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Supply Chain Management in the Swedish Steel Industry

Av

Gustav Terland Jonathan Mankowitz

Examensarbete 2008-xxx KTH Industriell Produktion SE-100 44 STOCKHOLM

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SUPPLY CHAIN MANAGEMENT IN THE SWEDISH STEEL INDUSTRY HAS THE NICHE STRATEGY IMPLIED LOST FOCUS ON PRODUCTION PROCESSES IN FAVOR OF PRODUCTS?

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ABSTRACT This research aims to investigate Supply Chain Management in the Swedish steel industry. More specifically, how actors in the industry regard their supply chains in relation to their overall strategy and what implications industry specifics have when the flow of material and information is to be optimized. Furthermore, this thesis looks into the reasons behind value chain positioning; is it desirable to encompass all the activities in the value chain into the core businesses (integration) or rather focus on a particular field of work? What are the reasons behind a certain positioning strategy? In order to bring clarity to those questions, in-depth interviews have been conducted with five of the largest Swedish steel companies. An additional survey has been sent to a selection of other steel companies with a Swedish connection. The interviews and surveys, together with a financial analysis of the companies, constitute the empiric base for this study. The findings suggest that forward vertical integration is a trend among Swedish steel companies and that the proximity to the end-user of steel is the main motive for the deployed strategy. Despite the fact that margins are generally lower for the latter parts of the value chain, the steel producers see financial incentives for encompassing these activities. Stabilized demand and secured sales volumes are reasons why these activities are taken over by the producers. The Swedish steel companies have chosen to focus on high value niche products since they can never compete with low cost bulk producers. The niche strategy has made efficiency efforts less lucrative than increasing margins by developing leading and customized products. Furthermore, as an effect of the product focus, delivery accuracy is one of the leading issues for the industry. Even though all companies are aware of this problem and strive to improve delivery accuracy, the absence of a top performer in the industry takes away the pressure for real improvements. Acceptance by customers, due to the favorable market situation for steel producers, is further an implication why this matter is currently not critical for survival.

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

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

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

3 THEORETICAL FRAMEWORK ............................................................11 3.1 SUPPLY CHAIN............................................................................................................................................. 11

4 ANALYSIS AND RESULTS ..................................................................15 4.1 INTERVIEWS ................................................................................................................................................. 15

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

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

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

5 CONCLUSIONS.....................................................................................53 6 CRITICAL REVIEW AND SUGGESTIONS ..........................................56 7 REFERENCES.......................................................................................57

APPENDIX 1 – DESCRIPTIONS & BEST PRACTICES ............................60 APPENDIX 2 – DESCRIPTION OF SCOR AREAS....................................63 APPENDIX 3 – COMPANIES: INTERVIEWED/SURVEYED .....................64 APPENDIX 4 – SURVEY .............................................................................65 APPENDIX 5 – CALCULATIONS & SOURCE DATA................................70 APPENDIX 6 – AHP METHODOLOGY ......................................................72 APPENDIX 7 – SURVEY RESULT .............................................................74

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1 BACKGROUND & PURPOSE

1.1 BACKGROUND Historically the focus of improvement methods within Supply Chain Management (SCM) has varied substantially. This is partly due to new manufacturing technologies and strategies, but also a result of the changing state of the world economy. In the 1980s, as manufacturing strategies such as lean, total quality management and just in time spread to a broader audience, reduced costs became the focus within SCM (Simchi Levi et al., 2007). The intense pressure to reduce costs further contributed to the trend of outsourcing in the 1990s, along with the focus on increased availability, and supply chain agility (Simchi Levi et al. 2007; Lindh 2004; Christopher & Towill 2000). Recently the risk management factor has been integrated to balance the focus on cost (Simchi Levi et al. 2007), and the importance of optimizing entire value- and supply chains rather than just parts of separate companies - such as inventory, manufacturing or transports - has increased (Lindh 2004; Stadtler & kilger 2005). Furthermore, it is apparent that the focus lies on costs when the economy is souring, while productivity is prioritized during upturns (Lindh 2004). The effects of capacity restrictions during upturns can be minimized by closer relationships with suppliers and customers, in other words; integration, which is the most apparent trend within SCM related literature today (Simchi Levi et al. 2007; Lindh 2004; Christopher & Towill 2000). It can also be noted that the past 5 years (since 2003) have been characterized by strong growth in the global steel market, much due to the industrial investments in China and the rest of Asia (Jernkontoret 2006). The Swedish steel industry’s characteristics are largely a result of the energy crisis in the 1970s. One of the most apparent reasons for this is that the Swedish ship building industry almost disappeared. This industry was at the time the second largest in the world and consumed most of the domestically produced steel. In addition the building sector reduced its activities and the domestic steel consumption shrunk by 50% from 1975 to 1990. As a result of this, the industry was restructured and the remaining companies specialized the production intensely towards niche product groups, with more value added than traditional steel. As a consequence, they no longer compete with each other. During this period there was also an intense focus on cost reducing strategies, which is characteristic for a recessionary industry. (Nyquist O. 1998) The steel industry in general has distinct characteristics that separate it from other industries. For example the products have relative long life-cycles, the companies are highly capital intensive and there is a global overcapacity of steel. This means that low cost production is, in general, a prerequisite to become a market winner and companies cannot rely on increased prices to ensure their profitability (Standard & Poor’s 2007). The Swedish steel industry, specifically, is highly specialized and therefore should not comply with the strategies used globally, where volumes and economies of scale are the center of attention today (Nyquist O. 1998). This makes an examination of SCM-strategies in Swedish companies especially interesting.

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1.2 PURPOSE The main purpose of this thesis is to describe Supply Chain Management from the view of the Swedish Steel Industry. In other words, how do the actors in this industry regard their Supply Chains in relation to their overall strategy and what implications do industry specifics have when the flow of material and information is to be optimized? The following sections break down the main purpose into more tangible objectives.

• Is there an unequivocal emphasis on certain Supply Chain areas by companies in the steel

industry? And do the companies face the same challenges i.e. are the problems due to industry specifics or do they exist isolated?

• What are the reasons behind value chain positioning? Is it favorable to be integrated all

along the value chain or is it more attractive to focus on certain activities from a value creating point of view?

