Full Text 01

DEGREE PROJECT IN INDUSTRIAL ENGINEERING AND
MANAGEMENT,
SECOND CYCLE, 30 CREDITS
STOCKHOLM, SWEDEN 2020
Effects of Digitalization in Steel Industry

Economic Impacts & Investment Model
JENNY CHENG
JOSEFIN WESTMAN
KTH ROYAL INSTITUTE OF TECHNOLOGY

www.kth.se SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
I
II
Economic Impacts & Investment Model
by
Jenny Cheng
Josefin Westman
Master of Science Thesis TRITA-ITM-EX 2020:280

KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
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Effekter av digitalisering i stålindustrin
Ekonomisk påverkan & investeringsmodell
av
Jenny Cheng
Josefin Westman
Examensarbete TRITA-ITM-EX 2020:280

KTH Industriell teknik och management
Industriell ekonomi och organisation
SE-100 44 STOCKHOLM
IV
Master of Science Thesis TRITA-ITM-EX 2020:280
Jenny Cheng
Josefin Westman
Approved Examiner Supervisor
2020-06-12 Hans Lööf Gustav Martinsson
Commissioner Contact person
SSAB
Abstract
The awareness and interest for digitalization have increased tremendously during recent years.
However, many companies are struggling to identify the economic benefits and often face long
payback time and large initial investment costs. This study aims to assess the potential economic
effects from digitalization projects in the steel production industry. The study begins by
elucidating central concept like, digitization, digitalization, digital transform and the link between
digitalization and automation. Furthermore, the study identifies effects of digitization at
production level from an internal efficiency perspective, based on existing literature. On this basis,
an investment tool for digitization projects has been developed, consisting of three different
analyzes; a level of automation analysis, a quantitative analysis and a qualitative analysis.
To continue, the investment model has been applied to a potential investment of a smart automatic
crane. The results from all three analyses provided positive results and incentives to initiate the
project. As a result of poor data collection and rigid data, only one effect could be accounted for
in the quantitative analysis, which generated a net present value of nearly 12 MSEK over a ten-
year period. The most critical parameter proved to be the timing of initiating the project.
Key Words: digitalization, automation, steel production, level of automation, discounted cash
flow, multicriteria analysis
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Examensarbete TRITA-ITM-EX 2020:280
Effekter av digitalisering i stålindustrin
Jenny Cheng
Josefin Westman
Godkänt Examinator Handledare
2020-06-12 Hans Lööf Gustav Martinsson
Uppdragsgivare Kontaktperson
SSAB
Sammanfattning
Medvetenheten och intresset för digitalisering har ökat enormt under de senaste åren. Många
företag kämpar emellertid med att identifiera de ekonomiska fördelarna och möter ofta långa
återbetalningstider och stora initiala investeringskostnader. Denna studie syftar till att utvärdera
de potentiella ekonomiska effekterna av digitaliseringsprojekt i stålproduktionsindustrin. Studien
börjar med att redogöra för vad digitalisering är samt kopplingen mellan digitalisering och
automation. Vidare identifierar studien effekter av digitalisering på produktionsnivå ur ett internt
effektivitetsperspektiv baserat på befintlig litteratur. Baserat på detta har ett investeringsverktyg
för digitaliseringsprojekt utvecklats, bestående av tre olika analyser; en automationsgradsanalys,
en kvantitativ analys och en kvalitativ analys.
Investeringsmodellen har dessutom tillämpats på en potentiell investering i form av en smart

automatkran. Resultaten från samtliga tre analyser var positiva och utgjorde incitament till att
initiera projektet. Som ett resultat av bristande datainsamling och ostrukturerade data kunde
kostnadsbesparingen från endast en effekt redovisas i den kvantitativa analysen, vilken genererade
ett nuvärde på nästan 12 MSEK under en tioårsperiod. Den mest kritiska parametern visade sig
vara tidpunkten för att implementera projektet.
Nyckelord: digitalisering, automation, stålproduktion, automationsgrad, ”discounted cash flow”,

multikriterieanalys
VI
Foreword
This Master Thesis report was conducted by Jenny Cheng and Josefin Westman at the
Royal Institute of Technology (KTH) at the department of Industrial Engineering and
Management, Stockholm, Sweden. The authors are both majoring in Industrial
Engineering and Management but with different masters respectively; financial
mathematics and sustainable power production. The idea was to combine the diversified
competencies and create an outlet for both management and finance. Furthermore, this
Master Thesis work was carried out in collaboration with a European special steels
company over a five-month period during spring 2020.
Acknowledgments
Firstly, we would like to thank our supervisor at KTH, Gustav Martinsson, Associate
Professor in Financial Economics, for always being accessible when we have been in need
of support and feedback; both regarding advise on formalities but also in logical reasoning
and ensuring the academical level of the work.
Secondly, we would also like to express our gratitude to everyone at the commission
company who has been involved in this project, one way or another. Especially, we want
to thank our supervisor; thank you for taking your time to have continuous meetings with
us and providing useful data. It has been a pleasure to get to know you and the company,
and this work would never have been completed without you.
Last but not least, we want to send a great thank you to our friends and classmates at KTH
who supported us not only throughout this period, but all five years at KTH, making every
day a bit more enjoyable.
We are incredibly grateful for everything you have contributed to enable or facilitate this
journey!
Jenny Cheng & Josefin Westman

June 2020
Stockholm, Sweden
VII
List of Abbreviations
AHP Analytical Hierarchy Process

AI Artificial Intelligence
CF Cash Flow
DCF Discounted Cash Flow
FTE Full-time Equivalent
H2M Human-to-Machine
IoS Internet of Services
IoT Internet of Things
ICT Information and Communication Technologies
IRR Internal Rate of Return
IT Information Technology
KET Key Enabling Technologies
KPI Key Performance Indicator
LoA Level of Automation
MCA Multicriteria Analysis
M2H Machine-to-Human
M2M Machine-to-Machine
NPV Net Present Value
OAT One-at-the-time
OED Oxford English Dictionary
PB Payback Period
ROI Return on Investment
RRR Required Rate of Return
SME Small and medium-size enterprise
SoPI Square of Possible Improvements
TTM Time-to-market
WACC Weighted Average Cost of Capital
VIII
Table of Contents
1 Introduction .............................................................................................................. 1
1.1 Background................................................................................................................... 1
1.2 Problematization .......................................................................................................... 3
1.3 Purpose and Research Questions................................................................................ 3
1.4 Delimitations ................................................................................................................. 4
1.5 Outline of Thesis ........................................................................................................... 5
2 Method ....................................................................................................................... 7
2.1 Research Design ........................................................................................................... 7
2.2 Research Method.......................................................................................................... 7
2.3 Data Collection ............................................................................................................. 8
3 Literature Review ..................................................................................................... 9
3.1 Digital Definitions......................................................................................................... 9
3.1.1 Digitization .............................................................................................................................. 9
3.1.2 Digitalization ......................................................................................................................... 10
3.1.3 Digital Transformation .......................................................................................................... 10
3.2 Automation and Digitalization .................................................................................. 10
3.3 History of Industrial Revolution ............................................................................... 12
3.3.1 Industry 4.0............................................................................................................................ 14
3.4 Steel Industry.............................................................................................................. 14
3.4.1 Production Process ................................................................................................................ 16
3.3.2 Current State .......................................................................................................................... 17
3.5 Assessment Methods .................................................................................................. 19
3.5.1 LoA Framework .................................................................................................................... 19
3.5.2 Discounted Cash Flow .......................................................................................................... 22
3.5.3 Multicriteria Analysis ............................................................................................................ 25
4 Effects of Digitalization .......................................................................................... 28
4.1 Approach..................................................................................................................... 28
4.2 Quantitative Effects ................................................................................................... 31
4.2.1 Quantified Quantitative Impacts ........................................................................................... 36
4.3 Qualitative Effects ...................................................................................................... 37
5 Investment Model ................................................................................................... 40
5.1 Conceptual Overview ................................................................................................. 40
5.2 LoA Analysis ............................................................................................................... 41
5.3 Quantitative Analysis ................................................................................................. 42
5.3.1 Initial Investment Data .......................................................................................................... 44
5.3.2 Cost saving factors ................................................................................................................ 45
5.3.3 Discount rate ......................................................................................................................... 49
5.3.4 Sensitivity Analysis ............................................................................................................... 50
5.4 Qualitative Analysis ................................................................................................... 51
6 Application of Investment Model .......................................................................... 58
IX
6.1 Project “Smart Crane” .............................................................................................. 58
6.2 LoA Analysis ............................................................................................................... 58
7 Results ...................................................................................................................... 67
7.1 LoA Analysis ............................................................................................................... 67
8 Analysis of Results .................................................................................................. 75
9 Discussion ................................................................................................................ 77
9.1 Discussion of Method ................................................................................................. 77
9.2 Reliability & Validity ................................................................................................. 77
9.3 Generalizability .......................................................................................................... 78
10 Conclusion ........................................................................................................... 79
10.1 Answer of Research Question 1 ................................................................................ 79
10.4 General Conclusion .................................................................................................... 80
10.5 Recommendation & Future Research ...................................................................... 81
References ....................................................................................................................... 82
Appendix A – Investment Model................................................................................... 86
X
List of Figures
Figure 1 Research Process .............................................................................................................................. 8
Figure 2 History of Industrialization ............................................................................................................. 13
Figure 3 Industry Chart ................................................................................................................................ 15
Figure 4 Steel Production Process ................................................................................................................ 17
Figure 5 Mechanical-Information-LoA Diagram Showing SoPI .................................................................... 22
Figure 6 Levels of Digitalization ................................................................................................................... 29
Figure 7 Viewpoints for Analyzing Digitalization Impact ............................................................................. 30
Figure 8 Classification of Effects .................................................................................................................. 31
Figure 9 Summary of Quantitative Effects ................................................................................................... 35
Figure 10 Summary of Qualitative Effects.................................................................................................... 39
Figure 11 Conceptual Overview of Investment Model ................................................................................. 41
Figure 12 Overview of Initial Investment Data............................................................................................. 60
Figure 13 Overview of Maintenance Savings ............................................................................................... 61
Figure 14 Overview of Productivity Savings ................................................................................................. 62
Figure 15 Overview of Personnel Savings .................................................................................................... 63
Figure 16 Overview of Quality Savings ........................................................................................................ 63
Figure 17 Overview of Downtime Savings.................................................................................................... 64
Figure 18 LoA Chart over Investment Potential ........................................................................................... 68
Figure 19 SoPI Results .................................................................................................................................. 69
Figure 20 Saving Potential ........................................................................................................................... 71
Figure 21 Savings Per Factor ........................................................................................................................ 71
Figure 22 Savings Pie Chart .......................................................................................................................... 71
Figure 23 Quantitative Sensitivity Analysis Result ....................................................................................... 72
Figure 24 Discount Rate Tornado Diagram .................................................................................................. 73
Figure 24 Qualitative Sensitivity Analysis Results ........................................................................................ 74
List of Tables
Table 1 Levels of Automation Reference Scale ............................................................................................ 20
Table 2 Summary of Quantified Quantitative Impacts .................................................................................. 37
Table 3 Overview of Qualitative Analysis ..................................................................................................... 66
Table 4 LoA Mapping .................................................................................................................................... 67
Table 5 Quantitative KPIs Results ................................................................................................................ 70
Table 6 Sensitivity Analysis Summary ........................................................................................................... 73
Table 7 Qualitative Analysis Results ............................................................................................................. 74
XI
1 Introduction
This chapter provides the background information about the research area and aims to
increase the understanding of the problem. The purpose of the study is explained, and
research questions defined, followed by a presentation of delimitations and the outline of
the thesis.
1.1 Background
Rapid changes in the digital technology is revolutionizing the industries and the society
(Snabe Hagemann & Weinelt, 2016). The impact of digitalization is major, and many
companies believe it is vital to follow the digitalization trend in order stay competitive in
terms of effectiveness, growth and prosperity (Vernersson et al., 2015). There are several
consequences, but also possibilities, followed by the industrial digital transformation.
Today we are currently entering a new technological paradigm, the next industrial
revolution, Industry 4.0, where we transform towards an industrial internet with smart
devices, higher flexibility and larger applications (Vernersson et al., 2015).
The steel industry is no exception and is undergoing tremendous digital transformations

today, even though it seems like the steel industry in many aspects lag behind other
industries when it comes to digitalization. The steel industry alone accounted for 3.8% of
the annual global GDP in 2017 and contributed to over 6 million employments the same
year (Oxford Economics, 2019). The industry is both capital and human capital intensive,
resulting in certain rigidity. Therefore, it seems only reasonable that transformations within
steel industry would require more time. On the other hand, large corporations hold some
benefits over small and medium-size enterprises (SMEs), where they can utilize scale
advantages and afford knowledgeable IT specialist to accelerate the transformation. In
order to reach higher production efficiency, more competitive products and better business
models, Key Enabling Technologies (KET) such as; Artificial Intelligence (AI), Internet
of Things (IoT), Internet of Services (IoS), Mechatronics and Advanced Robotics, Cloud
Computing, Cybersecurity, Additive Manufacturing and Digital Twin has been or will be
used. These KETs together build the foundation of digitalization, which in turn is the core
of Industry 4.0 and has become more popular than ever. (Murri et al., 2019)
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The importance of digitalization and Industry 4.0 are well known and the technological
shift in the industries is inevitable. Bill Ruh, Chief Executive Officer, GE Digital, USA
believes it is a now or never chance to act (Snabe Hagemann & Weinelt, 2016), but the
question is what the benefits from these actions are. It is rather easy to find both articles
and other studies dealing with the subject digitalization. However, it is difficult to find
studies that examine the economic impacts of digitalization and more specifically the
economic impacts of digitalization in steel industry. A big contributing factor to this fact
is that it is hard to identify the economic impacts from digitalization projects. Projects are
often very costly and require large capital investments while it is expected to meet short
payback requirements set by stakeholders. (Murri et al., 2019) According to the European
Steel Skills Agenda, the steel industry faces several barriers; difficulty in integrating new
technologies and processes among site workers, a strong age gap between current
employees and prospective employees creates knowledge transfer issues and lack of
investment in training and education from steelmaking companies as well as an insufficient
amount of in-house training provided by companies (Henriette et al., 2015).
Digital transforms affect the entire organization including the business model, operational
process and both internal and external stakeholders (Stolterman & Fors, 2004). Even
though the challenges are many and it is shown that technical barriers are less crucial than
organizational issues (Branca et al., 2020), digitalization is still something highly valued.
Companies must try to find ways to quantify the benefits of these kind of projects, but if it
cannot be done, the companies should ask themselves what they lose by not adopting to
the new technological shift rather than what they gain (Bossen & Ingemansson, 2016).
To conclude, production managers often foresees high potentials with new digital
solutions, while management is struggling to identify potential profit, preventing rapid
digitalization progress. Therefore, the desire for economic reason behind digitalization is
undeniably great in most industries. Increased popularity and utilization of digital
technologies leads to an incentive for several well-known journals and consultancy
companies to explore the topic and address the economic benefits it provides. However,
by studying the existing literature it can be confirmed that quantification of digitalization
in monetary terms is extremely difficult. For example, large initial investments and long
payback times puts spanners in the works. Hence, there is a great need of studies that aim
to concretize and quantify the economic effects of digitalization.
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1.2 Problematization
There is no doubt the majority has a strong belief that digitalization has a net positive effect
on the entire organization. The unlimited number of reports, case studies and articles
addressing positive impacts of digitalization creates a thrive for companies to follow the
trend. However, papers dealing with quantifying economic aspects of digitalization are
scarce. Furthermore, studies on current state of digitalization in steel industry in particular
are limited as well. Therefore, researchers and steel companies find it difficult to quantify
the actual effects of digitalization.
Furthermore, the notation digitalization is widely used in everyday language, contributing

to a confusion regarding what it actually comprises. Therefore, it is important to factorize,
concretize and specify the definition of digitalization in order to estimate the potential
economic impacts. The quantification of these impacts is obstructed by the uncertainty of
possible aggregated effects enabled by extension projects as well as the difficulty to
identify synergies from future integration of subprojects. As we currently are in the middle
of the digital transformation, the opportunity to compare potential outcomes with historical
data is highly limited and further increasing the level of difficulty.
At last, it is proven that digitalization projects have both long pay back times and contribute
to many soft term consequences, implying even higher uncertainty in calculations. For all
reasons stated above, it seems difficult to quantify obvious impacts and to address less
prominent varying soft term factors. This leads to financial uncertainties and difficulties to
justify the implementation of these projects.
1.3 Purpose and Research Questions

