge 5: Complex production scheduling combining both continuous and batch production
Figure 2 below illustrates the flow in a typical steel mill. While the blast furnace
and converter work in batches, the caster works continuously and the finishing
lines work in batches again.

Figure 2: Process flow in a steel mill

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

preparation and shipment planning. This means that the planning process needs
to be able to derive batches with characteristics inheritance and history tracing.
Finally, the scheduling part of the planning system needs to be able to work
with multiple and dynamic bottlenecks that is, bottlenecks which can change
based on incidents such as production problems in certain process steps. ERP
systems today can handle all of these situations.
Challenge 6: Detailed margin analysis
In todays steel industry when prices are high and capacity short, margin analysis becomes the essential method to tell what money is being made on which
customer/product segments. On top of segment analysis, it is also essential to
differentiate between strategic materials (cokes and ore, Ni and Cr for stainless)
and the other cost elements that may be easier to control. ERP systems provide
the tools to support these decisions.
The ERP system will also need to work closely with the companys Business
Information Systems (BIS) to optimize the business benefits. Working together,
the ERP and BIS systems can, for example, improve inventory allocation to late
orders.

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Highlights

Integrated IT Model for Steel

An integrated IT model as in Figure 3 is important because it lets you see the

A typical gap occurs between the ERP

and MES (process control and machine
control) systems, where the system

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

The Supply Chain Management (SCM) application provides the rough-cut
planning in Demand Planning. The result is planning blocks of similar

is actually combination of custom-built

applications and manual spreadsheets.
Bridging this gap properly is essential

products which are then handed over to production planning.

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

for realizing the business benefits on the

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

IT investments.

a promise date (at the end of the block to allow for the flexibility of possibly
moving to an earlier date).
The mill optimizer then typically would re-shuffle orders in between the blocks,
and feed results back into the SCM application in order to optimize the load
balancing.
Right before production starts, planned orders from the SCM application are
converted into production orders and, via the ERP system, are transferred
into the MES layer. It is at that time when quantities are being translated into
pieces (slabs, coils etc.).
Detailed scheduling then takes place, sequencing and combining pieces
from various orders throughout the mill into lots for optimization.
Production completion then posts an updated status of the orders into the

FIN, HR,..

Level 4&5

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

ERP

Sales Orders
Manufacturing
Inventory
QM

SCM

Demand Planning
ATP
ATP

PP

SNP
SNP

B/W

KPI
Balanced Scorecard
Reporting

Level 3

Inventory Allocation
Slab & Plate Design
MES Melting Shop

Melt Shop Scheduling

Hot Mill Scheduling

MES Rolling Mill

Finishing Line Scheduling

MES Finishing Line

Level 1&2

Execution, Tracking Roll Management

Process
Control
Process Control
Machine Control
Control

Figure 3: Steel Company Application Layers

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Highlights

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

companys different IT systems. A typical gap occurs between the

Implementing ERP is complex, and

takes a team of knowledgeable and
experienced ERP professionals to
successfully implement an ERP project.

ERP and MES (process control and machine control) systems, where
the system is actually combination of custom-built applications and
manual spreadsheets. Bridging this gap properly is essential for
realizing the business benefits of the IT investments.
If the applications in Figure 3 are to provide true value, they need
to be robust, integrated and cost efficient. A recent IBM survey
indicates that steel clients process control and MES systems are
custom-built applications 66% of the time, and that these custom-built
applications usually differ from mill to mill.5 Clearly, this risks creating
sub-optimal processes and leaves the company open to all the problems of maintaining custom-built, legacy applications.

Implementation Approaches for ERP

The key element for ERP success is to know how to implement an
ERP project. Past experiences recommends best practices such as:
Rapid/realistic project timelines due to external pressures
(acquisition synergies, legal reorganization)
Command-and-control approaches from a central project
management office
A global business process owner who has the authority and
credibility to approve process designs and business model/
organization changes
However, theres much more to it than these few general principles.
Implementing ERP is complex and takes a team of knowledgeable
and experienced ERP professionals to successfully implement an
ERP project.

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Highlights

ERP Steel Case Study: A South American Steelmaker and SOA.

Service Oriented Architecture (SOA) is the most recent technology step for ERP.

Service Oriented Architecture (SOA) is

the most recent technology step for ERP.
Properly implemented, SOA architecture
can provide real-time views of critical
cost and profit information online.

SOA breaks applications into smaller, granular software components which use
industry-standard methods to communicate and inter-operate.6 SOA moves
away from the one size fits all approach to one that fits more industry specifics
and customer specifics, all on a more productive development environment. SOA
makes it easier to incorporate new and innovative business processes and gives
more deployment flexibility.
A recent steel industry example for SOA is the IBM project in 2005 with a stainless steel company based in Brazil. The SOA architecture provides the company
with real-time views of critical cost and profit information for every key decision.
They now have an integrated solution that can provide real-time cost and profit
information online. This is essential in times of soaring raw material costs, especially for stainless steel manufacturers where Nickel and Chrome costs need to
be analyzed separately.
The steel company designed and implement the new ERP system based on core
mySAP modules (which are pre-SOA architecture), plus several SOA-compliant
software components. The ERP modules are integrated with the clients asset
management, production planning and packaging systems. The Integration
Message Broker, which is part of IBMs Websphere software, allows important
transactional data such as materials consumption and purchase orders to be
freely exchanged from the Oracle database to all of the companys systems.
This platform has proven to become the glue providing management online realtime cost and margin information which is needed for robust decisions in the
volatile stainless steel market.

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Conclusion
ERP is a key backbone application for companies in a fast changing industry
like steel. Given an awareness of the best practices and a good understanding
of the project complexities, the risks in an ERP implementation are usually outweighed by the benefits. The ERP discussion is often one of mindset more than
one of standalone business cases.
While implementing ERP can be challenging and demands sustained commitment from top executive levels, it is fundamental to enhancing the competitive
position of a company in the dynamic environment of the steel industry today.

About the Author

Dirk Claessens leads the IBM global industry practice for metals, a key industry
for IBM with dedicated research and development teams and nearly 200 professionals worldwide. He has been with IBM since 1994 and has worked since the
beginning of his career on assignments with metals companies, delivering strategy work, process redesign and application implementation, and automation assignments. Recently, he addressed steel conferences in Helsinki, Tokyo, India and
Moscow on various metals-specific topics such as supply chain and IT. He is a
Commercial Engineer by education and holds an MBA from the Catholic University of Antwerp. Dirk can be reached at dirk.a.claessens@be.ibm.com.

References

1
2
3
4


5
6

International Iron and Steel Institute (IISI), http://www.worldsteel.org

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

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 Copyright IBM Corporation 2007

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