• What methods are used in the different areas of the Supply Chain and is the purpose of the

deployed methods in-line with the academic research. Do they really aim at increasing information transparency and system wide efficiency?

• Are there any correlations between the use of Supply Chain Management methods and

KPIs regarding performance and value creation? • What areas of the Supply Chain are regarded as most strategically important and is this

coherent with current emphasis on overall business strategies?

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2 METHOD This thesis contains several sources of information to address the above stated purpose. The theoretical part consists of well-known sources complemented with academic articles on the subject. The empirical part of the thesis consists of two main sources, in-depth-interviews and a survey. The survey was sent out to get the broad picture of what specific tools are deployed in the industry, while the interviews have been conducted in order to understand the reasons behind certain SCM strategies. This material has been complemented by information from the companies’ annual reports.

2.1 SELECTION CRITERIA FOR STEEL COMPANIES Members of the trade organization Jernkontoret have been selected to constitute the market, which is referred to as the Swedish steel industry. To ensure that the selected companies are a fair representation of the Swedish market, the selection of companies has been complemented with steel companies listed by Statistiska Centralbyrån (SCB). Steel companies have been defined as companies producing steel, from steelworks to processed steel. Hence, excluding the mining industry (raw materials) and the engineering industry (modular production) according to figure 1. The last stage included here encompasses final activities such as cutting, bending etc. This is often done by an external part, referred to as Steel Service Centers (SSC), often with the responsibility to also distribute the steel locally.

The companies have been selected according to the following criteria:

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

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

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

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

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

Exploration and Mining

Smelting and Slab

production

Rolling, Hardening & Finishing of metal

Coiling/Coating/-Formatting

- SSC - Cutting, Stripping,

Welding, Bending of Metal

Modular

Production

Figure 1 - Delimitation of the “steel industry”

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

1 Outokumpu Stainless 16 Lindab Steel 2 Sandvik Materials Technology 17 Erasteel Kloster 3 SSAB Tunnplåt 18 Plannja 4 SSAB Oxelösund 19 Surahammars Bruks 5 Tibnor 20 Haldex Garphyttan 6 Ovako Steel 21 Scana Steel Björneborg 7 BE Group 22 Burseryds Bruk 8 Ruukki Sverige 23 ThyssenKrupp Materials 9 Acerinox Scandinavia 24 Böhler-Uddeholm Precision Strip

10 Höganäs 25 Arcelor SSC 11 Ovako Bar 26 Structo Hydralics 12 Outokumpu Tubular 27 Boxholm Stål 13 Uddeholm Tooling 28 Scana Steel Söderfors 14 Fagersta 29 Carpenter 15 Kanthal

2.2 SURVEY A large part of this thesis consists of investigating the SCM-tools that are used in the steel industry. As interviewing each one of the companies would have been too extensive, a survey was conducted in order to understand the great picture. The targets have been either site managers or managers within logistics or SCM who have been called in advance to increase the number of respondents. The survey answers the following questions: (1) How are steel companies positioned in the value chain, (2) What parts of the supply chain are emphasized, (3) What tools are used for managing the supply chain, and (4) Where in the supply chain do steel companies see most potential for cost savings and areas for profit generating possibilities. The complete survey can be found in appendix 4. In the first part of the survey the respondent is simply asked to indicate the stages in the value chain that are part of the company activities. The tools used in (3) are a collection of best/leading practice methods from the SCOR model and other credible sources (see theory). Best/leading practices are marked yellow in appendix 7. Abbreviations are explained in appendix 1, where also the source claiming the best/leading practice is listed for each method. Furthermore, the questions in the survey are sorted by supply chain area (e.g. source, make) and are constructed as statements where the respondent is asked to fill out to what extent the statements coincide with the supply chain activities taking place at present.

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SCM-Score Respondents are asked to rank to what extent each method is used, from “strongly disagree (1)” to “strongly agree (4)”. This allows for a simple computation of a SCM-Score. More specifically, the SCM-score has been calculated as the sum of all best practice methods multiplied with the degree of usage (1-4) and then divided with the total possible score (the sum of all methods multiplied with 4) to receive the percentage. The SCM-score is an indicator of Supply Chain Management maturity and is used in comparison with other metrics to reveal if there exists a correlation between the use of Supply Chain Management methods and performance. Representation of methods deployed For the representation of the survey results the answers 3 and 4, for each Supply Chain Management method, have been characterized as used to a “high extent”. The percentage of high extent users per method is shown in tables for each SCM area. To bring clarity and stringency the companies have been divided into two categories; steel producers (Stage 1&2) and service centers (Stage 3). This is due to the fact that the former is very production intensive while the latter is rather a middleman. AHP The final part of the survey consists of a pair-wise comparison of the supply chain areas, where the respondent is asked to rank each area in regard to potential. Information from this part is used in order to do an analytical hierarchy process (AHP)2, where the degree of potential for each area is revealed for the industry in general. For the evaluation of the survey the companies have been divided into two groups, producers and service centers. The reason for this is that a clear distinction can be made as the activities differ significantly, and thereby also the supply chain management strategies.

2.3 IN DEPTH INTERVIEWS The purpose of the interviews was to get a more detailed picture of how the supply chain for each company is outlined and the strategic reasons behind choosing a certain approach. The in-depth interviews have been carried out with the five of the largest steel producing companies in regard to revenues. In order to reach out to people with knowledge in the supply chain processes, the interviews have been carried out at the factory sites. Steel companies usually have several industrial units scattered throughout the country and for this thesis the major plant that encompasses steel production has been selected for the interviews.

2 Description can be found in appendix 6

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To be able to cover the whole supply chain from a strategic perspective, managers from market, production and logistics have been interviewed at each site. This grants a total of 15 interviews. The interviews were carried out with open-ended questions based on the survey, but from a more explanatory angle. In other words, the respondents were given space to speak freely in order to extract as much relevant information as possible.