The overall purpose of this paper is to partly solve few of the obstacles digitalization
brings, described in the background and problematization sections. This study aims to
identify potential impacts of digitalization within the special steels industry, in order to
address relevant saving opportunities and finally draw strategic conclusions. We aspire to
develop an investment model where the relationship between future digitalization projects
in a delimited steel manufacturing process and different cost saving factors will be
carefully examined through the lens of economic KPIs and other qualitative metrics. The
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intention of the model is to be used as a tool to help steel companies make well-grounded
digitalization investment decisions, taking not only the most obvious but all possible
effects into account.
With the problematization and purpose as a foundation, the following research questions
will be considered:
Q1: What are the potential impacts of digitalization in a delimited steel production section?
Q2: How can potential impacts from digitalization projects be quantified?
Q3: What potential cost savings can be expected from digitalization projects?
1.4 Delimitations
This report mainly focuses on digitalization projects at Process level which will be studied
from an Internal Efficiency perspective, based on the two frameworks developed by
Tihinen et al. (2017). Digitalization is implemented at Process level when it facilitates the
adoption of digital tools and streamlining processes by reducing manual steps. Process
level is thereby directly connected to the production department of a firm. When
digitalization is studied from an Internal Efficiency perspective, it is analyzed with regards
to how it improves the ways of working through digital means and by re-planning of
internal processes, see section 4.1 for further explanations. Digital implementations at any
other levels will not be considered, and projects will mainly be evaluated from this certain
perspective.
The investment model developed in this paper have been designed for valuation of
potential digitalization projects in a delimited production process within the special steels
industry. Projects that change or affect the organization in its whole and projects only
utilizing digital technology without generating a higher level of digitalization are not
considered as a part of the scope.
The intention of the model is primarily to be appropriate in evaluating digitalization

projects and not necessarily projects in general, such as projects only related to e.g. lean
production or sheer automation projects.
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1.5 Outline of Thesis
This thesis consists of ten chapters, which are briefly presented below.
1. Introduction: This chapter gives the background information to the research area and
creates an understanding of the problem. The purpose of the study is explained, and
research questions defined followed by a presentation of delimitations and the outline of
the thesis.
2. Method: This chapter presents the methodological approach and method chosen. A
conceptual visualization of the research process is given in order to make sense of the
logics and connections of different parts. An exposition of how data is collected and
utilized is provided as well.
3. Literature Review: This chapter consists of a literature review comprising relevant

knowledge for the subject of the thesis. Necessary concepts are defined and the background
to digitalization and its origin is given. Furthermore, basics of the steel industry are
explained and useful frameworks for the investment analysis are presented.
4. Effects: This chapter explains the approach from which effects of digitalization are
identified and describes the underlying frameworks. Potential effects are identified in the
existing literature based on the identified approach.
5. Investment Model: This chapter contains a presentation of how the investment model
is developed based on three analyses; LoA Analysis, Quantitative Analysis and Qualitative
Analysis. The model is built based on findings from the literature review together with
insights from the case study company, a European special steels producer.
6. Application of Investment Model: This chapter is directly referring to the case study
conducted at a European special steels company, aiming to answer the research questions
of this study. One specific potential investment is considered, and all data presented in this
section is collected at the case study company. Moreover, a detailed explanation on how it
is supposed to be used is given.
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7. Results: This chapter provides a presentation of the results from all three different
analyses of the investment model. The main results are shown in terms of NPV, IRR, ROI,
PB, SoPI and qualitative indexes. Results from sensitivity analyses are also presented.
8. Analysis of Results: This chapter is an overall analysis of the results in chapter 7, with
theoretical findings in the literature review as a starting point. Results are being
triangulated in order to broaden the understanding of their implications.
9. Discussion: This chapter contains a discussion and argumentation of the research

method used in this thesis. Furthermore, the reliability, validity and generalizability of the
model, as well as the thesis in general is discussed.
10. Conclusion: This chapter answers the stated research questions of the thesis and
explains how answers were arrived at. It also provides a summary of the main findings on
a higher level as well as a recommendation for producing companies and suggestions for
future research.
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2 Method
This chapter presents the methodological approach and method chosen. A conceptual
visualization of the research process is given in order to make sense of the logics and
connections of different parts. An exposition of how data is collected and utilized is
provided as well.
2.1 Research Design

This research is primarily descriptive in essence, as it attempts to “determine, describe or
identify what is” rather than why something is or how it came to be (Ethridge, 2004). We
aim to collect data and information that enables a better and more complete description
about the impacts of digitalization projects. Descriptive research is effective for analyzing
non-quantified topics and issues, and it also gives opportunity for integrating qualitative
and quantitative methods of data collection, where case-studies are one commonly used
data collection method. Furthermore, a deductive approach is taken for conducting this
descriptive research, meaning that reasoning goes from the general to the particular. Using
a deductive approach is advantageous for explaining causal relationships between concepts
and variables as well as for measuring concepts quantitively. Due to the nature of the
chosen field of study, this approach is considered suitable for appropriately address the
stated purpose and research questions. (Ethridge, 2004; Fox, 2007)
2.2 Research Method

The research method can be seen as a systematic roadmap to how research is planned to
be conducted. The project will be conducted based on a mixed method, where the aim is
to combine a qualitative single case study with quantitative findings in the literature to
fulfill the stated purpose. Data will be collected using both existing literature as well as the
single case study to iteratively develop a quantitative investment model for evaluation of
digitalization projects.
The first part of the study consists of a qualitative pre-study where information and data
will be collected by conducting a literature review. This literature review will consist of
three main parts; defining relevant concepts and their origins, explaining the steel industry
and identifying successfully used frameworks for evaluation of projects. Areas of our
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particular interest are for instance digitalization, digitization, digital transforms,
automation and steel industry production processes. In addition, existing literature will be
examined in order to identify potential effects of digitalization.
The aim of the single case study is twofold; firstly, one aim is to identify additional factors
to include in the model that were not covered by the literature, by observing the production
line. Secondly, primary data will be provided by the company in the case study, which will
be used for verification of the investment model and for applying the model on a real case
in a specific subprocess in production.
The merged data collection from the literature review and case study will form the
foundation of our study and the quantitative investment model. After identifying crucial
economic consequences of digitalization, the investment model will be built in the software
Excel. The outcome of the model when applied in the case study situation shall be carefully
examined, and a sensitivity analysis will be established. Results will be compared with the
literature and analyzed so that useful insight and conclusions can be drawn. Study of
literature and model construction will be an iterative process where all our findings should
be anchored in the literature and not only based on hypotheses from the case study
company. A conceptual overview of the research process can be found in figure 1 below.
Figure 1 Research Process
2.3 Data Collection

The collection of data will be derived from two channels; secondary data from existing
literature and primary data from the case study company. Primary data will be collected
by conducting field studies and by having continuous meetings, mainly with the system
development manager at the case study company who is highly involved in the company’s
ongoing digital transformation. In addition, a few semi-structured interviews with people
working with topics that are relevant for fulfilling the goal of this thesis may be conducted,
for instance in order to collect necessary initial input data to the investment model.
8
3 Literature Review
This chapter consists of a literature review comprising relevant knowledge for the subject
of the thesis. Necessary concepts are defined and a background to digitalization and its
origin is given. Furthermore, basics of the steel industry are explained and useful
frameworks for the investment analysis are presented.
3.1 Digital Definitions

Digitization, digitalization and digital transformation are closely related concepts and often
interchanged in a way that shortchange the power and importance of digital transformation.
The definition of these digital concepts is scattered and diffuse. These words are
wrongfully used as synonyms in everyday language and depending on whom you ask the
answer of the definitions will vary. Most people are confident when speaking about
digitization and digitalization since the notations are frequently used in both the academic
world and everyday life. However, the close association is triggering confusion and not
even the researchers agree upon a standardized definition. Thus, the unclear definition
could be a smaller contributing factor to why many companies struggle to see the potential
and benefits the transformations really brings. The truth is that neither of the three terms
are synonyms, but indeed very closely related.
3.1.1 Digitization
Most people agree upon the definition of digitization established by the Oxford English
Dictionary (OED) and the straightforward definition is “…the conversion of analogue data
(esp. in later use images, video, and text) into digital form”. (Oxford English Dictionary,
2016). The process of digitizing could for an example be the conversion of handwritten
papers to digital documents or conversion of LP and VHS to Spotify and Netflix. In other
words, digitization could also be defined as “the ability to turn existing products or services
into digital variants, and thus offer advantages over tangible products” (Stolterman & Fors,
2004). The last definition is closer related to digitalization since the conversion of a good
or service to a digital variant may be argued to change the whole business model for some
companies e.g. Netflix, HBO etc. However, the aim of a digitization project is rarely to
change the value proposition or the business model in order to create new revenue streams
and it does not include the organizational transformation needed to adopt to the new
digitized solution.
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3.1.2 Digitalization
The OED states that digitalization is “the adoption or increase in use of digital or computer
technology by an organization, industry, country, etc.” (Oxford English Dictionary, 2016).
Digitalization it is not only the digital technology in itself, where information is
represented in bits, it is “the use of digital technologies in order to change a business model
and to provide new revenue and value producing opportunities.” (Bloomberg, 2018). The
core of digitalization also includes the digital skills and reorganization needed to
implement a new digital solution. Digitization is a prerequisite for digitalization and plays
a key role in such processes. For an example, the conversion from manual manufacturing
to smart manufacturing is a digitalization process where the employees need to change
from working with physical equipment to managing a computer program and handle new
problems like cybersecurity and transparency.
3.1.3 Digital Transformation

Digital transformation is far beyond digitization and digitalization. According to
Stolterman and Fors (2004) digital transformation is “…the changes that the digital
technology causes or influences in all aspects of human life.” (Björkdahl et al., 2018).
Another literature states that digital transformation refers to “the customer-driven strategic
business transformation that requires cross-cutting organizational change as well as the
implementation of digital technologies” and cannot be implemented as a project. A digital
transformation often includes several digitalization projects at the same time. (Bloomberg,
2018) The organization should thrive to restructure the whole organization in order to more
effectively benefit from data, create new values and finally acquire some of the economic
value that it has created (Fasth et al., 2008). Only when the norm is adjusted to the new
digital technologies and work ethics, the transformation is considered complete.
3.2 Automation and Digitalization

Just as with digitalization, automation is another concept that have been given several
definitions over the years. Another word that is often used when it comes to automation is
robotization, which in this report will be used synonymously. Cambridge University
Dictionary defines automation as “the use of machines and computers that can operate
without needing human control” (Cambridge University Press, 2020). However, the
definition by Fasth et al. (2008) can be found more universal, defining automation as “a
10
technology by which a process or procedure is accomplished without human assistance”.
This definition allows not only machines and computers to be a part of automation, but
also communication systems and other digital systems that help reduce the need of human
assistance in a process. Consequently, digitalization is an important tool in order to
increase the level of automation in production systems
Due to the definition, automation is not only about transforming manual processes to
automatic ones but also about transforming them into completely autonomous systems
with no need of human assistance, which is what defines a 100 % automatic system or
process. However, the main purpose with automation is to achieve increased system
efficiency, in that regard 100 % automation is not always the best solution. The aim is to
target most appropriate level of automation in each manufacturing situation, rather than
the highest level possible, as a certain mix of machines and human interaction may be the
more efficient solution. (Ten & St, 2015; Tihinen et al., 2017) It may sound surprising that
the level of automation can be “too high”. In fact, excessive levels of automation may
result in weak system performance, (Endsley and Kiris 1995; Parasuraman et al. 2000) as
a result of too complex processes. Complex processes are often more vulnerable to
disturbances, which might decrease the overall production efficiency (Ylipää 2000). It may
also be that production tasks are too unstructured to be fully automized. On the other hand,
if the level of automation is too low production efficiency is not maximized. A low level
of automation could also cause working injuries and sick leaves.
An arrangement where devices and components communicate through a continuous flow

of information is commonly called Machine-to-machine (M2M) interaction, which is
appropriate when tasks benefit from automation. Furthermore, in cases where higher levels
of automations are inappropriate and human interaction is preferable, the arrangement is
called Human-to-Machine (H2M) collaboration. In addition, research efforts are invested
in so-called Machine-to-Human (M2H) communication or “collaborative robotics”. Here,
complex and unstructed manufacturing tasks are performed in collaboration between
advanced specially designed robots and humans. The goal with these highly advanced
technologies is to enable automation for tasks that earlier was preferred to be performed
totally manual. (Rojko, 2017)
11
A commonly used framework for measuring the level of automation is the LoA framework,
which is described in more detail in section 3.5.1. The LoA framework evaluates the level
of automation based on two grounds; one mechanical and one informational, where the
informational part is closely related to digitalization.
3.3 History of Industrial Revolution

To create a better understanding of the concept of digitalization and its impacts it is
important to derive all the way back to its origin. The source of the contemporary concept
can be derived to centuries ago and started with the first industrial revolution. Some basic
components of digital transformation are machinery, electricity, automation and
knowledge. The process from manual manufacturing by manpower to smart mass
production executed by smart machines, operating using own mental power is over two
and a half decade long. The industrial revolution did not only change how companies
produced goods, how people lived and how people defined political issues, it basically
changed the whole world. (Rojko, 2017)
The definition of industrial revolution can be divided into two parts. First, industrial
revolution incudes a large collection of transformations with origin in radical
technological innovations. Second, it infers organizational reforms changing
manufacturing industries, leading to widely established innovations changing the economy
at large. (Gassmann et al., 2014)
The first industrial revolution developed in Britain during late 17th century, followed by
western Europe and United States. Eventually, places such as Russia, Japan and southern
Europe unfolded the concept of industrialization. It is indeed difficult to determine an exact
year when the different industrial waves bursted out, since industrialization occurred
during different times at various places. What could be done is to identify when the
concepts developed and started to become more widespread and in the figure 2, an
overview of all industrial revolutions can be found.
Industry 1.0 is characterized by the implementation of new power sources in the production
processes. Power by humans and animals was substituted by machines driven by fossil
fuels. This resulted in increased human organization, management and coordination that
had never been considered necessary before. The main innovations of this era were steam
12
power and weaving looms driven by power. The steam engine was constructed to extract
energy from heated coal in order to create steam and the power looms did no long need
human assistance as the foot pedals were replaced. The revolution enabled more efficient
manufacturing, but also brought groups of people together and created sense of solidarity.
The steam power discovery was followed by electricity and factory production in late 18th
century, which was the key invention of the second revolution. (Henriette et al., 2015)
The third industrial revolution, also the so-called digital revolution took place a century
after the second and most producing companies could now benefit from mass production,
line production and the importance of automation became more essential. (Tihinen et al.,
2017) During this paradigm Information Technology (IT) started booming and analogue
technology was transformed to digital. Central innovations as integrated circuit chips,
computers, microprocessors, cellular phones and internet transformed the traditional
production and created a foundation for future digitalization. (Rojko, 2017) Industry 3.0
allows flexible production, higher variety of products and programmable machines,
however flexible production in terms of quantity was still a limitation. (Rojko, 2017)
Today the western countries just entered the Fourth Industrial Revolution that originally
emerged in Germany and was provoked by the fast growth of Information and
Communication Technologies (ICT). Central to this era is smart automation of cyber-
physical systems leading to decentralization within the organization and more advanced
data connection systems, which in turn enables higher flexibility within mass custom
production and in production quantity.
Figure 2 History of Industrialization
13
3.3.1 Industry 4.0
Industry 4.0 differ considerably from previous industrial happenings in the history. It is
not just another disruptive technology or yet another industrial revolution. The fourth
industrial revolution is a thrive to change into something unknown and implies using
Industry 4.0 strategy to sustain competitive in the market. The revolution was announced
prior to its implementation and not after it was fully established, which is one main
difference to previous industrial revolutions. (Rojko, 2017).
As mentioned, the fourth industrial revolution was triggered by the digitalization upswing
and development of ICT, but also saturation of the market, which forced the emergence of
new solutions. Production cost have been diminished by lean production and concepts of
just-in-time production and even more by outsourcing production to developing countries
offering lower work cost. (Björkdahl et al., 2018) The new paradigm with robotic, digital
and automatic technologies allows lower production cost in developed countries such as
Sweden and not only in low cost countries. (Rojko, 2017) The main idea is to seize the
potential of new technological concepts such as internet, IoT, integration of technical and
business processes, digital mapping and smart manufacturing, to minimize costs. (Bossen
& Ingemansson, 2016)
However, there are difficulties to identify potential impacts of Industry 4.0 and the
implementation of new technology in the early process. The benefits from industrialization
and digitalization may be recognized centuries after its implementation and some
intermediate steps in the process are required in order to enable later innovations. It is
possible that some steps in the transformation process are nonprofitable at first, even if the
whole solution in the end is a positive investment. A bottle neck in industrial transforms
are to identify the financial gains and the economic impacts, since it takes time to realize
profits from over-time projects contributing to many soft term consequences.
3.4 Steel Industry

The iron and steel industry enable the development of several other industries; heavy
engineering, energy and construction industry (World Steel Association, 2019) and plays
a key role in the global economy. There are over six million people working within the
industry and every two job in the steel sector create 13 more jobs throughout its supply
chain. In 2018 more than 1808 million tons of crude steel were produced, where China as
14
the largest actor on the market alone stood for more than 50 % of the total steel output. A
common global challenge is the large CO2 emissions the production entails. On average
every ton of produced steel yields 1.83 tons of CO2 emissions. (World Steel Association,
2019). The steel industry is a subindustry of the manufacturing industry which in turn is a
subindustry of a larger process industry, as shown in figure 3. The manufacturing industry
covers all manufacturers producing products by converting raw materials or commodities,
often in large scale, for example textiles, machines, equipment etc. While processing is a
broader term and could be defined as series of mechanical or chemical operations to change
or preserve something. Food is for example, processed and not manufactured.
Figure 3 Industry Chart
Steel in particular is manufactured using an alloy of iron and carbon, which sometimes
also includes other alloying elements in order to obtain different characteristics. It is used
in buildings, infrastructures, automobiles, machines etc. Some advantages of steel are, it is
possible to mold it plastically in both cold and hot conditions, harden it in multiple ways,
use alloying elements in order to change the properties of the steel and recycle most of the
materials. There exist three typical variations of steel; carbon steel, low alloy steel and
high alloy steel. Each type of steel holds different characteristics and are used for different
purposes. Furthermore, the variation of steels can be categorized as either commercial
steels with plain carbon and no alloys or special steels produced for special purposes with
different alloys.
15
3.4.1 Production Process
Today there mainly exists two different ways to produce steel and the process varies by
the raw materials and the furnaces process. The traditional way to produce steel is to use
iron ore and a blast furnace. However, today’s technology also allows us to reuse scrap
steel. When using scrap steel in the production process, electric arc furnaces are used
instead, where electricity is forced through an arc enforcing desired result and temperature.
Both methods can be described by the modern steel making process, which can be divided
into six steps and in a primary and secondary steel making phase. Please find illustration
of both methods in figure 4 below.
The first step is iron making where iron ore is reduced using coke and coal in a blast furnace
with high temperature, this way molten iron is produced. At this stage there are still many
impurities in the molten iron, so a smaller amount of scrap steel is infused. In the primary
steel making phase, oxygen is forced into an LD-converter, causing a temperature rise to
1700 Celsius degrees (World Coal Association, 2019), which reduce the carbon impurities
by 90 % and the molten iron is transformed to molten steel. (Melfab Engineering, 2017)
This process in particular gives rise to a high amount of carbon dioxide emissions. (SSAB,
2020) When only using scrap, the two first stages will be reduced by an electric arc furnace,
since the scrap steel already holds some of the desired characteristics. Following step is
the secondary steel making where more specific properties of the steel is determined, in a
so-called ladle, by de-oxidation, alloy addition (boron, chromium, molybdenum etc.) and
other operations ensuring the exact quality. (Wikipedia, 2020) Next in the casting, the
molten steel is tapped into cooling molds, drawn out and finally cut into desired length,
before completely cooled. When it is fully cooled it is transported for primary forging,
where the casts are formed in a hot rolling process. Here, small defects can be corrected,
and the optimal quality is ensured. Sometimes a secondary forming is necessary and
operations like coating, thermal treating, pressing etc. is performed in order to get the
correct shape and finish.
16
Figure 4 Steel Production Process
In this paper, the main focus will lie on potential digitalization projects in the last steps of
the steelmaking process, i.e. continuous casting, rolling and coating.
3.3.2 Current State

