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Can ERP handle the challenges of a steel company today? And will that
lead to business benefits for the company? IBM answers are yes, and
yes.
Supply and demand balancing: China and India are expected to maintain
strong growth, but the potential of overproduction by China could have a
major negative impact on the supply/demand balance.
Rising operating costs: Costs for raw materials and energy have
increased significantly, but the corresponding price rise in finished prod-
uct means margins remain strong. However, environmental costs in
developed regions continue to push up energy prices and could start to
erode margins.
IBM Global Business Services
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The steel industry is enjoying strong Consolidation: Consolidation in the industry has accelerated. Two major
growth but is driven by uncertainty mergers – Arcelor-Mittal in 2006 and Tata-Corus in 2007 – have intensified
around the value of the dollar, the interest in consolidation. The industry remains fragmented. In 2005,
balancing supply and demand and the top 10 steel companies shared about 25% of the market, the top 30
rising operating costs. The bottom companies shared slightly less than half the market, and the top 80 com-
line is that today’s Steel industry is panies shared 2/3 of the market.3
changing quickly.
Shifts to lower cost production regions: Many steel companies are shifting
towards making steel in lower cost regions, which are also nearer to the
growth markets. Leading companies such as Arcelor-Mittal and POSCO
are investing in Orissa, India and in China. However, developed countries
still lead in finishing equipment and technical know-how.
Increased niche players: Smaller niche players have the potential to make
more profits than the less-focused giants. This is especially true when
niche players co-operate with customers to develop products and ser-
vices jointly.
Highlights
However, the most important business benefits will often be delivered after the
ERP backbone is established, by other initiatives that use the ERP backbone:
There are cost savings on the IT side, often around 10-15%, especially when
different ERP implementations are being harmonized. These IT savings include:
This burdens the early discussions during the design phase of an ERP imple-
mentation. Fundamental decisions need to be made very early in the project
about how many (finished product) materials should be defined: one extreme
is to define by material group which needs to be configured completely in the
order, or the other end of the spectrum is to define all possible/feasible charac-
teristic combinations which can possibly explode into an extremely large number
of finished product definitions.
IBM Global Business Services
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ERP solutions today can readily handle the complexities this of the V-shaped
bill of material. They allow “characteristics based product configuration” with au-
tomatic deduction of characteristics, characteristic value inheritance from sales
order header to item level, entry of multiple order units such as pieces, tons,
dimensions, and so on. Characteristics then drive production, shipping and pur-
chasing processes across the supply chain
Finished
CRC
Gauge: .025 Gauge: .020 Gauge: .015 Gauge: .010
HRC
Gauge: .25 Gauge: .15
Slab
Challenge 5: Complex production scheduling combining both continuous and batch production
Figure 2 below illustrates the flow in a typical steel mill. While the blast furnace
and converter work in batches, the caster works continuously and the finishing
lines work in batches again.
The ERP system will also need to work closely with the company’s Business
Information Systems (BIS) to optimize the business benefits. Working together,
the ERP and BIS systems can, for example, improve inventory allocation to late
orders.
Global Business
IBM Business Services
Consulting Services
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IT investments. a promise date (at the end of the block to allow for the flexibility of possibly
moving to an earlier date).
• The mill optimizer then typically would re-shuffle orders in between the blocks,
and feed results back into the SCM application in order to optimize the load
balancing.
• Right before production starts, planned orders from the SCM application are
converted into production orders and, via the ERP system, are transferred
into the MES layer. It is at that time when quantities are being translated into
pieces (slabs, coils etc.).
• Detailed scheduling then takes place, sequencing and combining pieces
from various orders throughout the mill into lots for optimization.
• Production completion then posts an updated status of the orders into the
ERP system, including stock receipts of finished products, and so forth.
FIN, HR,..
Inventory Allocation
Slab & Plate Design Melt Shop Scheduling Hot Mill Scheduling Finishing Line Scheduling
Level 3
Process Control
Process Control
Machine Control
Control
Highlights Figure 3 is also important because it lets you identify gaps among a
company’s different IT systems. A typical gap occurs between the
ERP and MES (process control and machine control) systems, where
Implementing ERP is complex, and
the “system” is actually combination of custom-built applications and
takes a team of knowledgeable and
manual spreadsheets. “Bridging this gap” properly is essential for
experienced ERP professionals to
realizing the business benefits of the IT investments.
successfully implement an ERP project.
Highlights ERP Steel Case Study: A South American Steelmaker and SOA.
Service Oriented Architecture (SOA) is the most recent technology step for ERP.
SOA breaks applications into smaller, granular software components which use
Service Oriented Architecture (SOA) is
industry-standard methods to communicate and inter-operate.6 SOA moves
the most recent technology step for ERP.
away from the “one size fits” all approach to one that fits more industry specifics
Properly implemented, SOA architecture
and customer specifics, all on a more productive development environment. SOA
can provide real-time views of critical
makes it easier to incorporate new and innovative business processes and gives
cost and profit information online.
more deployment flexibility.
A recent steel industry example for SOA is the IBM project in 2005 with a stain-
less steel company based in Brazil. The SOA architecture provides the company
with real-time views of critical cost and profit information for every key decision.
They now have an integrated solution that can provide real-time cost and profit
information online. This is essential in times of soaring raw material costs, espe-
cially for stainless steel manufacturers where Nickel and Chrome costs need to
be analyzed separately.
The steel company designed and implement the new ERP system based on core
“mySAP” modules (which are pre-SOA architecture), plus several SOA-compliant
software components. The ERP modules are integrated with the client’s asset
management, production planning and packaging systems. The “Integration
Message Broker”, which is part of IBM’s Websphere software, allows important
transactional data such as materials consumption and purchase orders to be
freely exchanged from the Oracle database to all of the company’s systems.
This platform has proven to become the glue providing management online real-
time cost and margin information which is needed for robust decisions in the
volatile stainless steel market.
IBM Global Business Services
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Conclusion
ERP is a key backbone application for companies in a fast changing industry
like steel. Given an awareness of the best practices and a good understanding
of the project complexities, the risks in an ERP implementation are usually out-
weighed by the benefits. The ERP discussion is often one of mindset more than
one of standalone business cases.
References
1 International Iron and Steel Institute (IISI), http://www.worldsteel.org
2 MEPS World Steel Prices, http://www.meps.co.uk/allproducts%20steel%20price.htm
3 International Iron and Steel Institute (IISI), http://www.worldsteel.org
4 Aberdeen estimates ERP implementation costs to be approximately $5,000 to $6,000 US per user external costs
(except infrastructure) for large implementation (more than 1500 users, using Oracle or SAP). “The Total Cost of ERP
Ownership”, October, 2006
5 IBM, Global Business Services analysis, 2006
6 An audio-video (AV) system, for example your home TV-stereo system, is a good analogy for the idea behind SOA.
The individual SOA services are like the individual components of the AV system that can be cabled together. Many
people own an AV system with components that have been purchased over the years. Let’s say you want to add a
new DVD-video tape recorder to the system. You already have the TV monitor, the CD player/burner, the amplifier,
and the radio tuner. You can add the new DVD-video tape component with cables to the rest of the system, although
you might need to recable some of the components. Over time, you can replace each individual component as th
need arises, and as technology improves.
IBM Global Business Services
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