2.4 METRICS For comparison with the SCM-Score and the positioning by the various companies well known financial and Supply Chain Management specific key performance indicators (KPI) have been calculated. To minimize the effect of specific years, the metrics have been calculated as the average for the period 2003-2006. The complete results can be viewed in appendix 5. EBIT MARGIN (EBIT %) – EARNINGS BEFORE INTEREST AND TAXES EBIT takes all operational profits into account, i.e. exclusive interest payments and income taxes and is an indicator of a company’s profitability. The reason for the use is that the measurement excludes the effects of capital structures and tax rates, thereby making cross-company comparisons possible.3 EBIT % = OPERATING PROFIT / REVENUES ROCE – RETURN ON CAPITAL EMPLOYED ROCE indicates how efficient and profitable a company’s investments are, or in other words, how well the assets are used. As the operating profit is related to the investments it requires, this measurement should reflect more specifically the relative operational success of a company.4 ROCE = EBIT / (TOTAL ASSETS – CURRENT LIABILITIES) STOCK TURNS Stock turns, or inventory turns, is used as a measurement of how many times the inventory is sold and replaced in one year. A low value indicates poor sales and excess inventory (in relation to the sales volume). This is also one of the main KPIs used to measure a Supply Chain’s effectiveness and is supposed to improve with the use of best practice methods (Stadtler & Kilger 2005). Revenue and Inventory are measured in MSEK.5 STOCK TURNS = REVENUE / INVENTORY

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

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3 THEORETICAL FRAMEWORK

3.1 SUPPLY CHAIN The following section describes the origin of the methods used in the survey, the questions asked in the interviews and the model used for analysis. Abbreviations and explanations to specific methods can be read in appendix 1. DEFINITION OF SUPPLY CHAIN AND SUPPLY CHAIN MANAGEMENT Stadtler & Kilger define the supply chain as “a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer”. The chain involves two or more legally separated organizations that are linked together by either material, information or financial flows and includes the ultimate customer. Supply Chain Management has the objective of governing all parts of the supply chain as a unit, instead of single organizational elements, in order to achieve increased competitiveness. (Stadtler & Kilger 2005) There are two ways to improve a supply chain, i) closer integration of involved companies and ii) better coordination of material, information and financial flows. In order to achieve this, companies must overcome their own organizational barriers and align strategies with the other constituents of the chain. Hence, this is the core of Supply Chain Management and the definition is as follows: “The task of integrating organizational units along a supply chain and coordinating material, information and financial flows in order to fulfill (ultimate) customer demands with the aim of improving the competitiveness of a supply chain as a whole” (Stadtler & Kilger 2005) Simchi-Levi has similar definition of Supply Chain Management with an apparent focus on reducing cost and increased efficiency throughout the supply chain: “Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, an at the right time, in order to minimize systemwide costs while satisfying service level requirements” (Simchi-Levi et al. 2007) Integration is a necessity for an effective supply chain, where the ideal is that information and know-how is shared openly among the members. Competition along the supply chain is supposed to be replaced by the commitment to achieve increased competitiveness along the chain as a whole. On the other hand market interactions imply that companies can cancel their collaboration at any time for short-term reasons (better prices in other supply chains, etc.). Therefore bonds should be used to ensure the cooperation among supply chain members. These bonds can be either technical (common technologies), knowledge (about each others’ businesses), social, administrative or legal. (Stadtler & Kilger 2005)

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Coordination, the second part of SCM, includes utilization of information and communication technology, process orientation and advanced planning. Electronic Data Interchange (EDI) for example is favorably used to achieve instantaneous information exchange among members in the supply chain. Process orientation refers to the streamlining of cross-company processes to reduce system-wide costs while enhancing quality and various operations’ speeds (e.g. steel companies performing simple machining operations to facilitate the next production step for customers). Finally, advanced planning incorporates both short- and long-term planning where APS systems (Advanced Planning Systems) exist to complement ERP systems to include inter-organizational planning. (Stadtler & Kilger 2005) Collaboration is, in other words, essential to a company’s success and sequential processes ought to be replaced by global optimization. Therefore collaboration has become the focus of supply chain systems in recent years, resulting in development of standards for collaboration between suppliers and vendors (such as Collaborative Planning, Forecasting and Replenishment, CPFR). (Simchi-Levi et al. 2007) Furthermore a vital issue is that SCM should not be a strategy on its own, but rather an integral part of both each member’s strategy and the supply chain’s strategy as a whole. This can also be complemented by consolidations among different supply chains, e.g. combining demands for standard parts to increase the purchasing power. (Stadtler & Kilger 2005) THE BULLWHIP EFFECT “The increasing amplification of orders occurring within a supply chain the more one moves upstream. This phenomenon also occurs even if the end item demand is fairly stable”. (Stadtler & Kilger 2005) The Bullwhip effect is regarded as a classic problem within SCM, that results is unnecessary inventory, shortage costs and unstable system behaviors. One source for this effect is the use of multiple demand forecasts. The theory states that orders should be based on the ultimate customer demand and not that of intermediaries, which can be achieved by information integration through, for example, EDI-links or VMIs. In other words problems concerning all three parameters of working capital (unnecessary inventory), costs (unstable production) and lost revenues (supply shortages) can be related to the Bullwhip effect and minimized by better integration. (Stadtler & Kilger 2005) Other principles to reduce the Bullwhip effect are order batching (consolidating transports), prize stabilization (discounting increases the Bullwhip effect) and elimination of gaming (additional ordering as a result of speculations). These counteractions to the Bullwhip effect are simplified by the use of timely information, both intra- and inter-organizational. (Stadtler & Kilger 2005)

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SCOR-Model The SCOR model is a reference instrument, developed by the Supply Chain Council (SCC) in order to describe Supply Chains and the activities they encompass in a standardized way. As a result Supply Chains can be benchmarked against each other and best practice methods for specific processes are shared. (Stadtler & Kilger 2005) Furthermore the SCOR-model constitutes the base for the analysis model used to position the interviewed companies relative each other. The SCOR model consists of the process types: plan, source, make, deliver and return (recycle) and includes activities from suppliers to customers. Appendix 2 provides a brief explanation of the different areas.