Even though the steel industry, as a part of the process industry, lies far behind the
automotive and traditional manufacturing industry when it comes to digitalization, they
see high potentials with future transformation projects (Björkdahl et al., 2018). The process
industry has in general more strict manufacturing processes and products with less
flexibility- Therefore, the current focus is to digitalize the value chain rather than the
product itself. Research believe that more focus on surveillance, control and optimization
of value chain can result in higher resource efficiency in energy, environment, transport
and raw material management. The Swedish steel industry is currently focusing on higher
value-added products (Björkdahl et al., 2018) where they compete with production
efficiency and capacity. Thus, the greatest driving force in the steel industry is internal cost
saving and the goal is to reach a more even production flow with higher automation levels
through digitalization. Even though the investments are extensive, many companies have
a positive believe that these investments are profitable and look forward to implementing
concepts of smart manufacturing such as auto corrections and Machine to Machine
communication (M2M) (Murri et al., 2019).
Today the steel industry is in general very energy intensive. However, the European steel
industry is characterized by modern energy and emission efficient plants and make fast
17
progress towards a carbon dioxide free production (Bossen & Ingemansson, 2016). With
Big Data analysis the steel industry can expect a more energy efficient production with
only small efforts (Björkdahl et al., 2018). Currently, most actors on the steel market have
a connected melting process where they can collect measure points such as temperature.
Some also take measurements for quality and productivity related factors in order to
understand the relation between the production process and material characteristics, and
thereby developing products with higher quality. Another company highlights the
importance of the interface between the raw data and the user and most companies collect
large amounts of data but does not utilize it in a user-friendly way. One example of such
user-friendly interface is a mobile app that shows the current states of different furnaces.
(Murri et al., 2019)
Downstream production areas such as rolling and coating are the processes most affected
by digitalization and Industry 4.0 (Neef et al. 2018). The technical barriers are considered
less problematic than the organizational issues. As a conclusion, the main challenges are
legacy equipment, long payback time, data security and uncertainty about impacts on jobs.
Another challenge is the aging of workforce where many of the existing employees
possesses great industry knowledge, but on the other hand lack digital knowledge like
programming skills. (Gassmann et al., 2014) The resistance to change, learning and
collaborate is giving the companies a hard time to get through the digital transformation
without replacing parts of the staff. In a modern rolling production, using cameras and
other digital solutions as decision support, the employees are younger and hold both
computer and multilanguage skills. Meanwhile the traditional rolling production facility
consist of higher average age of employees where every individual possesses skills that
are harder to pass forward onto new employees.
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3.5 Assessment Methods
Most companies have a large number of potential projects competing to be implemented.
Project proposals usually grows from multiple levels; top management, head of
departments and people working on the floor all possesses creative ideas about how to
improve the business. In order to make well-grounded decisions about which of all projects
to initiate, they need to be evaluated on a structured basis. As this report aims to take both
quantitative and qualitative effects into account, the investment model consequently needs
to consist of two main analyses; one quantitative and one qualitative analysis.
The quantitative analysis includes aspects that could be described in monetary terms while
the qualitative analysis includes more vague aspects that are more difficult or even
impossible to explain in monetary terms. In general, a variety of both monetary and
nonmonetary objectives may influence a decision, which is the reason why qualitative
analyses are usually developed side by side with economic costs and benefits analysis to
include both aspects. As this thesis consider digitalization projects specifically, it is in
addition interesting to evaluate the change in level of automation, see section 3.2 for
explanation of how automation and digitalization are related. Theories building the
foundation of the quantitative and qualitative analysis as well as how level of automation
can be measured, will be explained in the sections below. These theories form the basis for
the investment model developed in this thesis.
3.5.1 LoA Framework

One common framework for evaluating the level of automation in manufacturing
processes is the Level of Automation (LoA) framework that was developed in the
DYNAMO project between 2004 and 2007, carried out in association with Chalmers
University of Technology, Jönköping School of Engineering, and IVF Industrial Research
Corporation. The LoA framework is a tool to measure and get an overview of the level of
automation and current information flows in production systems. It is built on a concept
assuming that tasks in manufacturing include both mechanical and cognitive activities. The
mechanical activity refers to the physical part of the task and are represented by the
Mechanical LoA, while the cognitive activity refers to the data and information exchange
which is represented by the Information LoA. The reference scale for different LoAs is
ranging from 1 – 7, corresponding to different levels of automation ranging from totally
19
manual to totally automatic. An overview of the LoA reference scale is shown in table 1
below. (Granell et al., 2007)
Table 1 Levels of Automation Reference Scale
To enable better understanding of the different levels in the reference scale, a short
explanation of each level will be given. Starting with Mechanical LoA, level 1 suggests
for tasks to be “totally manual”, meaning that it is performed entirely by man-force. For
instance, this level could apply to manual lifts in production. The second level, level 2,
refers to “static hand tool” which for example could be about using a screwdriver to tighten
a screw. Level 3, “flexible hand tool” would instead be the level of automation if a wrench
was used for this matter, as it can be set in different ways and thereby perform a variety of
operations. Next level, level 4, says “automatic hand tool” and if following the same
example as for previous levels, this level suggests using an electric screwdriver to complete
the task. Another example of level 4 would be usage of a crane. For level 1 – 3, the work
has been performed manually by man-force but with more or less helpful and flexible tools.
From level 4, tasks are supported by some sort of automation, meaning the task no longer
need manpower to execute the main task. Level 4 refers to manual work performed by
using automatic tools, e.g. usage of an electric screwdriver. Level 5 refers to “static
workstation”, which implies usage of static machines constructed for one single operation.
For instance, a lathe or an automatic crane. The sixth level, “flexible workstation”, applies
to when a flexible machine is used, with the ability to perform a variety of tasks. To
exemplify, this level includes machines that could produce products with different lengths
20
or thicknesses. To reach level 7, a totally automatic machine is used to perform a task, that
automatically adjusts its settings depending on the situation. AI, M2M and big data are
inevitable technologies that need to be considered, in order to reach LOA above 6.
Continuing with Information LoA, the first level “totally manual” applies to when the
person performing a task finds their own way of working without any informational
exchange. In other words, when there are no instructions available for how a task should
be performed. One example of this level is when the quality of a painted sheet of steel is
inspected with a person’s eyes only, without any specified routines for how it should be
assessed. Moving on, level 2 is when information is used in a decision giving matter, where
the person performing a task receives suggestions on the order of actions. The
informational exchange focuses more on mediating what should be done rather than how.
One example of this level is when employees conduct their work based on a working order
that suggests them what to do. The third level, “teaching”, is when the worker receives
instructions for how a task should be performed, for example by checklists or manuals.
Next level, level 4, is explained as “questioning” and can be considered the first level of
human-machine interaction. This level applies to when a system or machine generates
questions in order to ensure that correct settings are selected. For instance, it could be that
an employee changing the settings in order to produce another product type, whereupon
the machine asks “do you really want to change from X to Y?” before resetting production
settings from X to Y. Level 5 refers to “supervising”, referring to all kinds of alarm systems
and other control systems that calls for workers attention if an abnormal situation arises.
The sixth level is when the technology is “interventional” and takes its own command if
necessary. An example could be using sensors for automatic control and adjustment of a
task. The highest level, level 7, is reached when a system is totally automatic with no need
of human interaction.
On a higher level, there are two main steps when using the LoA framework. The first step
is to measure Mechanical LoA and Information LoA for different tasks in production in
order to define the current state of automation. The measurement process for determining
levels of Mechanical LoA and Information LoA for a specific task in production will not
be considered in this paper. Please find the report “Measuring and analysing Levels of
Automation in an assembly system” by Fasth et al. (2008), which gives a more detailed
explanation about how measurements should be done.
21
The second step is to assess relevant minimum and maximum values of LoA for each
operation. By determining relevant values, an area of automation potential can be defined,
to which observed LoAs from on-site measurements should be compared (Björkdahl et al.,
2018). Example of such area could be found in the Mechanical-Information-LoA diagram
in figure 5, where the vertical and horizontal lines correspond to relevant minimum and
maximum values for Mechanical and Information LoA respectively and the black spot
represents the observed value. The defined area forms a square, which are called “Square
of Possible Improvements” (SoPI) and sets the boundaries for possible automation
improvements, with regards to a company’s requirements. SoPI can indicate how to take
advantage of the automation potential and help assessing the current state with regards to
its future potential.
Figure 5 Mechanical-Information-LoA Diagram Showing SoPI
3.5.2 Discounted Cash Flow

An economic valuation of an investment is the analytical process of determining its current
or expected worth. There are various methods for doing so, where each may result in
different valuations. Some methods include looking at past and similar investments to
estimate an appropriate value. However, since digitalization projects in general have little
or very limited historical data to rely on for comparison with future projects, the discounted
cash flow (DCF) method is considered most suitable for the case of this report and form
the basis of the investment model that is aimed to be developed.
22
The discounted cash flow (DCF) method is a commonly used valuation method used for
valuating a company, a project or an asset, that is suitable for both financial investments
as well as for industry investments. This method takes the time-value of money in account
and is therefore appropriate for any situation where money is spent in the present with
expectations of receiving money in the future. The valuation is based on finding the present
value of the expected future cash flows of an investment, which is done by using a discount
rate. When conducting a DCF analysis the investor must estimate future cash flows and an
appropriate discount rate. Please find equation (1) for DCF calculations where DCF =
discounted cash flow, CF = cash flow and r = discount rate. (Chen 2020a)
"#! "#" "##

!"# = + + ⋯+ (1)
(1 + ()! (1 + () " (1 + ()#
The value of an appropriate discount rate can vary depending on the situation but needs to
be sufficient enough to cover the required rate of return of an investment, when taking risk
and time-value of money in consideration. One discount rate that is commonly used by
companies is the weighted average cost of capital (WACC). WACC is the overall required
return of a firm, calculated by its cost of capital proportionally weighted between the two
categories equity and debt. However, any discount rate could be used in the DCF analysis,
as long as it is an appropriate reflection of the required rate of return (RRR). (Chen 2020a)
Based on the DCF method, different perspectives can be used for comparing investments
with each other as well as for deciding which ones to pursue. Some commonly used
analyzes are net present value, internal rate of return, payback period and return on
investment which will all be given further explanations in the below sections.
Net Present Value

The general perception is that assessing an investment based on its net present value (NPV)
is very effective when it comes to evaluating projects as it takes the time-value of money
as well as risk in consideration NPV is calculated by summarizing the discounted future
cash flows, which is the present value of future cash flows, and subtracting the initial
investment cost. If the present value of cash flows is equal to or exceeds the initial
investment cost, the investment should be considered. In other words, a positive NPV
23
indicates for the investment to be profitable, while a negative NPV indicates for it to result
in net loss. The main drawback of NPV analysis is the uncertainty of estimations about
future events that may not be reliable, e.g. expected future cash flows. Also, it is most
suitable for evaluating one single project or for comparison of similar projects. Therefore,
this analysis is not appropriate for comparing investments with large differences in terms
of e.g. lifespan and initial investment cost. Please find equation (2) for NPV calculations
where NPV = net present value, CF = cash flow, r = discount rate and C$ = initial
investment cost. (Kenton, 2019)
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-./ = + + ⋯ + − "$ (2)
(1 + ()! (1 + ()" (1 + ()#
Internal Rate of Return

Internal Rate of Return (IRR) is the discount rate contributing to a net present value, of an
investment, equal zero. Because of the nature of the formula, IRR cannot be calculated
analytically and must instead be calculated by using software programmed for this matter.
IRR refers to the minimum required rate of growth an investment needs to generate, in
order to be a net positive investment. The internal rate of return rule states that if IRR is
greater than the minimum required rate of return, the investment should be carried through
and vice versa. This analysis can be used for comparing all kinds of projects with each
other. When comparing projects based on IRR analysis, projects with the highest
difference between IRR and RRR should be pursued. However, IRR can be misleading if
used alone and is therefore recommended to use as a supplement to for instance NPV.
While NPV analysis indicates the amount of value an investment creates to the company,
IRR analysis indicates how fast the value is earned. Please find equation (3) for IRR
calculations where NPV = net present value, CF = cash flow, r = internal rate of return and
C$ = initial investment cost. (Hayes, 2019)
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0 = -./ = + + ⋯+ − "$ (3)
(1 + ()! (1 + () " (1 + ()#
Payback Period
Payback period (PB) analysis calculates how long time it takes for an investment to be
paid back. In other words, the payback period is the amount of time it takes for an
24
investment to reach its breakeven. This is calculated by dividing the initial investment cost
with the average annual cash flow generated from the project, without discounting cash
flows to their present value. PB analysis is widely used mainly because of its simplicity.
Consequently, the simplicity of the method also makes it the least accurate (Kenton, 2019).
The main reason for this is that PB does not take the time-value of money or risk in
consideration (Wilkinson, 2013). In general, shorter payback periods indicates for more
attractive investments and vice versa. lease find equation (4) for PB calculations where CF
= annual cash flow and C$ = initial investment cost.
"$
.4 = (4)
"#
Return on Investment
Return on investment (ROI) measures the efficiency of an investment and is usually
presented as a percentage. It is calculated by subtracting the current value of an investment
with the initial investment cost and dividing the difference with the initial investment cost.
A positive ROI indicates for a profitable investment and a negative ROI a loss. The higher
the ROI, the more attractive the investment opportunity. This analysis is suitable for
comparing a variety of project with each other. Please find equation (5) for ROI
calculations where NPV = net present value, CF = cash flow, r = internal rate of return and
C$ = initial investment cost. (Chen, 2020b)
"#! "#" "##

+ + ⋯+( − "$
(1 + ()! (1 + ()" 1 + ( )#
678 = (5)
"$
3.5.3 Multicriteria Analysis

Most individuals are familiar with quantitative techniques for valuations but are less
familiar with qualitative techniques. A qualitative valuation of a project aims to address
qualitative aspects by assessing qualitative factors relevant for the implementation of it. A
commonly used method for assessing qualitative aspects is conducting a Multicriteria
Analysis (MCA). MCA is a description for any structured approach used to evaluate
different options based on their nonmonetary impact, allowing for decision makers to
include a full range of for example social, environmental and technical perspectives when
25
making a decision. It has its origins in decision theory and has been successfully used in
various fields (Rosén et al., 2009).
The basic concept of MCA is to assess how well different alternatives fulfill one or more
desired objectives, which are described as a number of criterions identified for the analysis.
Alternatives are evaluated based on to what level they fulfill the criterions and summarized
in order to enable an overall judgement. Some examples of MCA methods are multi-
attribute utility methods, analytical hierarchy process (AHP), outranking, non-
compensatory methods, linear additive methods and fuzzy set theory. The qualitative
analysis in the investment model will be based on a linear additive method, which is maybe
the most widely used MCA method (Communitites and Local Government, 2009). Linear
additive analyses mean that each criterion is weighted and graded in order to calculate a
final score in terms of a weighted sum. On a higher level, conducting a linear additive
MCA could be explained by the following five steps;
1. Identify criterions from which alternatives will be assessed
2. Assign weights to each criterion
3. Assign scores to each criterion for alternatives
4. Calculate a weighted sum of the total score
5. Conduct sensitivity analysis
All identified criterions should be independent of each other. If there are high dependency
among two criterions, they run the risk of giving some aspects greater impact than others
because of double counting their contribution in the analysis. Alternatives are judged based
on the criterions through a scoring system. One difficulty with using this method is
deciding how to set weights on criterions as no general rules exist for this judgement,
which is therefore highly subjective and dependent on the stakeholder interest. Because of
the uncertainty of the determined weights for each criterion, a sensitivity analysis should
be conducted.
The main advantages of conducting an MCA is that qualitative aspects can be considered
in a comparable and structured way, adding further support and transparency to the
26
decision-making process. It is also a flexible method where criterions are not locked
forever but can be changed for evaluation of different alternatives. However, criterions
have to be consistent to allow for comparison between project. In other words, they have
to be assessed from the same criterions in order to be comparable. A risk of using the MCA
methods is that results might be interpreted as scientific, while the outcome in fact is highly
subjective. Different variations of MCA methods can also give different results, which
further may lead to uncertainty among decision-makers about which method is best for a
particular case. Another important thing to keep in mind when developing an MCA
framework and identifying assessment criterions is to make sure the requirement for time
and manpower resources for the analysis are reasonable (DETR, 2000), as the level of
complexity can be adjusted depending on how criterions are selected. Conducting an
analysis with a large number of complex criterions will generate a more detailed decision
support but also consume more resources, while a smaller number of less complex
criterions will generate a simpler decision support but require less resources.
27
4 Effects of Digitalization
This chapter explains the approach from which effects of digitalization are identified and
describes the underlying frameworks. Potential effects are identified in the existing
literature based on the defined approach.
4.1 Approach
In previous studies, a number of general conclusions have been drawn about digitalization
within manufacturing companies. As mentioned earlier in this report, studying the existing
literature shows that effects of digitalization have been identified, but in rather vague or
loose terms without considering quantitative aspects. However, it is interesting for the
scope of this project to analyze what those effects are and how they could impact a
company. The existing literature have been analyzed from an Internal Efficiency
perspective, with regards to digitalization at Process level, only including effects that lie
within the area of a business internal functioning.
Tihinen et al., (2017) identify four levels where digitalization could be implemented;
Process level, Organization level, Business Domain level and Society level, see illustration
in figure 6. Digitalization at Process level is defined as “the adoption of digital tools and
streamlining processes by reducing manual steps” and is directly connected to the
manufacturing stage of a firm. At Organization level, digitalization is about “offering new
services and discarding obsolete practices and offering existing services in new ways”,
having more focus on how new services can be developed. The definition for digitalization
at Business Domain Level is when it is “changing roles and value chains in ecosystems”,
focusing on the interplay between actors in the value chain. Lastly, Society level is when
digitalization changes social structures. This report focuses on digital implementations at
Process level, centering around the steel manufacturing processes. Digitalization at other
levels will not be considered explicitly as they lie outside the scope of this project.
28
Figure 6 Levels of Digitalization
Tihinen et al., (2017) also state that the effects of digitalization within a firm can be studied
from different viewpoints, namely; Internal Efficiency, External Opportunities and
Disruptive Change. Only by studying digitalization from all three viewpoints, one could
fully understand the whole picture of how digitalization affects a business, see figure 7.
Internal Efficiency is about the “improved way of working via digital means and re-
planning internal processes”, focusing on effects within the internal functioning of a
business, keeping the external processes unchanged. Thus, these impacts are affecting how
things are being done rather than what are being done. External Opportunities include “new
business opportunities in existing business domain”, i.e. the emergence of new services,
customers etc. as a result of digitalization. Here, changes in the value offer of a business is
considered. Lastly, Disruptive Change covers changes from digitalization that causes
completely new business roles compared to earlier ones, meaning that the current business
of a company may become obsolete. In this report, effects of digitalization are primarily
studied from an Internal Efficiency perspective, marked green in figure 7.
29
Figure 7 Viewpoints for Analyzing Digitalization Impact
All effects identified in the literature can be categorized in two main categories;
quantitative, qualitative. Quantitative effects can easily be derived into monetary terms and
contribute to a direct economic impact, in terms of cost savings. Whereas qualitative
effects mainly contribute to an indirect economic impact and are almost impossible to
explain in monetary terms at first sight. Worth mentioning, is that both quantitative and
qualitative effects have an economic impact, however the difficulty to attribute to cost
savings and monetary savings vary at large. Both categories can possibly be quantified in
either monetary or nonmonetary terms. For example, the qualitative effect “work
satisfaction” can be quantified in terms of number of sick leaves, however it is difficult to
see the exact economic outcome.
Furthermore, under each category all identified effects are either seen as positive or
negative. Positive effects include effects from digitalization in production which result in
a positive economic impact for a company, mainly by increasing process efficiency and
thereby decreasing costs per unit. Increased process efficiency is mentioned as the main
aggregated effect from digitalization in almost all papers addressing the topic of
digitalization at process level, for instance in papers by Björkdahl et al. (2018), Goldfarb
& Tucker (2019) and Murri et al. (2019), among others. Negative effects include effects
resulting in negative economic impact for a company, often referring to additional costs.
An illustration of the classification of effects with respect to their category and positive or
negative economic impact is to be found in figure 8 below.
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Figure 8 Classification of Effects
Effects have been identified from the approach that each effect should stand for a distinct
result in production. Yet, some effects have correlations, even if this fact is attempted to
be minimized. When studying the literature, it appeared some papers were referring to the
same consequences but with different words. In these cases, a joint definition or naming
of the effect was decided upon and used in this report, with references to all papers where
the implication of the effect was mentioned. For instance, one effect defined in this report
is named “less production losses”. One paper mention “fewer deviations” as an effect of
digitalization, which means the same thing as “less production losses”. Therefore, “fewer
deviations” has not been defined as an effect of its own in this work and included in the
effect “less production losses”.
4.2 Quantitative Effects