Figure 2 SCOR-model6

In addition to best practices for Supply Chain Management, there are key performance indicators (KPIs) that are applicable and important for all supply chains. These are delivery performance (delivery accuracy), supply chain responsiveness (the ability to react to market changes), assets and inventories (inventory turns) and costs (e.g. cost of goods sold). (Stadtler & Kilger 2005) One important aspect of Supply Chain Management is demand fulfillment (delivery accuracy). Closely connected to demand fulfillment is the process of order promising, with the traditional approach that is standard for MRP systems of promising supply against inventory. If there is no available inventory, orders are quoted against production lead-time (backlog) which often violates other constraints, such as available capacity. A better approach to promise orders is available-to-promise (ATP), which considers all constraints along the supply chain to give more accurate and realistic promises. “ATP is the result of a synchronized supply and capacity plan and represents actual and future availability of supply and capacity that can be used to accept new customer orders on”. This method is especially useful in the case of a supply constraint in the industry, i.e. material and/or production capacity are bottlenecks. (Stadtler & Kilger 2005)

6 Supply Chain Council

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THE ANALYSIS MODEL The analysis model comprises the operational processes from the SCOR model (Source, Make, Deliver & Return), briefly described in the previous chapter. The model has been complemented with the dimension of working capital/revenues/costs. This will supposedly explain the use of certain methods as the focus shifts depending on each company’s state and the steel industry’s state in general. To further reflect the importance of integrating suppliers and customers and clarifying the strategies for this, these two areas have been added to the SCOR processes (to some extent this is incorporated in the excluded “plan” area from the SCOR model). Even though product development (“design”) is not addressed by the SCOR-model this area has been added as the model would not reflect the companies’ complete emphasis without it. The Supply Chain Forum, where these three areas are described as integrated processes in Supply Chain Management, further validates this addition to the SCOR model. (Stadtler & Kilger 2005) Combined, the various sources have resulted in an analysis model shown below (figure 3).

Figure 3 Analysis model

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4 ANALYSIS AND RESULTS

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

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

4.1.1.1 SSAB Oxelösund – Plate Division • Revenue: 9.563 MSEK7 • Production: 586 kt (kilo tonnes)8 • Employees: 25199 • Niche: Quenched heavy plate • Customers: Construction machinery, mining equipment & crane manufacturers • Strategy: Superior product, service & know-how, physical closeness to

customers

SSAB Oxelösund is one of two divisions within the SSAB Group, producing heavy plate with its two most recognized brands HARDOX and WELDOX. The facility in Oxelösund is an integrated steelworks, covering all production from smelting to hardening, quenching and finishing. Oxelösund’s products have better strength and resistance characteristics while maintaining a lower weight than competitors’ products. This is a source for competitive advantage, enabling a sales price that is often close to double that of other steel producers. Notable is also that by the end of 2007 almost no ordinary plate was produced as a result of the strategy of focusing more on niche products (quenched plate) 10. The main customers for Oxelösund are construction machinery, mining equipment and crane manufacturers. These industries have high requirements regarding safety and reliability and hence enable steel makers to charge more for superior product characteristics. Also the increased focus on environmental issues favors producers of lighter materials but with similar strengths. SSAB has very well-known brands in this niche, going as far as being recognized and requested by end-consumers (for example the buyer of a Caterpillar machine) when buying equipment.

7 Affärsdata (for 2006) 8SSAB Annual Report 2007, p. 29 (for 2006) 9 Affärsdata - 2006 10 SSAB Annual Report 2007, p. 28

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Generally the market for quenched plates shows a good growth. This is much due to investments in developing regions but also the developed regions have shown continuously increased demand11. For Oxelösund specifically, the demand is far bigger than the available production capacity, giving the company’s sales organization a highly favorable position. Rather than actively selling the steel, this is an operation of allocating small volumes to preferred customers. As a result of the above-mentioned factors Oxelösund has an extremely high EBIT margin compared to most other companies in the steel industry (as can be seen in appendix 5). Tied to the insufficient production capacity, is Oxelösund’s strategy to supply small customers that are not attractive to the big players in the industry, mainly due to small order volumes. Examples of this kind of customers are small local after-market service centers with demands for customized products. Going after this kind of customers, means not only supplying unattractive markets, but also being almost invisible to bigger competitors. It would be very difficult to find all these small customers to make counter-offers even if they wanted to.12 As it is impossible for Oxelösund to compete with lower prices – volumes are too small – the company constantly tries to develop products that are difficult to produce with high productivity. In other words they manufacture products that are unattractive to produce for modern flow-optimized factories where maximum tonnage at lowest possible cost is prioritized. This once again makes the products unattractive for competitors and is a part of the long-term strategy to dig deeper into the niche. 13 The activities with the most unique production knowledge at Oxelösund are the smelting (material recipe) and the hardening/quenching process. These two processes surround the process of rolling, which could theoretically be outsourced. The main reason for keeping this process in-house is to remain integrated with minimal external risk. Another factor is the desire that customers consider the products unique and special, something that would be harder to achieve if production processes were outsourced. 14 The sales strategy to concentrate on small customers is complemented with a very developed collaboration with end-customers. Specific about this collaboration is that it goes beyond marketing and long-term relationships, to have expert knowledge about the customers’ processes. This gives Oxelösund a very favorable position in negotiations and the possibility to sell the exact right steel at a higher price. In other words the products sold contain a high level of service, from application support to long-term relationships. For example Oxelösund has application engineers specialized in the mining industry where demands regarding safety and product reliability are extremely high. As a part of the strategy to go after small customers, mainly in the after-market, Oxelösund does not sell at all via wholesalers. Instead products are sold either directly to customers, often sub-suppliers to Original Equipment Manufacturers (OEM), or distributed by their own warehouse. The simplified value chain for Oxelösund is interpreted below.

11 SSAB Annual Report 2007, p. 9 12 Interview with SSAB Oxelösund representative 13 Interview with SSAB Oxelösund representative 14 Interview with SSAB Oxelösund representative

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Figure 4 Value Chain SSAB Oxelösund

The collaboration with customers in the after-market furthermore creates a pull for Oxelösunds products in earlier stages (OEMs and end-users). Alongside the collaboration with these after-market service centers, Oxelösund owns its own service centers. This is mainly in markets where there are few local SSCs and they must have their own in order to create an infrastructure to be close to potential customers. Owning SSC facilities is especially important when establishing operations in developing regions due to the lack of existing infrastructures for distribution. Furthermore Oxelösund is ready to buy local centers that are often family-owned and otherwise would be closed down. Apart from resulting in increased integration and a closeness to customers this strategy reduces uncertainties in demand.15 SCM-EMPHASIS The fact that demand is far greater than capacity affects lots of different areas of the company, although no apparent SCM strategy is deployed company-wide. Some extra attention should be given to the fact that most work focuses on increasing revenues, whether it is increased production or pro-active work with deliveries. As it turns out, it is currently much easier for the company to earn more by increasing sales than trying to reduce costs. 16 SUPPLIER/ SOURCE When purchasing raw materials the company uses few suppliers and long-term relationships to keep the raw material inventory at a minimum. The main raw materials (ore and coal) are bought at global market prices and conditions and are therefore considered difficult to affect from a SCM point of view. For example VMIs or EDIs are not used and there is a relatively low transparency between supplier and customer regarding demand.17 The sourcing process is furthermore aimed at lowering costs and keeping the inventories as low as possible. Although the money that can be saved by lowering inventory levels can never be 15 Interview with SSAB Oxelösund representative 16 Interview with SSAB Oxelösund representative 17 Interview with SSAB Oxelösund representative

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compared to the loss in production due to a lack of raw materials. Therefore costs are not prioritized when it comes to critical input materials, but the main focus regarding non-critical inputs. 18 DESIGN Design, or product development, has always been regarded as one of the main drivers for success by SSAB Oxelösund. The unit has a desire to be considered the market leader regarding product characteristics and innovation and therefore has to put emphasis on this area. Since the restructuring of the steel industry in the 1970s, Oxelösund has produced products with a significant quality advantage. Even though competitors are closing in regarding product characteristics, Oxelösund still has the leading edge. The strategy is to remain in this position and therefore the company focuses a lot of attention in this SCM area.19 MAKE Some best practice methods are used in order to create an efficient flow of goods. These methods are for example “drum-buffer-rope” (optimizing in regard to bottlenecks) and creating a capacity abundance in final production steps. This only helps to some extent as the factory site is old and the layout is not optimized to create a flow of products from the start.20 Being able to sell more than can be produced also comes with some problems. The factory at Oxelösund has been constantly occupied with orders for more than 100% of available capacity. The slightest problem in the factory therefore creates a huge gap and delivery accuracy has been very low in the past. A way of avoiding this problem is to have a close communication between sales offices and production. The slightest stop in production is immediately communicated to sales offices where allowed sales volumes are reduced correspondingly.21 DELIVER External transports are constantly being improved and remain an important area within SCM at Oxelösund. Transports are being optimized in regard to costs in the long run, but the main reason for improvements in this area is that it must not become a future bottleneck. This would be highly plausible if production capacity would be more in line with demand. In other words the work is pro-active in this case. As part of the distribution strategies Oxelösund also develops methods for loading containers for transport and shifting to trains from trucks. Apart from being more environmentally friendly this alternative allows for fewer transshipments and hence is more effective. 22 RECYCLE Within the factory site, excess material and scrap is recycled and used as input material. When it comes to recycling material from customers or various service centers, the potential cost savings are very small. Furthermore the logistics solution for achieving this would have to be established

18 Interview with SSAB Oxelösund representative 19 Interview with SSAB Oxelösund representative 20 Interview with SSAB Oxelösund representative 21 Interview with SSAB Oxelösund representative 22 Interview with SSAB Oxelösund representative

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as there are lots of outgoing transports but only a few incoming, i.e. cross-docking solutions are difficult to achieve. 23 CUSTOMERS One important aspect of the Supply Chain Management theory is sharing information openly. This strategy is currently not used between Oxelösund and its customers. The reason for this is very specific, namely that the company does not want customers to view the products in stocks as available at wish. This of course relates to the strategy that the sales force basically allocates volumes to customers. On the other hand the company focuses lots of attention on this area when it comes to cooperating, long-term relationships and knowledge about customers’ processes (as described previously). Hence, it is one of the main aspects of the company’s strategy and helps to reduce demand uncertainties while increasing the sales volumes. 24 ANALYSIS SSAB Oxelösund does not seem to have a general SCM strategy, although some specific SCM methods are used in the various sections. Because of the favorable market the company does not focus on costs at the moment and most strategies are directed towards increasing production capacity and short- and long-term revenues. The emphasis on Supply Chain Management is recapped in figure 5 below. The SCM areas “supplier”, “source” and “recycling” receive by far the least attention. These areas are typically associated with cost reduction and as the company rather focuses on increasing sales, they are given less emphasis.

Suppliers Design Source Make Deliver Recycle Customers

Working Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 5 Supply Chain emphasis SSAB Oxelösund 23 Interview with SSAB Oxelösund representative 24 Interview with SSAB Oxelösund representative

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• Delivery accuracy is low due to the over-scheduled production system. • Focus lies on developing the products rather than developing the production processes.

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

• Customer relationships and collaboration go beyond the end-user to even include the

aftermarket, creating a very favorable position that is difficult to reach by competitors. A pull for the products is created throughout the value chain when end-users demand that products should contain steel from Oxelösund.

• Even though small customers are preferred, global steel consumers constitute an

important part of the total sales volume. These companies demand a global presence by the steel supplier in order to have a consistent steel quality throughout their production sites. Hence the global distribution net becomes an important aspect, placing emphasis on improving logistic solutions.

4.1.1.2 SSAB Tunnplåt – Strip Division • Revenue: 14.824 MSEK25 • Production: 2660 kt26 • Employees: 405627 • Niche: Advanced high strength steels (strip) • Customers: High strength: Heavy & light vehicles, crane manufacturers,

Ordinary: Engineering & construction • Strategy: Advantageous distribution net on home market, increased focus on

niche products SSAB Tunnplåt, the strip products division, manufactures both ordinary and high-strength strip steel. Customers for high strength steel are mainly in the automotive industry with applications ranging from containers (hot rolled) to safety components (cold rolled). The main competitors in this product area are Arcelor Mittal and Thyssen Krupp. Ordinary steel has applications in the construction, engineering and automotive industry and competitors are most European steel producers. In summary, the market for the products manufactured by the SSAB Tunnplåt facility, is highly competitive (more so for ordinary than high-strength) and the prices depend much on the competitors. Therefore a strategy that focuses on reducing costs is necessary for this division, although reduced working capital has recently become an important issue. This is the opposite of the SSAB Oxelösund division that basically dictates conditions and focuses a lot on increasing revenues. 25 Affärsdata (for 2006) 26 SSAB Annual Report 2007, p. 10 (for 2006) 27 SSAB Annual Report 2007, p. 25 (for 2006)