Followed by the definition mention above, this section addresses all the identified
quantitative effects in the literature and gives a more specific explanation of each. In some
cases, examples will be given. However, the identified potential quantitative effects in
terms of percentage can be found in section 4.2.1. Moreover, all positive effects are
assigned with (+), while the negative effects are identified with (-). A summary of all
quantitative effects is presented in figure 9 in the end of this section.
(+) Increased Productivity

Productivity is a common measure for how much value is created per unit input factor, for
instance how many tons of steel is produced per hour. Productivity can increase as a result
from implementing automation and digitalization projects (Herzog et al., 2018). By using
31
digital tools, more advanced production planning is enabled, which in turn can increase
the availability of a production plant and improve capacity use (Björkdahl et al., 2018). An
optimized production flow allows for current production volumes to increase. When
production volumes increase, the production cost per unit decreases as fixed costs in
production are distributed on more units.
(+) Less Production Losses

As a result of adopting digital tools, production losses can decrease on account of more
stable production with fewer deviations (Herzog et al., 2018). One reason why production
may become more stable is because digitalization often reduces the human factor.
Production losses are costly, and digital tools can help detect deviations at an early stage,
which helps preventing from further refining a product that is already outside the quality
reference range. Also, there may be a chance to fix a deviation if it is detected in time. This
way production losses can be reduced, and cost savings achieved.
(+) Shorter Downtime

Production downtime refers to the period of time when production is shut down without
producing any goods or performing any value adding tasks. Downtime can be categorized
into two main categories; planned downtime and unplanned downtime. Planned downtime
is the time scheduled for continuous maintenance during which a system cannot be used
for normal production. This time is mainly used to ensure reliable production and avoid
sudden disruptions. Unplanned downtime is the opposite of planned downtime, referring
to the amount of time production is offline due to unexpected events, such as for instance
power outages and breakdowns.
Digitalization has the ability to limit the amount of unplanned downtime and optimize the
amount of planned downtime. (Murri et al., 2019) The limitation and optimization of
downtime can be achieved by using predictive maintenance, which is further explained
under the effect “More efficient maintenance work” later in this section. Downtime can
also be reduced by digital machines being able to either configure themselves or at least
being configured more efficiently due to digital systems (Björkdahl et al., 2018). In
general, unplanned downtime is more costly than planned downtime.
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(+) Less Misconfigurations of Machines
The occurrence of machine misconfigurations can be limited or even eliminated as a
consequence of digital machines reducing the human factor in the configuration process,
which in turn may reduce losses from manual misconfigurations. Misconfigurations of
machines lead to production losses due to incorrect production, which as stated earlier are
a heavy cost factor in most industries. Misconfigurations also contribute to longer
downtimes as the machines will need to be reconfigured. Digitalization enables for
machines to configure themselves (Rüßmann et al., 2015).
(+) More Efficient Maintenance Work

Minimizing maintenance costs is a big challenge for many industries (Murri et al., 2019)
Maintenance work can be managed more efficiently mainly through the digital concept
predictive maintenance, which is based on remote monitoring of equipment (Herzog et al.,
2018). Better accessibility and quality of production and order data can help optimizing
the scheduling of maintenance work, both in terms of time and frequency. Predictive
maintenance can decrease planned downtime by optimizing continuous maintenance. For
instance, the risk of turning off a furnace due to maintenance work just before an important
order will be reduced. By optimizing continuous maintenance, maintenance done due to
safety reasons only to assure reliability can be minimized as well and instead be performed
when necessary (Arens, 2019). Unplanned downtime may decrease as mechanical devices
can be repaired or replaced proactively in advance instead of after it has broken.
(+) Higher Quality

Higher quality refers to higher product quality enabled by higher production quality. By
implementing reproducible procedures, contributing to less manual steps, decreased
number of deviations and reduced production losses, the quality can be improved (Bossen
& Ingemansson, 2016; Herzog et al., 2018). Higher quality implies increased revenue,
since higher quality products can be sold at a higher price. The economic impact is not
always obvious, but as the quality improves, the company could also face less customer
service matters and complaints, indicating less administrative costs for handling
dissatisfied customers. (Vernersson et al., 2015)
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(+) Less Low-skilled Jobs
One economic benefit from automation of repetitive processes are less low-skills jobs. In
this context low-skilled jobs are not equivalent to low-paid jobs but refers to monotone
jobs with routine tasks. Typical low- skilled activities in industry include manual operation
of specialized machine tools, short-cycle machine feeding, repetitive packaging tasks and
monotonous monitoring tasks. At first, implementation of autonomous system contributes
to decreased low-skilled jobs as the human workers are replaced by robotics. Implying a
decrease in labor cost, which can directly be translated to a cost saving. The fear of the so-
called technological unemployment was already prominent in the early 18th century but
has been proven to be unjustified and wrong (Brånbry, 2016). Even if it seems like low-
skilled jobs are being replaced, there is proof of new job paths emerging; upgrading low-
skilled jobs and new digital low-skilled jobs, . For example, Henning Kagermann (2017)
says that “in the future, workers will be employed less as “machine operators” and more
“in the role of the experienced expert, decision- maker and coordinators”. (Hirsch-
kreinsen, 2017)
(+) Reduced Raw Material Consumption

Another advantage of digitalization is more efficient use of resources, contributing to less
consumption of raw materials. As a result of new digital systems, fewer deviations are to
be expected, meaning more no unnecessary loss of raw material. (Herzog et al., 2018;
Rojko, 2017)
(+) More Efficient Energy Use

Energy can be used more efficiently if production is optimized through digitalization
(Herzog et al., 2018; Murri et al., 2019). By using energy more efficiently, CO2-emissions
are reduced, leading to a greener production. Considering todays’ increasing
environmental awareness, this is an important factor for companies to keep a competitive
market position. Furthermore, electricity costs can be reduced when utilizing new energy
friendly technologies . Bossen & Ingemansson (2016) claim that small adjustments would
lead to significant energy savings for the mining and steel industry.
(-) New jobs

At the same time as low-skilled jobs disappear, new jobs emerge. Automation and
digitalization can create new jobs, particularly within IT and data science (BCG, 2015)
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(Rojko, 2017a). The growing use of connectivity and software to collect data and manage
production flow will increase the demand for employees with new skills. Furthermore, the
European Centre for the Development of Vocational Training (CEDEFOP), expects there
will be over 151 million job openings between 2016 - 2030, with 91 % being created due
to the replacement needs and the remaining 9 % due to new job openings (Panorama, 2018)
New jobs flourish the societies and economies, but for the single company, it is considered
as another labor cost. Consequently, digital systems might bring new expenditures in terms
of new jobs.
(-) Disturbance in Production

There is a risk that the production will experience some turbulence in the transition towards
a digital transformation (Murri et al., 2019). Disturbances might lead to downtimes and
deviations, which is a factor that should be considered when adopting new digital
technologies. The aim should be to maintain a stable production during the transition but
can be difficult depending on the situation. However, production should be kept as stable
as possible at all times. If implementing a new system means stagnant production for
several days or even weeks, the alternative cost should be taken in consideration.
Figure 9 Summary of Quantitative Effects
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4.2.1 Quantified Quantitative Impacts
In the following section, all quantified findings in the literature, stated in a percentage
improvement, are presented. As stated, the number of studies considering quantitative
aspects of digitalization projects are few. However, there are some papers giving
indications for how big the effects could potentially be, which will be addressed below. A
compiled version can be found in table 2, at the end of this section.
- According to Bauernhansl et al., (2016), production costs could decrease by 10 -

30 % as a result from adopting Industry 4.0.
- Tihinen et al., (2017) claims that for a typical automation/IT system, only 20 - 40
% of the total investment is spent on purchasing the system. The other 60 - 80 %
are additional costs arising from maintaining and adjusting the system during its
lifespan, so called upgrade services, which becomes an additional expenditure.
- In a report from McKinsey (2016), it is claimed that predictive maintenance can

help reducing maintenance costs by 10 – 40 % and 10 – 20 % of waste. Operating
costs are also estimated to be reduced by 2 – 10 %. Planned downtime is expected
to be optimized, and unplanned downtime limited with an estimated reduction by
2 – 10 %.
- In another report from Boston Consulting Group (2015), a quantitative analysis of

the impacts from Industry 4.0 in German manufacturing companies was carried
out. The study showed that productivity improvements on conversion costs will
range from 15 – 25 %. Conversion costs include direct labor and overhead expenses
arising due to transformation of raw materials into finished products (Horton,
2019), excluding material costs. When material costs are included, the
improvement instead corresponds to 5 – 8 %. It is predicted that Industrial-
components manufacturers will achieve the highest productivity improvements,
around 20 – 30 %. This report also expects component manufacturers to reduce
labor costs, operating costs and overhead costs by 30 % over five to ten years.
(Rüßmann et al., 2015)
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Table 2 Summary of Quantified Quantitative Impacts
4.3 Qualitative Effects

As mentioned above, qualitative effects are judged to have an economic impact on a high
level but are somewhat more difficult to quantify than the quantitative effects. This section
follows the same structure as previous section and all positive effects are assigned with
(+), while the negative effects are identified with (-).
(+) Shorter Time-to-market

The time required for a product development process, from product idea to finished
product, is often referred to as time-to-market (TTM). Shorter TTM is an effect from more
efficient internal development cycles (Bossen & Ingemansson, 2016) and reduced lead
times (Murri et al., 2019). This helps a company faster responding to dynamic market
demands and change in customer requirements.
(+) Increased Flexibility

Increased flexibility is mentioned as an important effect of digitalization by many authors;
Murri et al. (2019), Herzog et al. (2018), ESTEP (2017), Bossen & Ingemansson (2016),
Rojko (2017), among others. Flexibility can improve by self-organizing cyber physical
production systems allowing for flexible mass custom production and flexibility in
production quantity (Rojko, 2017), making production of small lot sizes economically
37
defensible. Higher flexibility in production can shorten delivery times for specific orders
as it becomes easier to reprioritize in production. Short delivery times is a rapidly growing
customer requirement and is one important competitive advantage for manufacturing
companies (Murri et al., 2019; Rüßmann et al., 2015). Increased flexibility also makes
production of smaller lot sizes economically defensible.
(+) Increased Traceability

Increased traceability is another potential benefit which can be achieved by connecting
ingoing raw materials with products as well as tracing customer orders in the production
flow. In general, manufacturing companies see great benefits with increased traceability.
(Björkdahl et al., 2018). One benefit could be improved customer service by better quality
of, and access to, production data.
(+) Customized Goods

Customizing goods can become economically defensible as a result of digital systems,
allowing for production of smaller lot sizes (Murri et al., 2019). Offering customized
products may help companies target new customers. Shorter TTM is also an enabling
factor for customized goods.
(+) Better Work Satisfaction

Employee work satisfaction can increase through automation of routine tasks, by giving
employees the possibility to develop new skills, focus on more value adding tasks, flourish
their creativity, and last but not least work more time efficiently. (Murri et al., 2019; Ten
& St, 2015). Work satisfaction is also positively impacted by a more friendly and flexible
work environment, which also can be achieved by new digital solutions. (Murri et al.,
2019; Rojko, 2017). For example, as software like CAD becomes more sophisticated, a
production quality engineer can design complex products, test its functionalities and life
cycle, in different digital environment without having to set a foot on the production floor.
(+) Improved Health and Safety of Workforce

In order to maintain the trust between the employees and employers, it is important for the
employers to provide a safe and healthy work environment. Companies violating human
rights or contributing to unethical work conditions can face legal punishments, but
moreover high pressure from social media leading to decreased market shares. By
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implementing collaborative robotics and other digital technologies the health and safety of
a workforce can improve, since the human involvement in dangerous environments
reduces. (Murri et al., 2019).
(-) Re-skilling of current employees

When upgrading the production using new digital technologies, such as sensors to collect
deeper and useful insights in the production, skills of current employees needs to be either
upgraded or replaced. Therefore, it is important to have workers with transferable and
flexible skillsets to stay competitive. Low-skilled jobs are slowly being replaced by
autonomous machines and, while there will be over 1 750 000 job openings for ICT
professionals during the period 2016-2030. Even if the production companies no longer
need an operator to drive a static machine, someone needs to manage; data security,
software upgrades and how to best visualize and make use of the data. As a conclusion,
current workforce will need new competencies in the transition towards a more digital
production process. The re-skilling process may require additional resources for
developing education programs, manuals, etc. The re-skilling process of current employees
is not only costly, but also time consuming. (Murri et al., 2019)
Figure 10 Summary of Qualitative Effects
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5 Investment Model
This chapter contains a presentation of how the investment model is developed based on
three analyses; LoA Analysis, Quantitative Analysis and Qualitative Analysis. The model
is built based on findings from the literature review together with insights from the case
study company, a European special steels producer.
5.1 Conceptual Overview

An investment model was developed based on a combination of existing literature within
relevant areas and the contextual situation at the case study company. The foundation and
overall structure of the model were mainly derived through existing literature. However,
in order to quantify key components and industry specific operations the model was
validated by further insights from a delaminated production section in the steel
manufacturing process. The model aims to evaluate digitalization projects based on three
different analyses; LoA analysis, Quantitative analysis and Qualitative analysis.
The purpose of the LoA analysis is to identify areas with high investment potential based
on current and potential levels of Information LoA and Mechanical LoA. The Quantitative
analysis is a monetary valuation of projects based on the DCF method and cost savings
enabled from change in the five cost driving factors Maintenance, Availability, Personnel,
Quality and Downtime. The qualitative analysis is a nonmonetary valuation based on a
multicriteria approach, taking the many soft term effects from digitalizing into account.
The qualitative analysis is based on the assessment criterions Flexibility, Traceability,
Work Satisfaction, Health & Safety and Re-skilling. A conceptual overview of the
investment model can be found in figure 11. Sensitivity analyses are established for the
quantitative and qualitative analyses in order address the uncertainty in input data. They
generate an evaluation of how sensitive results are to uncertainties in inputs.
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Figure 11 Conceptual Overview of Investment Model
5.2 LoA Analysis

There are two main features of the LoA analysis in the model; firstly, to map the current
state of automation in order to identify subprocesses with high investment potential and
secondly, to evaluate the potential change in LoA by going through with an investment.
By conducting a thorough mapping of the current state in a delimited production section it
is possible the identify a specific area of the production that lags behind the rest with
respect to digitalization and automatization and therefore needs to be examined more
carefully. Examples of production sections at the case study company are for instance
rolling or coating. Each production section consists of a number of subprocesses that needs
to be identified. At the case study company, a subprocess usually refers to one single
operation, for instance a crane or a furnace and is easily defined by the company.
Required input data from the company to conduct the LoA analysis is relevant minimum
and maximum values of LoA as well as current LoA values from on-site measurements for
each subprocess within a production section. Based on the data collection, a visualization
of SoPI can be created, as explained in section 3.5.1. The visualizations for distinct
subprocesses constitute a tool to help the company identify areas with high automation
potential interesting for initiating digitalization projects. For example, a subprocess with
its current LoA close to the maximum values of Mechanical and Information LoA should
be interpreted as less interesting compared to a subprocess with its current LoA far from
the maximum values. The analysis can also help identifying subprocesses that urgently
41
should be considered for digitalization projects if its current LoA value is located close to,
or below its minimum values.
Except from mapping current state of automation, another feature with the analysis is to
visualize the future potential state of LoA as a result of a specific investment. When an
investment is being evaluated, this analysis considers the effect on LoA after the
investment. The user shall determine an investment’s change on Mechanical and
Information LoA, which can be visualized in the SoPI square and easily be compared with
its current state by plotting both the values. In this way, the potential change on LoA
through an investment could be graphically evaluated. LoA values will be maximized
when the potential state lies in the upper right corner of the SoPI square, and a significant
graphical movement in LoA towards that corner can be seen as one contributing factor in
the decision about whether or not to accept a specific project.
Furthermore, a percentage for the level of automation is calculated by the sum of the
current Mechanical and Information LoAs divided by 14 (the maximal sum). A relevant
percentage is also calculated, with the only difference that the sum is instead divided by
the sum of relevant maximum LoA values, which may be lower than 14. The difference
between the sum of relevant maximum LoAs and the sum of current LoAs corresponds to
the investment potential.
5.3 Quantitative Analysis