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Sweden, as SSABs home market, is the absolutely largest market for the Tunnplåt division with approximately 35% of the total deliveries. The remaining shares are somewhat equally distributed across Europe completed with small shares in the USA and China. In the Nordic market the company sells both ordinary and high-strength steel, whereas the strategy is to only supply high-strength in the remaining markets. Ordinary steel sales in the home market are made possible mainly by the proximity to customers and a well established distribution net. Environmental issues and requirements have a positive effect on the demand of high-strength steel as reduced weight can be achieved with similar or higher strength and a longer product life (this is mainly relevant for sales in the automotive sector). As the company has also come relatively far in the emissions reduction area (compared to competitors in other countries), stricter, but equal, environmental regulations could be of advantage.28 The strip products division consists of two units; a slab production plant in Luleå and rolling plants and after-treatment in Borlänge. As the capacity in Luleå is not sufficient, the remaining slabs are purchased from the Oxelösund unit. To increase the capacity in the final steps, several sub-contractors are used for various finishing operations close to the customers. 29 Generally the production sets limits for how much high-strength steel can be produced and sold. The production flow is very complex for the different high-strength products, with many bottlenecks at final steps. This allows for the remaining production capacity in the first steps (rolling) to be utilized for ordinary strip steel production. Tunnplåt has the same strategy as the company as a whole, namely to increase the focus on niche products. Investments in the production capacity for advanced high-strength steels are in line with this strategy and as a result the share of high-strength steel increased from approximately 28 % in 2006 to 33 % in 2007. Compared to the Oxelösund facility, where almost only niche products (quenched steels) were produced towards the end of 2007, this strategy still has large potential. 30 The material flows for the Tunnplåt division are shown simplified in figure 6 below.

28 Interview with SSAB Tunnplåt representative 29 Interview with SSAB Tunnplåt representative 30 Interview with SSAB Tunnplåt representative

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Figure 6 Value Chain SSAB Tunnplåt

As can be seen in figure 6 the products are sold mainly via wholesalers but also directly to sub-suppliers and manufacturers. Especially in the home market, Sweden, the distribution net is very elaborated including the ownership of distributor Tibnor and building sheet producer Plannja. This distribution net and local presence is also the main competitive advantage for ordinary strip steel in the home and neighboring markets.31 SCM-EMPHASIS The strip division has no common SCM strategy to increase the company-wide efficiency. Despite this, several improvement methods are used within each of the defined areas that are described below. Generally Tunnplåt strives to improve delivery accuracy, although the main focus lies on reducing costs and increasing the share of niche products through investments and productivity improvements.32 SUPPLIER / SOURCE Within purchasing there is not so much to do in order to lower the prices because of the industry’s characteristics. Rather, this is a cash-flow issue where raw material stock levels ought to be optimized to minimize the working capital. The current focus in this area therefore lies on reducing the number of suppliers in order to increase long-term collaboration, which potentially means advantageous payment conditions. Also, the stock levels are not optimized at the current, as a result of insufficient inventory management systems. This area has large potential for savings and for that reason focus lies on optimizing order sizes and inventory levels. Otherwise, the raw material prices are regarded as a relatively small problem as the increases apply to all other global competitors as well. Although there is some lag, the price increases are

31 Interview with SSAB Tunnplåt representative 32 Interview with SSAB Tunnplåt representative

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also shifted to the end-price for the customers. This should be compared to environmental requirements that vary in different countries and hence distort the competition.33 DESIGN As the strip division manufactures products that are relatively standard, research and development becomes very important - niche products within this steel area today, often become bulk products within ten years. Therefore the company has to invent numerous new steels each year to keep the competitive advantage of being the leader in innovation. For this purpose a “technology-push” way of working is applied, i.e. instead of focusing on customers’ demands the research is technology driven. Most research is conducted within the areas of cold and hot rolled steel as the focus on niche products increases. To sum up, there is a large focus on this area even though no specific SCM strategies are apparent. This is a result of the recent strategy to focus more on increasing the variety of products provided instead of expanding globally.34 MAKE As stated above the production can only handle a certain amount of high-strength steel as there are several bottlenecks in the different flows. All volumes are produced on customer orders (MTO) as the products are highly differentiated and customizable (with restrictions). This also makes the batches relatively small (compared to other strip steel producers) and places pressure on reducing changeover times. Therefore this is a focus area in production at the strip division and methods like Total Productive Maintenance are used to improve the efficiency. As high strength volumes are restricted, the marketing and sales forces reserve volumes upon received orders. These volumes are then converted by the production planning units into batches that are realizable regarding lead and changeover times. Hence the production sets the limits, regarding high strength steel, for the sales forces whose task it is to keep the sales volumes even. This communication, however, shows great potential for improvements as the information flow between market units and production is often not good enough. Partly this is due to obsolete IT solutions, but also focus should be shifted to treating different areas in the company as customers, i.e. the customer-orientation should be exploited internally as well. A better communication would lead to better production planning and a significant competitive advantage as the share of niche products could be increased. Even though production is said to be completely MTO, prognosis are used indirectly for the production planning process. Customers place a preliminary order, weeks or months ahead of production, with the various sales companies but are not bound to that volume instantly (orders are bound to the customer in the rolling stage). The same volume is used for production planning and discrepancies occur if customers change their order later in the process. Better forecasts would therefore show a large potential. Once again a more integrated communication system would prove useful for this scenario as information could be shared faster and easier internally.35

33 Interview with SSAB Tunnplåt representative 34 Interview with SSAB Tunnplåt representative 35 Interview with SSAB Tunnplåt representative