The quantitative analysis of the model aims to answer whether a specific investment is
profitable or not and to enable economical comparison between different projects. It is
based on a DCF valuation and will evaluate the investment opportunity in terms of NPV,
IRR, PB and ROI which are explained in the literature review, see section 3.5.2. For the
DCF valuation, annual cost savings achieved from an investment are seen as positive
expected cash flows. Investments are the evaluated based on the discounted cost savings
and their initial investment cost.
Five main factors contributing to cost savings have been identified based on a combination
of the literature review and the contextual situation at the steel company. Quantitative
effects from digitalization identified in the literature review have been considered. These
42
effects have been clustered together and customized to make logical sense, due to how cost
savings can be achieved in the steel industry based on the MECE (Mutually Exclusive
Collectively Exhaustive) principle (Minto, 2010). This principle means every factor should
be distinctly different and altogether make a complete whole.
The factors include all identified positive and negative quantifiable effects from the
literature review except Less Misconfigurations of Machines. The reason for this is that
misconfigurations of machines appeared to be a non-existing issue within the steel industry
and was therefore excluded in the model. The matching between findings from the
literature review with requirements of the steel industry was mainly done with help from
interviews conducted with people at the steel company. The five factors can be seen as the
main areas of economic improvements resulting from steel companies implementing
digitalization projects in production, and are identified as;
• Maintenance
• Productivity
• Personnel
• Quality
• Downtime
Cost savings per factor is calculated by determining its current costs and potential costs
after the investment. The difference between the current state and the potential state
constitutes for the potential cost saving. All input values estimated for the potential state
after an investment are given three different cases; base case, best case and worst case.
This apply to all input values that require estimation of future values after implementing
the investment. Consequently, the DCF analysis will give three different outcomes
depending on which of the cases that is considered.
Next step was to break down each factor into its value drivers and identify which costs
belong to which key factor, which was realized by very supportive coworkers possessing
in-depth industry specific knowledge. The top management provided conceptual ideas and
general information about the production process, while the financial division supported
43
with figures and specific costs referred to the production process. An explanation of how
each factor is broken down to costs and how current and potential states are calculated are
explained below.
5.3.1 Initial Investment Data

All investment models require initial input data. Many future calculations are dependent
on these initial input values and are therefore playing a fundamental role in the investment
analysis. For example, initial investment cost, time horizon etc. are crucial factors to
generate reliable and accurate results. Except for these factors, the investment model asks
for data like; utilized production hours, production volume, replacement time, replacement
costs, upgrade service costs and replacement time. Lastly, the user is asked to give the
discount rate for the project, which can affect the outcome of the analysis considerably.
The first input is the initial investment cost, which varies depending on the characteristics
of the project. The investment cost for a strategic project is straight forward. As strategic
investments are completely new solutions implemented as an expansion to existing
solutions, the entire initial investment should be accounted for in the calculations. The
purpose of these investment is usually to generate higher production efficiency or create
new revenue streams. On the contrary, if current equipment becomes obsolete and needs
replacement, it can either be replaced by the exact same equipment or a new upgraded
equipment using new digital technologies. Hence, the initial investment for replacement
projects, with new digital solutions, should for most parts be lower than strategic projects.
In this case, only the difference between the cost for new upgraded equipment and the cost
for new equipment with old solution, should be accounted for in the initial investment cost.
In the model Initial investment cost is divided in three categories; initial investment cost
(strategic), initial investment cost (replacement) and initial investment cost, where the
replacement part accounts for the cost from a simple replacement with no upgraded
technologies, while the strategic part includes cost related to an investment in a new
upgraded equipment. Ultimately, all calculation in the model are based on the initial
investment cost, which is the difference between the other two categories according to the
description above.
Second input value is lifetime, referring to the number of years the new investment is
expected to generate cash flows. To continue, the third value asked for is, utilized
44
production hours, meaning number of hours the production is running on a yearly basis.
Upgrade service costs is next input value and accounts for continuous costs associated with
the equipment or software, i.e. license cost for software. Furthermore, it is vital to know
the replacement time or replacement cost, which is the time/cost for implementing the new
equipment. During this time, the production cannot proceed and results in a alternative cost
affecting the investment calculation negatively. Lastly, production volume on a yearly
basis and the discount rate should be inserted and thereby complete the initial investment
data. Please find illustration in section 6.3, figure 12.
5.3.2 Cost saving factors

Maintenance
The first cost saving factor is Maintenance. This factor includes the identified effect More
Efficient Maintenance Work from the literature review. At the case study company, costs
for maintenance is a heavy post where small improvements could result in high financial
gains. Maintenance includes expenses for repairs, replacements and continuous
maintenance. The company divides their maintenance work in three different categories;
Internal Maintenance, Additional Internal Maintenance and External Maintenance.
Internal Maintenance includes material costs for materials with regards to repairs and
replacements performed by the company’s own personnel. However, personnel costs and
alternative costs in terms of lost production values are not included in this category. The
reason for this is that personnel costs are covered by Additional Internal Maintenance and
lost production is accounted for in the cost saving factor Downtime, which will be
described later. Cost savings due to Internal Maintenance are calculated by knowing the
current annual material cost for maintenance as well as the size of the savings that could
be achieved due to the investment, expressed in monetary terms. Internal Maintenance
could for instance decrease if old machinery is exchanged with new one which does not
have as many breakdowns, and therefore not as many replacements of devices. The
material costs for replacements that can be eliminated as a result of the new digital solution
shall be seen as the potential cost saving.
Additional Internal Maintenance includes the cost for own personnel working extra hours
due to maintenance reasons. This category does not cover maintenance performed during
45
normal working hours. The cost for Additional Internal Maintenance is calculated by
knowing the cost for an extra working hour multiplied by the total number of extra working
hours for internal maintenance during a year. Savings can be calculated by estimating how
much the annual number of extra working hours for internal maintenance may decrease.
For instance, the number of extra working hours may decrease as a result from less
breakdowns when new machinery is implemented.
Lastly, External Maintenance includes maintenance work performed by external actors.

The cost for external maintenance includes costs for both material and personnel. In
general, external maintenance is more expensive than internal maintenance due to higher
personnel costs. Invoices from performed external maintenance presents a total invoice
value without separating material and personnel costs. By estimating how much the yearly
external maintenance cost will decrease in SEK due to an investment, savings can be
calculated. For instance, there might be one sort of breakdown that is usually fixed by
external players that may be performed less frequently or not at all as a consequence of the
investment.
The annual maintenance savings are calculated by summarizing the yearly savings for
Internal Maintenance, Additional Internal Maintenance and External Maintenance. The
yearly savings for each category is calculated by subtracting the potential cost from current
cost, as explained.
Productivity
Productivity is the second cost saving factor and includes the effects Increased
Productivity and More Efficient Energy Use from the literature review. Productivity
possibly allows for production volumes to increase if later production flow has enough
capacity. However, if this is achieved, the consequence of increased production volume is
twofold.
Firstly, energy for driving the machines can be used more efficiently. At the case study
company, gas, oil and electricity are the energy sources driving the production.
Consequently, fixed operation costs can be distributed on more units and the cost per unit
will decrease as a result of increased availability. Digitalization projects can for instance
increase availability by implementing optimization programs to better utilize capacity. One
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example would be to invest in an optimization program to optimize the filling in an oven,
which would increase the degree of filling which is the same as increasing availability in
this specific case. By knowing the current operation cost and production volume, the
current cost per ton can be calculated. The increased production volume can be calculated
by estimating how much availability will increase from the digitalization project. Dividing
the fixed operation costs with the new production volume will give a potential cost per ton.
Cost savings per ton is calculated as the difference between current cost per ton and
potential cost per ton. However, this will not affect the annual availability savings since
the fixed operation costs for the company will be the same after an investment.
Secondly, the production will create more value during a year due to increased
productivity. The increased value of steels produced is seen as an additional income, e.g.
a positive cash flow, in the model. By estimating the increase in production flow and
knowing the value for each produced ton, the annual value of additional steels produced
can be calculated. The increased production volume multiplied with the value of one
produced ton equals the yearly availability income and is considered a positive cash flow
in the analysis.
Personnel
The third cost saving factor is Personnel, which is measured in number of FTEs, which as
mentioned stands for full-time equivalent. The number of FTEs an operation requires refers
to the number of full-time employments needed. 1 FTE is equivalent to one full-time
worker while 0.5 FTE is equivalent to one worker with a part-time employment of 50 %.
FTE includes the positive effect Less Low-skilled Jobs and the negative effect New jobs.
When an investment is being considered, the change in required personnel for the
subprocess should be estimated. A digitalization project might lead to a reduced number
of FTEs for one task but may create a new job that requires personnel. Therefore, what is
interesting is the net change in FTE after considering both reduction and creation of
working tasks. Historically, reducing the number of FTEs in production has been the main
initiative for increasing the level of automation at the case study company.
Savings due to FTE reduction are calculated by determining the total personnel costs in
the current state and potential state by multiplying the cost per FTE with the number of
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FTEs for current and potential state respectively. The difference between current state and
potential state after an investment corresponds to the yearly cost saving.
Quality
Quality is the fourth factor contributing to cost savings and is in this study referring to
production quality. This factor includes the positive effect Less Production Losses and
Reduced Raw Material Consumption from the literature review. Reduced production
losses are a possible result of digitalization enabling for smoother production with fewer
deviations. In other words, if deviations decrease; deviation costs will go down and
production quality increase.
Deviations are more or less costly depending on their nature. There are two kinds of
deviations at the case study company; jettison deviations and reprocess deviations. Jettison
deviations are the most expensive ones and refers to deviations where things in production
have gone completely wrong and the whole unit needs to be discarded. The cost for jettison
deviations is the cost of production until jettisoned, minus the scrap value. In other words,
this cost equals the accumulated value created by all earlier value adding processes in the
production flow, except the value that that will remain when scrapped. Reprocess
deviations on the other hand, are not as expensive as jettison deviations and refers to
deviations where production have gone wrong but can be restored by reprocessing the unit.
For each subprocess, there are a limited number of possible reprocesses, i.e. painting. The
cost for reprocessing only includes cost for the reprocess operation and do not take
alternative costs, like taking time and capacity from original production, in consideration.
The cost per ton for jettison deviations as well as for reprocess deviations are known by
the company and also how many tons on an average each deviation holds. By estimating
how much deviations could decrease if a digitalization project is initiated, current and
potential deviation costs can be calculated. Quality savings are calculated as the difference
between current deviation costs and potential deviation costs.
Downtime
The fifth and final factor identified to generate cost savings is Downtime, simply including
the positive effect Shorter Downtimes. There are three different kinds of downtimes at the
company; planned downtime, unplanned downtime (normal) and unplanned downtime
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(bottleneck). Planned downtime refers to downtime due to scheduled maintenance work.
Unplanned downtime (normal) is caused by deviations that have no noteworthy effect on
the remaining production flow, while unplanned downtime (bottleneck) is caused by
deviations that affect later production flow. The cost for Unplanned Downtime (normal)
does not include alternative costs from lost production later in the production flow.
However, alternative costs from lost production in the remaining production flow are
included if the activity represents a bottleneck. The literature review states that unplanned
downtime is more costly than planned downtime. This applies to the case study situation
as well; the standard hourly cost per downtime is identical in both cases, but the number
of downtime hours varies. Consequently, the total cost for unplanned downtime is higher
than for planned downtime.
By knowing the cost per hour for the different categories of downtime, and the yearly
average hours for each one, current downtime costs can be calculated. Potential state is
calculated by estimating how much each downtime category could decrease due to the
investment.
5.3.3 Discount rate

As described in the literature review, discount rate is a manual input by the investor,
usually represented by the RRR and WACC. For digitalization projects the discount rate
is subjective and reflects the specific company’s RRR, commonly predetermined by the
top management team. As many know, DCF models are very sensitive to the chosen
discount rate. Thus, the RRR in the investment model will be separated into low, middle
and high, in order to detect how the result varies depending on RRR. The user chooses a
relevant RRR as input for the middle case, then the high and low case are directly
calculated as the middle case, plus and minus one percent respectively.
The case study company distinguishes between replacement projects utilizing new digital
technologies and new digital strategic investments. A normal replacement project of
obsolete equipment does not require any return, as it only replaces existing equipment and
performs the exact same operations. In comparison, a new digital strategic investment has
a fixed RRR of 14 %. Consequently, the RRR of replacement investments with new digital
technologies and solutions are usually somewhere between 0 % and 14 %.
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5.3.4 Sensitivity Analysis
In order to identify how sensitive the economic KPIs NPV, IRR, ROI and PB are to the
variation of input cases in the quantitative analysis combined with different variations of
discount rate, a sensitivity analysis has been conducted. We aim to examine how the
uncertainty in the output can be allocated to two different sources of input. If a small
variation in discount rate or the chosen case contribute to big fluctuations in output,
impacting the final decision making, then the investment model is highly sensitive and
should be used with caution. In the case where all variations of inputs give the same output,
the economic impact of the considered project is more certain. In the other cases where all
the different variations of input leads to mixed decision-making incentives, the precaution
principle should be considered.
Using the sensitivity analysis, one can test the robustness of the result, get better
understanding of the correlation between input and output, and easily identify errors in the
model. Based on these insights, the model can be simplified by removing redundant parts
of the model structure once the user identified the inputs that have no effect. Moreover,
input values that create significant volatility in output should be carefully analyzed in order
to improve the robustness of the model. This framework should be used as an indication.
However, it is up to the user how big impact the risk from the mathematical model should
have on the final decision making, contra the qualitative effects and other risks associated
with the project.
This sensitivity analysis is based on the simple model called one-at-the-time (OAT), where
one factor at the time is varied and analyzed while holding the rest of the factors constant.
In this specific model there are only two different factors considered; case and discount
rate, as mentioned above. A basic assumption in this model is that each of the parameters
should be somewhat uncorrelated. The advantage of OAT is that all changes in output can
be ascribed to variation in one specific factor.
The sensitivity analysis is divided into four identical matrixes where all KPIs are
represented in one matrix each. The vertical axis in the matrixes represents the first factor
“case” which in turn is represented by three variations; base, best and worst. The different
cases can be chosen in the quantitative analysis, where base case represents the most
expected scenario and correspond to basic input values for all cost drivers identified under
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each cost saving factor; maintenance, availability, FTE, quality and downtime. As the
assumption may vary, a minimal and a maximal value for each entry should be estimated.
The best case represents the highest (max) potential value possible for each cost driver and
reflects an optimistic belief of project outcome. Lastly, the worst case is based on the
lowest (min) potential value possible for each cost driver and reflects a precautious
approach. On the horizontal axis three different variations of discount rate (WACC);
middle, high and low, represented in numbers can be found. The middle case is based on
the actual discount rate given by the case study company, which is adjusted by plus and
minus one percent for respective case. This shows how sensitive the outputs are to changes
in discount rate. An illustration of the sensitivity analysis can be found in section 7.2.1
under results.
Furthermore, the analysis is complemented with a summary showing the average, median
and standard deviation for each KPI. By logical reasoning, the median will always be the
base case combined with the middle discount rate, which is considered as the most likely
outcome. A smaller standard deviation shows lower volatility in output based on the
different variations of input and a specific decision should not depend too much on
different assumptions made in the model. Therefore, lower standard deviation implies a
more reliable outcome.
5.4 Qualitative Analysis

The qualitative analysis aims to evaluate the positive qualitative contribution to the
company as a consequence of implementing a digitalization project. It is built based on the
qualitative effects identified from the literature review, which are potential effects from
digitalization that does not explicitly refer to specific costs and are thereby difficult to
quantify in monetary terms. Instead of deriving an economic outcome of these effects, the
qualitative contribution is concretized through an MCA approach, where a linear additive
method is chosen to form the basis of the analysis. Some modifications to the “general”
linear method have been done due to the fact that this model aims to evaluate different
kinds of project and not only several alternatives for solving one single problem. Therefore,
the five steps defined in the literature review have been modified and the method used in
this model instead contains of seven steps, where step number two “decide relevance for
each criterion” and step number 6 “identify and calculate indexes” is added as a
51
supplement in order to enable a more nuanced evaluation. This modification is inspired by
others work; indexes are for example calculated in the works by DETR (2000) and Rosén
et al. (2009) among many others. Furthermore, a relevance function as well as indexes
were used in the work by the Swedish Havs-och vattenmyndigheten (2016).
1. Identify criterions from which alternatives will be assessed
2. Decide relevance for each criterion
3. Assign weights to each criterion
4. Assign scores to each criterion for alternatives
5. Calculate a weighted sum of the total score
6. Identify and calculate indexes
7. Conduct sensitivity analysis
Step 1: Identify criterions from which alternatives will be assessed

Criterions should be selected so that they are appropriate for assessing qualitative impacts
from digitalizing. Criterions for this model have been defined based on the literature
review and are therefore considered as appropriate criterions as they are claimed by authors
to be potential effects which digitalization is more or less able to fulfill. Furthermore, they
are identified to be either positive (P) or negative (N).
The identified qualitative effects in the literature review are Shorter Time-to-market,
Increased Flexibility, Increased Traceability, Customized Goods, Better Work
Satisfaction, Improved Health and Safety of Workforce and Re-skilling of Current
Employees, where all effects are positive except the last one. In order to assure
independency among the identified effect, we decided to cluster Shorter Time-to-market
and Customized Goods into the effect Increased Flexibility. The reason for doing so is that
increased flexibility in production helps shortening the time-to-market and enables for
easier customization of goods. Another reason was due to the contextual situation at the
case study company; it is easier for decision-makers to estimate the effect in terms of
flexibility rather than the other two. In this way, conducting the analysis will be less
resource consuming. The final criterions for the analysis were defined as;
52
• Flexibility (P)
• Traceability (P)
• Work Satisfaction (P)
• Health & Safety (P)
• Re-skilling of Employees (N)
Step 2: Decide relevance for each criterion