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DELIVER For the delivery process SSAB Tunnplåt uses several large distribution platforms, with the main distribution center in Rotterdam. The transports are carried out by rail/truck/ship to Rotterdam and then by trucks to the end destination. This end destination can either be a customer or one of the approximately 50 smaller Distribution Centers (DC), mainly in Europe. The company uses a large service center in Maastricht, otherwise service operations are carried out close to the customers through an elaborated cluster of partner companies. Although the strategy is to be as close as possible to the customers, there is not a current plan to own these service centers but they are needed as the product range exceeds the own capacity. For the distribution in general and transports to these local service centers, the strip division has a tool for real time control. In other words the products that are currently not in their own possession can be monitored easily. The system also generates an invoice automatically for the customers. 36 RECYCLE This area was not mentioned during the interviews as the area was not perceived as a prioritized issue. CUSTOMERS As mentioned above the strip division has a very close collaboration with customers in the home market. For a few large and strategically important customers in the Nordic area the company uses EDI-links as a way to simplify the order flows. These customers often have extreme demands regarding delivery times and delivery accuracy why this kind of system and some reserved stock is needed. Otherwise the strategy is to increase the number of smaller customers in order to create barriers. Small customers make it easier to retain a higher price level since their relative bargaining power is lower. The collaboration with customers otherwise receives large focus as application knowledge is regarded as one of the competitive advantages for the company. A trustworthy and high quality sales force is vital to the operations On the other hand information is not shared openly regarding capacities and prognosis outside the companies boundaries. 37 ANALYSIS Most important areas are R&D, collaboration with, and proximity to customers and superior production knowledge. There is additionally a small focus on reducing working capital, mainly in the areas of sourcing and deliver. Apart from production, where the focus is directed towards cost reductions, the most emphasized areas are focused towards increasing revenues.

36 Interview with SSAB Tunnplåt representative 37 Interview with SSAB Tunnplåt representative

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Suppliers Design Source Make Deliver Recycle Customers

Working Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 7 Supply Chain emphasis SSAB Tunnplåt

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

• Apart from enhancing the products’ physical attributes, R&D functions focus on

increasing knowledge about customers’ processes through collaboration. The products’ value consists of the physical characteristics and the knowledge provided by the steel producer. Steel characteristics can only be developed to a certain level while the know how still shows a lot of potential.

• As a result of the desire to have small customers a more complex distribution net is

needed, implying for increased working capital. Increasing raw material cost will further contribute to this rise of working capital. The recent focus on lowering working capital therefore makes logistic solutions (Deliver) important to improve.

• Generally Tunnplåt strives to improve delivery accuracy in the production, although the

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

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4.1.1.3 Outokumpu Stainless - Avesta

• Revenue: 20.016 MSEK38 • Production: 656 kt39 • Employees: 219140 • Niche: 2m wide cold and hot rolled plate - Stainless • Customers: Process industries, e.g. oil & gas, chemical, pulp & paper industry • Strategy: Superior production methods, application know-how, enhanced

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

Outokumpu is a global producer of stainless steel with production facilities in Finland, Sweden, the UK, the US and the Netherlands. The production facility in Tornio, Finland is considered to be the most cost-efficient General Stainless Steel factory in the world, focusing on large-volume production and integration to even include its own chromite mine (chrome used for some steel grades, reducing price volatility and increasing cost competitiveness). The Swedish mills focus on Specialty Stainless, an area that produces half the volume compared to General Stainless while contributing with the same sales value. This gives approximately the double per tonne price (EUR/t) and the double margin for Specialty products41. The biggest Swedish subsidiary, Avesta, represents Outokumpu in this text. Customers for the Specialty Stainless area are typically in the oil & gas, chemical, nuclear power or pulp & paper industry. These industries typically demand tailored solutions for their project orders and have high requirements regarding product properties. This increases the importance of the R&D function and collaboration with customers through application engineers and sales personnel42. Recently, there have been major investments in Avesta, totaling about EUR 550 million, to almost double the production capacity and enable increased focus on Specialty Stainless. Today some General Stainless is produced as well but the strategy is to produce higher shares of Specialty Stainless in the future. This shift will decrease productivity but the total value added is supposed to account for the productivity losses.43 The Stainless pricing mechanism works differently than that of normal steel. The price depends on the global steel price but with an addition for alloys (for example Nickel), which makes the end-price44 and thereby the demand very dependent on the alloy prices45. This increased exposure to financial institutions’ trading adds volatility to the end-product price. This means that even if the underlying demand for products is stable and in line with production capacity, the sales 38 Affärsdata (for 2006) 39 Outokumpu Annual Report 2007, p. 25 (for 2006) - aggregate figure for Specialty Stainless division 40 Affärsdata (for 2006) 41 Outokumpu Annual Report 2007, p.22 & 25 42 Outokumpu Annual Report 2007, p.25 & 38 43 Interview with Outokumpu representative 44 Transaction price = base price + alloy surcharge 45 Nickel accounted for 75% of raw material costs for the Group in 2007, Outokumpu Annual Report 2007, p. 34

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volume will vary substantially, creating extreme Bullwhip effects for Outokumpu. As an example, quarterly EBIT for the Outokumpu Group, varied from approximately EUR 400 million to negative EUR 280 million due to changes in Nickel prices46. Avesta’s production facility is adjusted to produce high quality Stainless from a lower quality of raw material (mainly scrap) and works with material recipes that contain smaller amounts of alloys than competitors but with similar material properties. This, of course, gives a competitive advantage while reducing volatility for the own company’s margins. Furthermore Avesta produces 2m wide slabs as one of only 3 factories in the world, a differentiation that further reduces dependence on the world’s trading markets.47 Outokumpu Avesta considers its main strength to be competence in the areas of sales, production methods and applications for their products. The advantage in production has been partially pointed out above, but an area that is especially important in the Special Stainless industry is application know-how. It is impossible for Outokumpu Avesta to compete with prices and the focus is shifted to selling better products than competitors. Therefore a big task for the sales force is often to explain the superior material characteristics to customers, both for existing and recently developed products. At the same time this collaboration with customers provides information about their real needs. Outokumpu Avesta currently sells approximately 50% of its products via internal distributors and directly to sub-suppliers, while the rest is sold to external distributors48. Simplified the main flows in the value chain for Outokumpu Avesta are shown below in figure 8.