As a variety of digitalization project are aimed to be evaluated through this analysis, a
relevance function was added. When analysing a specific effect, relevance should be set to
either “1” or “0” depending on whether or not each criterion is relevant to it. A criterion is
relevant if the project in consideration have an impact on the specific effect. For example,
if the project of analysis will increase Flexibility relevance is set to “1” and vice versa. The
scale for relevance is binary and consequently includes 1 and 0.
Relevance Scale
1: This specific qualitative effect is directly impacted by the project in consideration
0: This specific qualitative effect is not impacted by the project in consideration
Step 3: Assign weights to each criterion

Weighting criterions is about determining how importance each criterion is to the project
in consideration. This is done in order to adjust the final score for each criterion and thereby
judging the relative importance of their scales. Assigning scores to each criterion, step 4,
is about measuring performance while this step, assigning weights, is about determining
the value or importance of that performance. Thus, this is a fundamental step of the MCA
analysis as it will significantly affect the final outcome of the analysis.
The weighting process in this model is recommended to be done in line with the SWING
method of weighting, which is commonly used by most proponents of MCA to elicit
weights (DETR, 2000). The SWING method basically suggests the decision-maker to
decide the criterion with the biggest “swing” at first, meaning deciding what criterion that
is of highest importance to the project. This criterion should be assigned the highest value
of the weighting scale. When assigning weights to the remaining criterions, they should be
53
compared to the most important criterion as a reference. As the number of criterions in this
model are rather limited, the stakeholders involved in the decision making should be able
to agree upon weights without any significant difficulties. If complication regarding
assigning weights would occur, one solution is that all stakeholders suggests weights for
each criterion and the average or median value can be used for analysis.
As stated in the literature review, assigning weights is highly subjective. The scale for
weights is discrete and ranges from 1 – 5, depending on the level of importance a criterion
has to the project in consideration.
Weighting Scale
1: This specific qualitative effect has very low importance to the project in consideration
2: This specific qualitative effect has low importance to the project in consideration
3: This specific qualitative effect has moderate importance to the project in consideration
4: This specific qualitative effect has high importance to the project in consideration
5: This specific qualitative effect has very high importance to the project in consideration
Step 4: Assign scores to each criterion

Each criterion is to be assigned a score that expresses the value associated with the
consequence a project has on the particular criterion. If the weight is an expression for the
“value of impact” the score is an expression for the “strength of impact”. The score
estimates the size of impact the project in consideration has on the specific criterion.
In our analysis, the positive criterions, that have been identified from the positive
qualitative effects in the literature review, are scored on a discrete scale ranging from 1 –
5 depending on what level of impact the project will have on the specific criterion. For the
criterion that have been identified from the negative qualitative effect in the literature
review, the scoring scale goes from -1 to -5. This separation is done due to their positive
and negative contributions to the total impact of initiating a project.
Scoring Scale (P)

1: The project has very small impact on the specific qualitative effect
2: The project has small impact on the specific qualitative effect
3: The project has moderate impact on the specific qualitative effect
4: The project has high impact on the specific qualitative effect
5: The project has very high impact on the specific qualitative effect
54
Scoring Scale (N)
-1: The project has very small impact on the specific qualitative effect
-2: The project has small impact on the specific qualitative effect
-3: The project has moderate impact on the specific qualitative effect
-4: The project has high impact on the specific qualitative effect
-5: The project has very high impact on the specific qualitative effect
Step 5: Calculate a weighted sum of the total score

When criterions are identified and relevance, weights and scores are assigned for the
project in consideration, the next step is to calculate a weighted sum of the total score. The
total score for each criterion is calculated by multiplying relevance, weight and score. If a
criterion is considered irrelevant for the project, relevance will be set to “0” and the total
score for that criterion will equal 0. Provided that relevance for a criterion is set to “1”, the
total score for that criterion could be either negative or positive depending on the nature of
the criterion and thereby which scoring scale that is being used.
The weighted sum for the project is calculated by summarizing the total scores for all
criterions. The formula for how to calculate the weighted sum, i.e. total score :%&% , is shown
in equation (6) where 6# = relevance, ;# = weight for criterion n, !! = score for criterion
n, n = criterion. With the scoring and weighting scales in this model, the minimum and
maximum values of the weighted sum is -25 and 100 respectively.
'
:%&% = < 6# ∗ ;# ∗ :# (6)

#(!
Step 6: Identify and calculate indexes

In order to be able to compare the total qualitative score between different projects and
draw reasonable conclusions, one index and one relative index is calculated. To obtain the
index, the total score :%&% from previous step is divided by the sum of the maximal total
outcome. The index is an indication of how well an investment meets the theoretical
potential positive contribution to the company. It is automatically calculated in the Excel
model as a weighted average over the maximum total score, where the weight on each
criterion is equal and independent of the relevance. Meaning, even if only four out of the
five criterions are relevant, the denominator in the index calculation is still based on the
55
maximum total score from all five criterions. This makes sense, since the index should be
lower for a project with only four relevant criterions than a project with five relevant
criterions assigned with the same scores for each respective criterion. Currently, there are
four positive criterions identified with a maximal score of 25 each, meaning that the total
maximum score for all criterions equals 100 (4*25). The maximal score is achieved when
the negative criterion has no relevance and does not affect the total score. A presentation
of how index 8 is calculated is shown in equation (7), where :%&% = total score, ")*+ =
maximal score per criterion and -, = # positive criterions.
:%&%
8= (7)
")*+ ∗ -,
As the analysis aims to address the positive contribution to a company due to an

investment, the total score is defined to never equal below zero. Consequently, if the
weighted score for the negative criterion exceed the score of positive criterions, the total
score will equal zero. Further, the total score ranges between 0 and 100, implying the
index will have an output range between 0 % and 100 %. An index of 0 % could imply
that the total qualitative effect from this project is a liability, whereas an index above 0 %
indicates that this project generates a positive qualitative outcome and can be viewed as an
asset.
In the model, a relative index is also calculated where the only difference is the weighting.
The weight for normal index is fixed and independent of relevance, however the relative
index is dependent on the relevance for each criterion. For an example, if three out of four
positive criterions are relevant, the denominator in the relative index will be reactive and
only take three criterions in consideration, meaning the score will be divided by 75 (3*25)
instead of 100. The relative index cannot be compared between different projects since the
number of criterions for this index is not constant. It is only useful to evaluate one single
project. Equation (8) presents how relative index 8- is calculated, where :%&% = total score,
")*+ = maximal score per criterion and -. = # relevant positive criterions.
:%&%
8- = (8)
")*+ ∗ -.
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The qualitative outcomes are found to be rather difficult to translate into exact numerical
values, however intuitively it makes sense for these qualitative factors to have an indirect
economic impact and need to be taken in consideration when evaluating a new potential
project. It is up to the user how much the qualitative effects should weight in comparison
to the quantitative analysis.
Step 7: Conduct sensitivity analysis

Last but not least, the user should estimate the uncertainty of the point assessments made.
To do so, a scale was developed where the uncertainty assessment ranges from 1 to 3, see
table below. This uncertainty assessment appears as a drop-down list in the valuation
model and is a manual input made by the user. For an example the “Health & Safety”
metric in the qualitative analysis may be quantifiable in terms of number of injuries, as
well as “work satisfaction” may be decided by number of sick leaves or resignations.
Therefore, the uncertainty value for these criterions are likely to be lower. On the other
hand, “traceability” is much more difficult to quantify and should imply a higher
uncertainty level. As a conclusion, a point assessment with any quantitative base, even if
it is not quantification in economic terms, has lower uncertainty.
Sensitivity Scale
1: The uncertainty of grade input value is low, meaning the input is true to the real situation
2: The uncertainty of grade input value is moderate, meaning the input is somewhat true to
the real situation
3: The uncertainty of grade input value is high, meaning the input may be true to the real
situation
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6 Application of Investment Model
This chapter is directly referring to the case study conducted at a European special steels
company, aiming to answer the research questions of this study. One specific potential
investment is considered, and all data presented in this section is collected at the case
study company. Moreover, a detailed explanation on how it is supposed to be used is given.
6.1 Project “Smart Crane”

To make sense of exactly how large the economic impact from different digitalization
projects in the steel industry is, contextual values were gathered based on the project in
consideration in a delimited production area. One potential digitalization project currently
in consideration is a smart crane used for insertion of raw steel between inventory and
oven. Currently, the company is using a manual crane to execute this operation. However,
this crane has become obsolete and needs to be replaced in the near future. Therefore, this
is classified as a replacement investment and not a strategic investment. Strategic
investments are usually more expensive and has higher required rate of return than
replacement investments. Example of a strategic investment could be an investment in a
new sensor system to better keep track of the products throughout the production flow.
This is not an existing system and would imply a new investment made for strategic
reasons. In this case, the smart crane would replace an old obsolete manual crane, in need
of replacement. So, the investment decision the company is facing is whether they should
buy a new manual crane or invest in a new, a bit more expensive, smart crane.
This investment model is developed in the Microsoft software Excel. Note that all beige
cells in the visualization are inputs and all white cells contains formulas or important
information and should therefore never be edited by the user.
6.2 LoA Analysis

The chosen production section consists of ten different subprocesses; “Takkran N2”,
“Inlägg”, “Ugn N2”, “Diregerare”, “Ugn N4”, “QT”, “Småkranar”, “Takkran H4”,
“Linjen” and “Märkning”. Current LoA values were determined for all subprocesses
through on-site measurements prior to the study of this report and were provided by the
58
case study company. Laster, relevant min and max LoA values were determined for each
subprocess during this project.
For the subprocess in consideration, “Takkran”, Mechanical LoA equals 4, which also is
the lowest Mechanical LoA that could possibly be accepted in this activity. Level 4 is the
lowest level due to the heavy weight of steels being lifted, which simply could not be
performed alone by man-force. The optimal level of mechanical automation is 7, as the
company would benefit from having a totally automatic machine for this activity. If the
company choose to invest in a new manual crane instead of the automatic smart crane,
LoA levels will remain the same. However, if the current crane is replaced with the
automatic crane the Mechanical LoA will raise to 6. The automatic crane is a flexible
machine, able to operate at different speeds etc.
Currently, Information LoA in “Takkran” is at level 2. The person running the crane
receives instructions about the order in which steel sheets should be moved. Level 2 is also
considered the minimum level for this task and level 7 is set as the optimal level. Investing
in the smart crane will bring up Information LoA to 5. The automatic crane will not be able
to handle errors itself, however the machine will communicate errors through alarm
systems.

As described, the potential Mechanical and Information LoA are measured as 6 and 5,
respectively. The investment cost for the smart crane amounts up to 23 MSEK. However,
the actual investment for the digital solution, represented by “initial investment cost” in
figure 12, is the difference between the price of a new manual crane, 20 MSEK and the
smart crane, which equals to 3 MSEK. As the old crane needs to be replaced, the expense
for at least one manual crane is inevitable to keep the production going. The estimated
lifetime for the smart crane is 10 years, yielding potential cost savings for at least 10 years.
At the case study company, they currently utilize 5988 hours (250 days) of production
every year. During this time, 276 250 tons of steel is produced, and the time needed for
changing the old crane to a smart crane is 288 hours (12 days). These 288 hours do not
affect downtime in the model, since the company has a planned production stoppage of
59
672 hours on a yearly basis, during which the change of equipment can occur. To continue,
this particular investment has no upgrade service costs, that needs to be taken in
consideration.
Figure 12 Overview of Initial Investment Data
Implementation of new smart crane would result in less downtime, caused by breakdowns,
as the human factor will more or less be eliminated. An automatic smart crane is
programmed to drive as optimally as possible and drives more smoothly than any human.
Heavy breaking and fast acceleration wears more on the machine, resulting in higher
internal maintenance cost, in terms of more frequent replacement of breaks and faster
consumption of machine oil.
On the other hand, additional internal maintenance cost will rise, at least in the beginning,
since the new solution is more complex, implying more extensive troubleshooting. In
addition, this cost should decrease as a result of less breakdowns, leading to less need of
extra personnel. Furthermore, the external maintenance cost should be slightly decreased
as less breakdowns occur. All aspects of maintenance should be affected by the new
investment, but as seen in figure 14 below, the maintenance savings are equal to 0. This is
a result of lack of data. To compute the economic impact on maintenance savings, the
company should possess data information on how much maintenance expenses each
category amounts up to. The company currently only keep track of “important”
maintenance expenses, which means large expenses having a direct impact on the
company’s overall cash flow.
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Figure 13 Overview of Maintenance Savings
Intuitively, when replacing a manual crane by a smart crane, the production efficiency
would improve. This is true only if, the rest of the production flow has no capacity
limitation. For this specific case, it is not true since the production capacity in this
production process is limited by the capacity in the oven placed after the crane in the
production flow. The oven is using 100 % of its current capacity, meaning the productivity
in the process cannot be improved even if the crane can operate at a higher speed. If the
capacity in the oven was to be improved, tremendous productivity savings could be
achieved, since the new crane can work more effectively if needed. The average value of
one ton of steel is 12 000 SEK. In the case where higher production volume can be reached,
the company would generate higher revenue and increase their profit margins as the costs
are unchanged.
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Figure 14 Overview of Productivity Savings
The most obvious and maybe largest saving potential can be found in the Personnel
savings. Currently there are five full time employees operating the manual crane. With a
smart crane replacement, these five workers would no longer be needed as drivers.
Although, the new crane is not totally autonomous and needs supervision in case of errors.
A Common error is for example, when the plates are too thin and the magnet on the crane
too strong, several plates are incorrectly lifted at once. This implicates wrong treatment
further down the process, contributing to jettisons or retreatments. To cope with this
problem, a worker needs to manually press a button and demagnetize the crane. Therefore,
the most likely scenario is that half of an FTE would be offered to stay, be re-skilled, and
work in a control room; thereby changes their daily working task.
As mentioned, all potential estimations are given three cases; base, best and worst.
Previously, the base case has been explained, while the best case suggests none of these 5
workers are necessary to keep, meaning current supervisors in the control rooms have
capacity to oversee another subprocess. In contrast, the worst case implies one FTE is
needed to oversee the new smart crane, resulting in less FTE savings. Based on the most
likely situation, the potential Personnel savings would amount up to 2 835 000 SEK per
year and the company face a cost saving of 90 % compared to before, as seen in figure 16.
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Figure 15 Overview of Personnel Savings
In figure 17 the calculations for quality savings can be found, showing that the number of
jettison and reprocessed deviations will stay constant after this investment. The truth
behind this result is, insufficient data. The company in question, is in need of extensive
changes when it comes to data collection. Today, the company gathers data of deviation in
only one categorization, type of deviation. Information about number of repainted and
reground sheets are available. However, there is no knowledge about where in the
production process these deviations emerged. As well as, only large deviations are tracked
and the alternative cost for reprocessed steel sheets are not accounted for in any calculation.
To summarize, the economic impact on quality savings is difficult to quantify due to
incomplete data, even if the smart crane may result in fewer deviation, since it drives softer
and more smoothly.
Figure 16 Overview of Quality Savings
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Regarding downtime savings once again, two different scenarios should be considered. In
figure 18, calculation for downtime savings can be found for the scenario of today, where
the production capacity is limited by the next production step. The potential cost saving
equals 0, even if today’s knowledge indicates less planned and unplanned downtimes. All
breaks and restroom visits are times so the oven always can operate at 100 %, meaning
there is a backlog sufficient enough to cover smaller downtimes in the crane. In the other
scenario, where there is unlimited capacity in remaining production process, unplanned
downtime will decrease, in terms of restroom visits and shortage of personnel, contributing
to a cost saving. Furthermore, unplanned downtime could potentially decrease as less
breakdowns eventuates. As recognized in the figure below, unplanned downtime has two
categorizations; bottleneck and normal. This part is developed after case study company’s
preferences as they have production processes where the unplanned downtimes causes
production failure further down the production stream, leading to higher costs.
Figure 17 Overview of Downtime Savings
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An overview of the qualitative analysis of investing in an automatic crane compared to a
new manual crane is presented in table 3 at the end of this section. If a new manual crane
is considered, the net qualitative impact would equal zero as it is no different from current
situation.
Work satisfaction is considered a relevant criterion for the investment in consideration.

Referring to the Quantitative Analysis, the best-case scenario is when a 100% reduction of
FTEs can be achieved, and this criterion would not have to be accounted for . However, as
there is a risk that the activity will still require 0.5 – 1 FTE after the investment, the
criterion is seen as relevant. The weight is set to 1 since whether or not work satisfaction
in this subprocess will be affected, by investing in the automatic crane, is of very low
importance. However, if work satisfaction will be affected, the impact is considered to be
moderate and grade is set to 3. The reason for this is that the person that may remain for
this activity will be digitally controlling the smart crane from a control room together with
other employees, instead of manually running it. In general, working with others improves
work satisfaction as the level of human interaction increases. On the other hand, the person
running the manual crane could experience higher stimulation from practical work than
from sitting in front of a screen. Because of the uncertainty in whether or not this activity
will continue to require personnel, as well as the uncertainty about how work satisfaction
will be affected depending on individual preferences, the sensitivity of inputs is set to 3.
Criterion 2, “Health &Safety”, is also relevant for the smart crane. The risk for injuries
will significantly decrease due to two main reasons. First, the risk for accidentally running
into something or someone will be eliminated when the crane is automatic. Second, an
automatic crane requires that the area for its operation is enclosed. Health and Safety is
highly prioritized at the company; therefore, weight is set to 4. The impact will be very
high because of stated reasons and grade is set to 5. As it is known these safety precautions
will be taken, the sensitivity is low and set to 1.
The relevance of Flexibility is set to 0, since the considered project has no impact on this
criterion.
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Re-skilling of Employees, the only negative criterion in the calculation, is relevant. The
automatic crane is a completely new technology at the company and will require education
of personnel in order to run the production, i.e. how it is controlled from the control room
and how to handle errors. Education is crucial for the implementation; therefore, weight is
set to 4. However, new knowledge required is considered to be small and grade is set to -
1. Still it is difficult to appropriately estimating how smooth an implementation of new
technology will actually be, which is the reason sensitivity is set to 2.
The last criterion, “Traceability”, is relevant and significantly affected. In the ongoing
digital transformation, it is of high importance for the company to improve traceability as
it constitutes a prerequisite for smart manufacturing. Consequently, weight is set to 5. The
automatic crane will scan the serial number of steel sheets in order to know how to move
it, and it will also register which serial number is lifted at a certain date and time. The
impact on traceability is very high and grade is set to 5. Sensitivity is set to 1 because of
the low uncertainty in input values.
Table 3 Overview of Qualitative Analysis
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7 Results
This chapter provides a presentation of the results from all three different analyses of the
investment model. The main results are shown in terms of NPV, IRR, ROI, PB, SoPI and
qualitative indexes. Results from sensitivity analyses are also presented.
7.1 LoA Analysis

This section shows the results from the mapping of the production section as well as the
assessment of the specific project. Starting with the mapping, the average current
Mechanical LoA and Information LoA for the entire production section equals 4.6 and 3.2
respectively. Mechanical LoA ranges from 4 – 5, while Information LoA ranges from 2 –
5, where Mechanical LoA exceeds Information LoA in all subprocesses except one, where
they are equal. The average minimum value for Mechanical LoA is 4.3, which is higher
than the average minimum for Information LoA of 1.9.
This current state of LoA, in which where mechanical levels tend to be higher than
cognitive levels, can be explained by the chronological order in the history of the industrial
revolution. As mechanical solutions were implemented earlier in history than digital
solutions, companies have had more time to improve and develop the mechanical parts of
production systems compared to the cognitive parts. The average relevant maximum LoA
for Information is 7, while the average relevant maximum Mechanical LoA is below 7,
since some activities would not benefit from possessing more advanced features than for
instance level 5 or 6. An overview of the LoA mapping and the percentual levels of LoA,
Relative LoA and Potential is presented in table 4 below.
Table 4 LoA Mapping
67
A visualization of the level of automation in relation to its potential for each subprocess
and accumulated for the entire production section is presented in figure 19. It shows that
the subprocesses “Takkran N2”, “QT” and “ “Småkranar” are the subprocess with the
highest digitalization potential, while “Ugn N2” is the most digitalized subprocess. In total,
the production section reached an automation level of 58 %, implying it contains great
potential for future digitalization investments.
Figure 18 LoA Chart over Investment Potential
Continuing with the assessment of the specific investment, figure 20 shows SoPI results
referring to investing in the automatic crane. Currently, “Takkran N2” is at the bottom left
corner of the square, holding the lowest acceptable levels of automation. The investment
would entail a significant improvement; Mechanical LoA would increase by two levels
and Information LoA by three levels. Expressed in percentages, the level of automation
would increase from 43 % to 79 %. The LoA improvement can be considered an incentive
for investing.
68
Figure 19 SoPI Results

The quantitative analysis shows a large positive outcome for the NPV. From the literature
review, it is known that projects with an NPV greater than 0 should be considered a good
investment opportunity but needs to be complemented with other analyses. This result is
confirmed by the IRR, PB and ROI. Since the annual saving obtained from this investment
is around 2.8 MSEK and the initial cost for the digital expansion is 3 MSEK, the PB
becomes only 1.1 years. Hence, this project hits break-even after only 1.1 years, without
considering the time-value of money. In this case, the PB is short, meaning in one year the
money will no longer be tied-up in this investment and can carry new investment
opportunities. Similarly, an IRR at 71 % is significantly higher than the require rate of
return of 14 %, implying this is a good investment.
Last but not least, to reinforce the hypothesis of a positive investment the ROI was
determined. As visualized in the table below, the ROI are close to 400 %, meaning a value
4 times larger than the initial investment can been realized through this investment. To
obtain a better feel of an ROI of 400 %, it can be compared to the return from an investment
in a risk-free asset, for example 10 years treasury bond rate, with an average around 2 SEK
69
over time. After comparison it can be concluded that project is a great investment, from an
economic standpoint.
Table 5 Quantitative KPIs Results
The only cost saving factor that could be quantified in the case study, based on the current
conditions, is Personnel. The current cost for five operators is 3.15 MSEK, and if applying
the base case where 0.5 FTE will remain in operation, the cost for personnel will be
equivalent to 0.3 MSEK. Please find the illustration of the different in figure 21. To find
the saving per factor please see figure 22 and figure 23 shows how the savings are
distributed among the different factors.
70
Figure 20 Saving Potential
Figure 21 Savings Per Factor
Figure 22 Savings Pie Chart
71
To simulate different possible outcomes of the quantitative result, different discount rates
are compared with different cases of input data. There are three possible cases and three
variations of discount rates, giving 9 possible outcomes for each KPI, illustrated in next
figure. The best outcome is generated by the combination; best case and lowest discount
rate, which makes sense as the best case generates the highest saving potential and the
lowest discount rate generate highest discounted value possible. On the contrary, the worst
case against the highest discount rate results in the worst outcome, with the same
reasoning. From conducting this sensitivity analysis one can conclude that all KPIs are
more sensitive to movements in the chosen case than fluctuation in discount rate. In the
figure below, please find all the different outcomes.
Figure 23 Quantitative Sensitivity Analysis Result
Per definition of median, it is reasonable that the base case combined with middle discount
rate gives the median. The median in this case should be interpreted as the most likely or
most common outcome. The median and average lies within the same range, indicating no
extreme outcomes for any of the combination. The standard deviation is quite small in all
cases, indicating the result is somewhat stable and does not deviate from the mean too
much. Lower volatility implies a more reliable result and in this case the result is
unanimous and indicates positive investment opportunity.
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Table 6 Sensitivity Analysis Summary
Moreover a tornado diagram has been established to acknowledge how different KPIs
varies when the discount rate changes by plus and minus one percent, respectively. The
diagram, in figure 24, indicates that one percent change in discount rate implies 5 percent
change on NPV and ROI. However, the same change in discount rate only generates 2
percent change on IRR. Moreover, it is reasonable that PB remains unaffected by the
change in discount rate, as the metric does not take any time value into consideration. As
a conclusion, NPV and ROI is more sensitive to discount rate changes, while IRR is less
sensitive.
Figure 24 Discount Rate Tornado Diagram

Table 7 shows the results of the qualitative analysis. The total score for the investment
equals 39 out of 100, resulting in an index of 39 %. This can be interpreted as that the total
qualitative contribution is 39 % out of the maximal possible contribution of a digitalization
project. Not many digitalization projects succeed to impact all criterions, which is the
73
reason why an index of 39 % can be interpreted as a high index. The relative index equals
52 %, which is higher than index since only 3 out of 4 positive criterions were relevant.
This result shows how well the investment fulfills the criterions it aims to, or is able to,
have an impact on.
Table 7 Qualitative Analysis Results

The sensitivity analysis of the Qualitative Analysis is illustrated in figure 25. The
illustration is clearly showing that input values for Work Satisfaction and Re-skilling of
Employees hold the highest uncertainties. However, since both the index for Work
Satisfaction as well as for Re-skilling of Employees is low, the deflection from the
uncertainties will affect the analysis to very little extent. Note that index for Re-skilling of
Employees is presented on the negative y-axis, since it represents a negative assessment
criterion. As the criterions with the highest indexes are the least sensitive, the overall
sensitivity of the analysis is low, and the qualitative results can be considered accurate.
Figure 25 Qualitative Sensitivity Analysis Results
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8 Analysis of Results
To begin with, it is of importance to enlighten that the results of this thesis presented in
chapter 7 are somewhat subjective, since they are all based on estimations and assumptions
made by the user of the model. However, the sensitivity analyses showed low sensitivity
in outputs for the specific project the model was applied to. In general, the non-monetary
results of the LoA Analysis and Qualitative Analysis could be examined with less caution
than the Quantitative Analysis.
Firstly, the investment “smart crane” considered in this thesis showed to be a positive
investment from all three analyses. However, the timing of the project determined whether
or not it would be considered a replacement investment or a strategic investment, which in
the end has great significance to the quantitative results. If the timing would have been
different, and the current crane was still able to function as normal, the project would
instead have been considered a strategic investment. The main differences would be the
initial investment cost which would equal 23 MSEK instead of 3 MSEK, and also the
discount rate for DCF calculations which would be set to 14 % for the entire investment.
When applying the quantitative model on the same case but considering the project a
strategic one, all the economic KPIs are instead extremely negative and it would be very
difficult to argue for implementation. Moreover, the importance of timing when
considering digitalization is therefore crucial in economic investment analyses.
Secondly, the results presented in section 7.2 are limited since some impacts on the cost
saving factors Maintenance, Productivity, FTE, Quality and Downtime were not taken into
account due to lack of data or difficulties in estimating potential state. Due to the lacking
data collection, marginal effects are not able to be accounted for in the analysis. One
important insight from this thesis is that not enough data is collected at the case study
company, which we believe applies to many other manufacturing companies as well. Thus,
this constitutes one factor obstructing solid analyses of economic impacts within the area
of digitalization at process level.
In addition, evaluating the actual effects of digitalization is limited by how other operations
in the production flow are functioning. In the case of the smart crane, production volumes
can increase if productivity improve in remaining production flow as well. However, these
75
effects can only be achieved if other projects at other subprocesses or production sections
are implemented as well. This is one of the main complexities with digitalization projects;
the positive impacts can be fully achieved only when the entire production chain is
digitalized, and a digital transformation attained.
Lastly, in the project of consideration, five out of five identified cost saving factors were
estimated by the case study company to be theoretically impacted. Due to this fact, it can
be interpreted that the effects that are argued for in the literature seem present the actual
effects in a real manufacturing situation. FTE was the only cost saving factor this study
was able to quantify in monetary terms, which would decrease by 100 % in the best case
and by 80 % in the worst case. The literature review showed one quantified quantitative
effect was decreased conversion costs by 15 – 25 %, see section 4.2.1. Conversion costs
include direct labor and overhead expenses, excluding material costs. In this thesis, costs
for direct labor are the same as FTE costs. However, as no results about change in overhead
expenses were derived in this study, comparison with quantified effects in the literature
review was not possible.
76
9 Discussion
This chapter contains a discussion and argumentation of the research method used in this
thesis. Furthermore, the reliability, validity and generalizability of the model, as well as
the thesis in general is discussed.
9.1 Discussion of Method

An observation when studying the existing literature addressing effects of digitalization
was that many articles contained a low level of transparency and replicability. The impacts
identified were sometimes from different perspectives or completely correlated, meaning
the researcher uses two different words to explain the same effect. The chosen
methodology allows the reader to transparently understand how effects of digitalization
are addressed in this thesis, i.e. at Process Level from an Internal Efficiency perspective.
A limitation of this study is in fact the chosen research methodology where a single case
study is conducted. Therefore, the results and conclusions of this paper should be used
with caution in other situations where circumstances are different.
Another limitation was the current situation; with the pandemic of Covid-19, meetings,
field trips and presentation were cancelled. Among those, planned visits in production were
cancelled where knowledge and input data were supposed to be collected. Due to the
circumstances, discussions with the supervisor at the case study company became even
more important in order to collect the required information.
9.2 Reliability & Validity

As mentioned in Analysis of Results, chapter 7, the case study showed that theoretically,
5 out of 5 cost saving factors included in the quantitative analysis were affected by the
digitalization project in consideration. This can be seen as a validating factor for cost
saving factors being identified in a rigorous way.
As this study aims to address effects of digitalization at Process level from an Internal
Efficiency perspective, there may be consequences outside the scope that potentially could
affect the economic or qualitative outcome.
77
As this study aim to develop a quantitative investment model based on data collection from
literature reviews and a single case study, it is important to keep in mind that the results
are depend on assumptions and estimations made by the user of the model which may
reduce the level of reliability. As shown in results, small adjustments to the discount rate
result in large fluctuations of different KPIs.
As described in the problematization, the number of legitimate sources providing insightful

and rigorous result of the economic aspect of digitalization in steel industry or
digitalization in general, are limited. As a result, it was difficult to collect and find data
from published literature, leading to lower validity. During this study we mainly focused
on reliable sources like textbooks, published articles with large amount of citations,
academic journals and reports published by larger organizations or well-known
consultancy firms, with minor compromises. These minor compromises combined with
limited number of primary sources lower the generalizability.
9.3 Generalizability
We believe the structure of the investment model is developed to be appropriate for use at
several manufacturing industries and not only the case study company, since the structures
are mainly derived from findings in the literature. The LoA analysis should be applicable
to other situations without any modifications. However, the Quantitative Analysis may
need to be modified in terms of how each cost saving factor is calculated, while the cost
saving factors themselves (Maintenance, Productivity, Personnel, Quality and Downtime)
are more general. Regarding the Qualitative Analysis, it could definitely be applied to other
cases, there may be other quantitative effects important for a company that should be taken
into account if the contextual situation were different, and new criterions might need to be
added to the analysis.
78
10 Conclusion
This chapter answers the stated research questions of the thesis and explains how answers
were arrived at. It also provides a summary of the main findings on a higher level as well
as a recommendation for producing companies and suggestions for future research.
10.1 Answer of Research Question 1

The first research question was formulated as “What are the potential impacts of
digitalization in a delimited steel production section?”, which this thesis managed to
answer in a transparent way. The potential impacts of digitalization can be categorized into
different sorts of effects; quantitative or qualitative. Depending on their economic impact,
they can also be identified as either positive or negative. Digitalization is closely related to
automation and another effect from digitalizing in productions is an increased level of
automation. In total, eleven quantitative effects and seven qualitative effects were
identified, whereof ten out of eleven quantitative effects were relevant at the delimited
steel production section. The relevant quantitative effects can be clustered into five cost
saving factors; Maintenance, Productivity, Personnel, Quality and Downtime, while the
qualitative effects can be summarized with five qualitative criterions; Flexibility (P),
Traceability (P), Traceability (P), Work Satisfaction (P), Health & Safety (P) and Re-
skilling of Employees (N).

Research question number two asked; “How can potential impacts from digitalization
projects be quantified?”. The investment model developed in this thesis provides a three-
part support for decision making regarding digitalization projects. The first analysis, LoA
Analysis, is a quantification of how digitalization may increase the level of automation in
production. Quantitative effects are quantified by the quantitative model, which is based
on a DCF valuation, quantifying the effects in terms of cost savings, NPV, IRR, PB and
ROI. Qualitative effects can be quantified by conducting a MCA based on the five
qualitative criterions and thereby calculating score, index and relative index.
79
The last research question was stated as “What potential cost savings can be expected from
digitalization projects?”. Section 4.2.1 “Quantified Quantitative Impacts” presents what
the existing literature is claiming regarding how different costs in production may be
affected through digitalization. Based on the single case study conducted in this work, cost
savings can be calculated based on the factors Maintenance, Productivity, Personnel,
Quality and Downtime, as mentioned in in the answer of the first research question. The
results of this work showed that a steel producer could expect yearly cost savings of nearly
3 MSEK by investing in a smart crane, only taking the change in personnel costs into
account.
10.4 General Conclusion

Due to the findings of this thesis, digitalization has a significant impact on producing
industries. However, these impacts are sometimes difficult to quantify, mainly because of
poor data collection, unstructured data and issues related to estimating the extent of change.
The results of the single case study imply for the largest impacts to include reduce
personnel costs, increased health and safety at the workplace and increased traceability in
production. Digitalization projects are net positive investments if the timing is right, i.e. if
they are implemented at the end of the lifespan of current technology and therefore can be
considered a replacement project, only requiring a certain return on the accessible cost for
the digital solution compared to the cost of current technology. However, digitalization
can become a vicious circle if only monetary valuations are taken into consideration for
decision makings. Effects can reach its full potential only when production efficiency is
optimized in the whole production line, meaning initiation of projects may be necessary in
order to enable synergies that will later affect the economic result. Therefore, there may
be incentives to initiate a digitalization project even if the quantitative analysis is currently
showing negative results on KPIs.
80
10.5 Recommendation & Future Research
Throughout this study several issues regarding concretizing and quantifying economic
effects of digitalization in steel industry have arisen. A considerable insight from this study
is the lack of data collection within the area of “quantitative effects of digitalization”.
Therefore, future research should bring more attention to structuring interviews and collect
more information on how industries work with digitalization and what effects that has been
identified in historical projects. A fundamental prerequisite for researchers to better collect
data on how companies work with digitalization, is diversified and structured data
collection at each individual company. Without necessary measurements on the production
it is impossible to see the full economic potential of digitalization. Therefore, companies
need to invest in new digital systems, such as sensor systems, allowing more intensive data
collection and hire knowledgeable workers whom can make sense of the data. Collected
data needs to be flexible and categorized on several factors in the entire production. These
are large investment for companies and unfortunately without the data it is impossible to
analyze the economic benefit from digitalization.
Due to the time limitation it was not possible to apply the model to several projects or
account for the affect extension projects brings. As mentioned before, large economic
benefits are often realized by several digitalization projects combined and not each one
separately. Therefore, another interesting research area is to examine the economic benefit
when accounting for different extension projects.
As addressed in the report, timing is an important factor for new digitalization investments.
However, not all digitalization projects are replacement projects and some strategic
projects are vital to the future digitalization progress at the companies. As for now in 2020,
digitalization seems inevitable and most companies are aware of the cost of not following
this trend. So once again, maybe the question is not if it is economic beneficial to
implement new digital technologies, but rather what is to be lost in not doing so.
81
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Appendix A – Investment Model
Please find a compiled version of the Excel model in the following pages.
86
Investment model
Creators
Jenny Cheng Josefin Westman
Industrial Engineering and Management Industrial Engineering and Management
Financial Mathematics Sustainable Power Production
This investment model aims to evaluate digitalization projects based on three analyses; LoA, Quantitative & Qualitative. The
model is developed based on a combination of existing literature within relevant areas and the contextual situation at SSAB. The
foundation and overall structure of the model were mainly derived through existing literature. But in order to quantify key
components and industry specific operations the model was validated by further insights from a delaminated production section
(Hardox) in the steel manufacturing process.
Content
Initial data Input of initial investment data and crucial economic parameters
Raw data Contains raw data, production numbers and lists
LoA analysis Level of Automation analysis for each activity and the total production section
Quantitative analysis Calculation of economic benefits and cost savings
Qualitative analysis Evaluation of expected qualitative benefits
Results Result over accrued cost saving and qualitative benefits
Sensitivity analysis Sensitivity analysis of chosen case and discount rate
Business case Summary of result in visualisations
User Information
Input cells In input cells, the user makes manual inputs according to contextual situation
Output cells In output cells, there are predefined formulas or figures and should not be edited at any time
Evaluation Procedure
Register & Register & Register &
Valuation of Risk
Enter inital Validate raw validate LoA validate validate Business case
Cost savings assessment &
data data for all quantitative qualitative
& results sensitivity
activities benefits benefits
All investment models This sheet contains There are two main The quantitative The qualitative This section is based The sensitivity analysis The business case is a
require fundamental specific production features of the LoA analysis aims to analysis aims to on a DCF valuation, identifies how summary of the
initial data, like figures used analysis in the model; quantify potential cost quantify the where the annual cost sensitive the economic results from previous
lifetime & initial thoughout the model. 1. map current state of savings from five qualitative effects savings is accured over KPIs; NPV, IRR, ROI & steps. The
investment. Many Moreover, lists for automation, to sepcific factors, for identified in the the investment PB are to the variation visualisations shows
future calculations are data validation is identify subprocesses digitalization projects, literature, in lifetime. Futhermore, of input cases in the cost savings
dependent on these presented here. with high investment identified in the nonmonetary terms. the investment quantitative analysis distributions &
initial input values and potential literature. It also This validation is opportunity is combined with quslitative benefit in
are playing a crutial 2. Evaluate potential enables economic based on a linear assessed in terms of different variations of relation to risk etc.
role in the investment change in LoA by comparison between additive MCA economic KPIs; NPV, discount rate
Initial Data
Process Takkran N2
Project name Smart crane
Date Saturday, 9 May 2020
Owner Jenny Cheng & Josefin Westman
Project type Replacement project
Economic Parameters
Parameter Unit Value
Initial investment cost (strategic) SEK 23 000 000
Inital investment cost (replacement) SEK 20 000 000
Initial investment cost SEK 3 000 000
Initial personnel cost SEK 0
Lifetime years 10
Utilized production hours hours/year 5 988
Upgrade service cost SEK/year 0
Replacement time hours/year 288
Replacement cost SEK 0
Production volume tonnes/year 276 250
Discount rate Percentage 14%
Smart crane Takkran N2 Saturday, 9 May 2020
LoA analysis
Select process: Takkran N2
Framework Potential LoA LOA Subprocess
Levels Mechanical Information Mechanical 6
7
1 Totally manual Totally manual Information 5
2 Static hand tool Decision giving 6
3 Flexible hand tool Teaching

4 Automatic hand tool Questioning 5
5 Static workstation Supervising

4
6 Flexible workstation Interventional
Mechanical
7 Totally automatic Totally automatic 3
Maximum level 14 2
1
Subprocess Mechanical Information LoA Relative LoA Potential
min current max min current max
0
Takkran N2 4 4 7 2 2 7 43% 43% 57% 0 1 2 3 4 5 6 7
Inlägg 4 5 6 2 4 7 64% 69% 31% Information
Ugn N2 5 5 5 2 5 7 71% 83% 17%

LoA Current State
Diregerare 4 4 6 3 3 7 50% 54% 46% 100%
90%
Ugn N4 5 5 5 2 4 7 64% 75% 25% 80%
70%
QT 5 5 7 2 3 7 57% 57% 43%
60%
50%
Småkranar 4 4 7 2 2 7 43% 43% 57%
40%
Takkran H4 4 4 7 2 2 7 43% 43% 57% 30%

20%
Linjen 4 5 7 1 4 7 64% 64% 36% 10%
0%
Märkning 4 5 7 1 3 7 57% 57% 43% g re r g n
N2 läg N2 ra N4 QT na H4 jen in io
n In n ge n ra n Lin kn ct
ra Ug re Ug åk ra är Se
kk Di kk M n
Ta Sm Ta tio
Production Section 4,3 4,6 6,4 1,9 3,2 7,0 56% 58% 42% od
uc
Pr
Data source 4 4 7 2 2 7 43% 43% 57% Relative LoA Potential
Quantitative Analysis
Case chosen 1
Base case 1
Best case 2
Worst case 3
SAVINGS CALCULATION
Maintenance Unit Current Potential
Internal maintenance cost SEK/year 0 0

- Improvement SEK 0
- base case 0
- best case 0
- worst case 0
Additional internal maintenance cost SEK/hour 0 0

Additional internal maintenance hour/year 0 0
- Improvement hours 0
- base case 0
- best case 0
- worst case 0
External maintenance cost SEK/year 0 0

- Improvement SEK 0
- base case 0
- best case 0
- worst case 0
Total maintenance cost SEK/year 0 0

Maintenance cost per tonnes SEK/tonnes 0,0 0,0
Maintenance savings SEK/year 0

- Savings in percentage 0%
Savings per tonnes SEK/tonnes 0,0
Productivity Unit Current Potential
Operation cost SEK/year 0 0

Production volume tonnes/year 276 250 276 250
Cost per tonnes SEK 0,0 0,0
Capacity use 100% 100%
- base case 100%
- best case 100%
- worst case 100%
Total productivity income 0,0 0,0
Productivity Income SEK/year 0

Personnel Unit Current Potential
Cost per FTE SEK/year 630 000 630 000

#FTE 5,0 0,5
- base case 0,5
- best case 0,0
- worst case 1,0
Total peronnel cost SEK/year 3 150 000 315 000
Personnel cost per tonnes SEK/tonnes 11,4 1,1
Personnel savings SEK/year 2 835 000

Quality Unit Current Potential
Jettison deviations tonnes/year 276 276

- Improvement (%) tonnes/year 0%
- base case 0%
- best case 0%
- worst case 0%
Cost per deviation SEK/tonnes 9 800 9 800
Reprocessed deviations tonnes/year 0 0

- Improvement (%) tonnes/year 0%
- base case 0%
- best case 0%
- worst case 0%
Cost per deviation SEK/tonnes 180 180
Total deviation cost SEK/year 0 0

Deviation cost per tonnes SEK/tonnes 0,0 0,0
Quality savings SEK/year 0

Downtime Unit Current Potential
Planned downtime hours/year 615 615

- Improvement (%) hours/year 0%
- base case 0%
- best case 0%
- worst case 0%
Cost per downtime SEK/hour 553 607 553 607
Unplanned downtime (bottleneck) hours/year 0 0

- base case 0%
- best case 0%
- worst case 0%
Cost per bottleneck SEK/hour 0 0
Unplanned downtime (normal) hours/year 2 160 2 160

- base case 0%
- best case 0%
- worst case 0%
Cost per normal SEK/hour 553 607 553 607
Total downtime cost SEK/year 0 0

Downtime cost per tonnes SEK/tonnes 0,0 0,0
Downtime savings SEK/year 0

- Savings in percentage SEK/tonnes 0%
Savings per tonnes 0,0
TOTAL SAVINGS SEK/year 2 835 000

- base case 2 835 000
- best case 3 150 000
- worst case 2 520 000
- Savings in percentage 90,0%
- base case 10,3
- best case 11,4
- worst case 9,1
Qualitative Analysis
Total score per effect 25
Qualitative effect Description P/N Relevance Weight Grade Sensitivity Score Index Rel. index
Work satisfaction is positively impacted by a more friendly and

Work Satisfaction flexible work environment, which also can be achieved by new P 1 1 3 3 3 12% 12%
digital solutions
Health and safety of a workforce can improve due to reduced

Health & Safety human involvement in dangerous environments P 1 4 5 1 20 80% 80%
Flexibility can improve, by making production systems more self-

Flexibility organizing P 0 5 5 0 0 0% 0%
When adopting new digital solutions, the current workforce needs

new competencies in the transition towards a more digital
Re-skilling production process. The re-skilling process may require additional
N 1 4 -1 2 -4 -16% -16%
resources for developing education programs, manuals, etc.
Traceability can be achieved by connecting ingoing raw materials

Traceability with products, as well as tracing customer orders in the production P 1 4 5 1 20 80% 80%
flow
TOTAL 39 39,0% 52%
Positive (P) Assessment Criterias Negative (N) Assessment Criterias

Relevance 1: This specific qualitative effect is directly impacted by the project in consideration 1: This specific qualitative effect is directly impacted by the project in consideration
0: This specific qualitative effect is not impacted by the project in consideration 0: This specific qualitative effect is not impacted by the project in consideration
Weight 1: The specific qualitative effect has very low importance to the project in consideration 1: The specific qualitative effect has very low importance to the project in consideration
2: The specific qualitative effect has low importance to the project in consideration 2: The specific qualitative effect has low importance to the project in consideration
3: The specific qualitative effect has moderate importance to the project in consideration 3: The specific qualitative effect has moderate importance to the project in consideration
4: The specific qualitative effect has high importance to the project in consideration 4: The specific qualitative effect has high importance to the project in consideration
5: The specific qualitative effect has very high importance to the project in consideration 5: The specific qualitative effect has very high importance to the project in consideration
Grade 1: The project has a very small impact on the specific qualitative effect -1: The project has a very small impact on the specific qualitative effect
2: The project has a small impact on the specific qualitative effect -2: The project has a small impact on the specific qualitative effect
3: The project has a moderate impact on the specific qualitative effect -3: The project has a moderate impact on the specific qualitative effect
4: The project has a high impact on the specific qualitative effect -4: The project has a high impact on the specific qualitative effect
5: The project has a very high impact on the specific qualitative effect -5: The project has a very high impact on the specific qualitative effect
Sensitivity 1: The uncertainty of grade input value is low, meaning the input is true to the real situation 1: The uncertainty of grade input value is low, meaning the input is true to the real situation
2: The uncertainty of grade input value is moderate, meaning the input is somewhat true to the real 2: The uncertainty of grade input value is moderate, meaning the input is somewhat true to the real situation
situation 3: The uncertainty of grade input value is high, meaning the input may be true to the real situation
3: The uncertainty of grade input value is high, meaning the input may be true to the real situation
Results
Discount Rate
Case chosen 1
Mid 14,0% 1
High 15,0% 2
Low 13,0% 3
Data source 14,0% 1
Discounted Cash Flow Analysis (DCF)

KPIs ROI PB IRR NPV PV 0 1 2 3 4 5 6 7 8 9 10
Data source 393% 1,06 70,5% 11 787 688 14 787 688 -3 000 000 2 486 842 2 181 440 1 913 544 1 678 548 1 472 410 1 291 588 1 132 972 993 835 871 785 764 724
- base case 393% 1,06 70,5% 11 787 688 14 787 688 -3 000 000 2 486 842 2 181 440 1 913 544 1 678 548 1 472 410 1 291 588 1 132 972 993 835 871 785 764 724
- best case 448% 0,95 79,8% 13 430 764 16 430 764 -3 000 000 2 763 158 2 423 823 2 126 160 1 865 053 1 636 011 1 435 098 1 258 858 1 104 261 968 650 849 693
- worst case 338% 1,19 61,2% 10 144 611 13 144 611 -3 000 000 2 210 526 1 939 058 1 700 928 1 492 042 1 308 809 1 148 078 1 007 086 883 409 774 920 679 754
Cumulative value -3 000 000 -513 158 1 668 283 3 581 827 5 260 374 6 732 785 8 024 372 9 157 344 10 151 179 11 022 964 11 787 688
Sensitivity Analysis
NPV Sensitivity ROI Sensitivity Average Median Std
NPV 11 799 766 11 787 688 1 510 112
DISCOUNT RATE DISCOUNT RATE ROI 393% 393% 50%
13,00% 14,00% 15,00% 13,00% 14,00% 15,00% PB 1,1 1,1 0,1
C worst 10 674 134 10 144 611 9 647 297 C worst 356% 338% 322% IRR 71% 71% 8%
A A
12 383 400 11 787 688 11 228 209 413% 393% 374%
S base S base
E best 14 092 667 13 430 764 12 809 121 E best 470% 448% 427% Discount rate - 1% Δ + 1% Δ |Δ|
NPV -5% 5% 5%
PB Sensitivity IRR Sensitivity ROI -5% 5% 5%
PB 0% 0% 0%
DISCOUNT RATE DISCOUNT RATE IRR -2% 2% 2%
13,00% 14,00% 15,00% 13,00% 14,00% 15,00%
C 1,19 1,19 1,19 C 63% 61% 60%
worst worst Impact on KPIs by Change in Discount Rate
A A
1,06 1,06 1,06 72% 71% 69%
S base S base NPV
E best 0,95 0,95 0,95 E best 81% 80% 78%
ROI
PB
IRR
-6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
- 1% Δ + 1% Δ
Smart craneTakkran N2 Saturday, 0 January 1900
Business Case
TOTAL SAVINGS TOTAL COST NET BENEFIT NPV ROI PAYBACK PERIOD IRR QUALITATIVE SCORE QUALITATIVE INDEX QUALITATIVE RELATIVE INDEX
2 835 000 SEK -3 000 000 SEK 25 350 000 SEK 11 787 688 SEK 393% 1,1 YEARS 71% 39,0 0-100 39% 0-100 % 52% 0-100 %
QUANTITATIVE RESULT LoA RESULT
Cumulative Present Value LoA Potential LoA Current State

14 000 000 100%
7
12 000 000
90%
10 000 000
6
80%
8 000 000
6 000 000 5 70%
4 000 000
2 486 842 60%
2 181 440 1 913 544
2 000 000 1 678 548 1 472 410 4
1 291 588 1 132 972 993 835 871 785 764 724
50%
0
Mechanical
3
-2 000 000
40%
-3 000 000
-4 000 000
0 1 2 3 4 5 6 7 8 9 10
30%
2
Present Value Cumulative Value
Savings per Factor Saving Potential

20%
3 500 000 1
Downtime savings 3 150 000
10%
3 000 000
Quality savings 0
2 500 000 0 1 2 3 4 5 6 7 0%
Takkran N2 Inlägg Ugn N2 Diregerare Ugn N4 QT Småkranar Takkran H4 Linjen Märkning Production Section
Information
Relative LoA Potential
Personnel savings 2 000 000 Current Potential
1 500 000
QUALITATIVE RESULT
Productivity Income
1 000 000 Qualitative Sensitivity Analysis Qualitative Criteria Grade

Maintenance savings 100% 3
5
500 000
315 000
0 0 0 0 0 0 0 80%
00 00 00 00 00 00 0 0 0 0 0,0 0,0 0 0
0 0 0 0 0 0
50 00 50 00 50 00 0 2
1 1 2 2 3 4
Total downtime cost Total deviation cost Total peronnel cost Total productivity income Total maintenance cost 60%
Maintenance savings Productivity Income Personnel savings Quality savings Downtime savings
After Before
40%
1 3
Savings Pie Chart Impact on KPIs by Change in Discount Rate
20%
0% 0% 0 2
Index
NPV
Sensitivity
-20%
-1 1
-40%
ROI
-60%
-2
0
PB -80%
-1
-100% -3
on ty y g y
IRR cti il it illi n bilit
s fa Safe xib -sk c ea
h& Fle Re Tra
S ati alt
rk He
Wo -2
100%
-6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% Index Sensitivity Work Satisfaction Health & Safety Flexibility Re-skilling Traceability
Maintenance savings Productivity Income Personnel savings Quality savings Downtime savings - 1% Δ + 1% Δ
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DEGREE PROJECT IN INDUSTRIAL ENGINEERING AND

Effects of Digitalization in Steel Industry

KTH ROYAL INSTITUTE OF TECHNOLOGY

Economic Impacts & Investment Model

Master of Science Thesis TRITA-ITM-EX 2020:280

Examensarbete TRITA-ITM-EX 2020:280

Effects of Digitalization in Steel Industry

Effekter av digitalisering i stålindustrin

Investeringsmodellen har dessutom tillämpats på en potentiell investering i form av en smart

Nyckelord: digitalisering, automation, stålproduktion, automationsgrad, ”discounted cash flow”,

Jenny Cheng & Josefin Westman

AHP Analytical Hierarchy Process

The steel industry is no exception and is undergoing tremendous digital transformations

Furthermore, the notation digitalization is widely used in everyday language, contributing

1.3 Purpose and Research Questions

Q2: How can potential impacts from digitalization projects be quantified?

The intention of the model is primarily to be appropriate in evaluating digitalization

3. Literature Review: This chapter consists of a literature review comprising relevant

9. Discussion: This chapter contains a discussion and argumentation of the research

2.1 Research Design

2.2 Research Method

Figure 1 Research Process

2.3 Data Collection

3.1 Digital Definitions

3.1.3 Digital Transformation

3.2 Automation and Digitalization

An arrangement where devices and components communicate through a continuous flow

3.3 History of Industrial Revolution

Figure 2 History of Industrialization

3.4 Steel Industry

Figure 3 Industry Chart

3.3.2 Current State

3.5.1 LoA Framework

Table 1 Levels of Automation Reference Scale

Figure 5 Mechanical-Information-LoA Diagram Showing SoPI

3.5.2 Discounted Cash Flow

"#! "#" "##

Net Present Value

"#! "#" "##

Internal Rate of Return

"#! "#" "##

"#! "#" "##

3.5.3 Multicriteria Analysis

1. Identify criterions from which alternatives will be assessed

2. Assign weights to each criterion

3. Assign scores to each criterion for alternatives

4. Calculate a weighted sum of the total score

5. Conduct sensitivity analysis

4.2 Quantitative Effects

(+) Increased Productivity

(+) Less Production Losses

(+) Shorter Downtime

(+) More Efficient Maintenance Work

(+) Higher Quality

(+) Reduced Raw Material Consumption

(+) More Efficient Energy Use

(-) New jobs

(-) Disturbance in Production

Figure 9 Summary of Quantitative Effects

- According to Bauernhansl et al., (2016), production costs could decrease by 10 -

- In a report from McKinsey (2016), it is claimed that predictive maintenance can

- In another report from Boston Consulting Group (2015), a quantitative analysis of

4.3 Qualitative Effects

(+) Shorter Time-to-market