Figure 8 Value Chain Outokumpu

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

46 Outokumpu Annual Report 2007, p. 8-9 47 Interview with Outokumpu representative 48 Interview with Outokumpu representative 49 Outokumpu Annual Report 2007, p. 4

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This means that an investment in service centers indirectly means taking over production to end-customers and increasing the demand for the company’s own products.50 Distribution centers in general make large profits by speculating on material prices and thereby increasing the volatility of Stainless products. In other words they build up large stocks when the prices are low and sell of stock when prices increase. This is a main reason for the varying demand during 2007. Therefore another aspect of the investments made in this area, is that they reduce the volatility for Outokumpu’s products by smoothening the demand, which is a central strategy for the Avesta facility.51 SCM-EMPHASIS Outokumpu has launched a program called OK>1 to increase focus on SCM in the entire company. This company-wide introduction combined with emphasis from top management on SCM constitutes a ground for successful implementation. The main idea of the program is to create a “customer-oriented supply chain thinking with end-to-end management” of the internal value chain52. Combined with some other strategies this program is described for each SCM area in the following sections. SUPPLIERS/SOURCE Apart from ferrochrome Outokumpu uses external suppliers for all input materials. The general strategy is to enter long-term contracts, but also the company has changed its pricing model for the alloy surcharge in order for the end-price to faster reflect the changes in supplier contracts and prices (this is mainly due to the volatile Nickel prices).53 The increased scrap prices have increased the attention on invested capital in inventories, but the main focus in sourcing is still reducing costs (inventory accounts for a very large part of the Group’s total costs54). An explanation for this is that production cannot be allowed to stand still due to empty raw material inventories, i.e. they must not be bottlenecks.55 As part of OK>1 Outokumpu has established a new category organization within procurement in order to leverage the Group’s size and thereby buying power. This means that all contracts are made at company level by the Supply Chain Management function to guarantee lowest possible price across different business units. This improvement work alone has resulted in savings of EUR 10 million (for the entire Group).56 DESIGN R&D is an area within Outokumpu’s work that achieves some extra attention. One of the advantages Outokumpu has over its competitors is that the steel produced has a similar, or better, quality but with a lower quality of scrap as input material. Also, a smaller amount of alloys per tonne Stainless is used, which is a result of thorough research. To keep this advantage the 50 Interview with Outokumpu representative 51 Interview with Outokumpu representative 52 Outokumpu Annual Report 2007, p. 34 53 Outokumpu Annual Report 2007, p. 36 & 45 54 Outokumpu Annual Report 2007, p. 34 55 Interview with Outokumpu representative 56 Outokumpu Annual Report 2007, p. 36

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company focuses a lot of attention on this area with an R&D center in Avesta, mainly to increase revenues and margins.57 There is also a linkage between the R&D functions and the Production Excellence program (OK>1) at Outokumpu, to ensure system-wide efficiency at all levels. While research at Avesta in concentrated on developing new grades, there is a constant parallel development of production technology to keep up with the pace. Furthermore the R&D experts with Outokumpu are the link to sales departments and customers, providing both advice and valuable feedback.58 MAKE Some areas in the internal supply chain attract some extra attention, with production (“Make”) as the most outstanding part. In production the focus lies mainly on reducing costs while constantly improving processes and lead times to secure delivery accuracy in the long run. The major key performance indicator (KPI) for this area is OEE, or Operational Equipment Efficiency, which has improved continuously since the program was introduced. The value of the KPI itself is not as important as the drive it gives each employee to achieve improvements. The financial implications are difficult to see, but the program is a pro-active approach to meet potentially higher future demands when it comes to delivery accuracy and lead times. Furthermore approximately 90% of the production volume at Avesta is produced and tied directly to a specific customer (MTO) after leaving the steelworks (Stage 1). This means that internal stocks are kept at a minimum to reduce working capital in later stages. Interesting is that the steelworks run at a fairly constant speed, while later activities, like rolling, are adjusted directly to demand and thereby highly flexible. This is possible because the steelworks can supply for other Outokumpu units but also sell of material as General Stainless bulk steel. It is apparent that the bottleneck lies in later stages at the present, but the investments might shift the bottleneck back to the steelworks making it possible to produce more Specialty Stainless. Although most of the production is made to order (MTO), the company uses prognoses for production planning in the longer run. These forecasts are based on collaboration between salesmen and their customers. When an actual order is made it is entered into an MPS system but still not visible to all separate facilities in Avesta. The steelworks for example download information from the general MPS system twice a week after it has been processed by production planning.59 DELIVER The main thing that has come up within the distribution area is that Outokumpu continuously invests in local distribution and service centers. Apart from smoothening the demand this ensures reliable distribution channels to chosen markets. Also this area is part of the responsibilities of the SCM function at a corporate level, ensuring system-wide efficiencies60. Locally there is a well established information flow regarding production capacity and stock levels and some of the best practice methods regarding transports are used (for example wave picking). Despite this

57 Interview with Outokumpu representative 58 Outokumpu Annual Report 2007, p. 38 59 Interview with Outokumpu representative 60 Outokumpu Annual Report 2007, p. 34

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“deliver” does not give the impression as one of the most prioritized improvement areas for the company.61 RECYCLE Similarly to “deliver”, recycling is not one of the most focused areas within SCM at Outokumpu. Having a close collaboration with its customers in the home market although enables the Avesta facility to have an elaborated recycling strategy. For example rest products are taken care of internally and there is a logistics solution for reusing excess steel from the customers. At the same time this area is regarded as having the least potential regarding profit generating and cost saving possibilities.62 CUSTOMERS Outokumpu has a strategy to increase collaboration with customers through a structure that is very similar to SSAB’s application engineers (as described in the “design” section). The company has a very good understanding of both end-customers’ and distribution centers’ needs. Furthermore Outokumpu has a very well established distribution net in the home market (Nordic region), partly through ownership but also through long-term relationships with distribution centers. This combined with the fact that Outokumpu is often the single largest provider gives a large competitive advantage, which has to be built on in order not to lose market share when other global players enter this market. Therefore collaboration with customers is an important area for the company’s future success. 63 ANALYSIS Generally Outokumpu gives the impression of focusing more attention on Supply Chain Management than other interviewed companies in this report. The reason is a company-wide improvement program that has come up at all interviews and permeates all levels of the Avesta facility when interviewed. The focus within SCM appears to lie mainly on cost reduction and stabilizing demand. This is achieved through increased integration, increased customer collaboration and implementation of well-known production methods. The results are visualized in figure 9 below.

61 Interview with Outokumpu representative 62 Interview with Outokumpu representative 63 Interview with Outokumpu representative

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Suppliers Design Source Make Deliver Recycle Customers

Working Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 9 Supply Chain emphasis Outokumpu

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

• The overall most important KPI for Outokumpu is “delivery accuracy”. Although

improvements have been initiated there is still work to be done in order to meet higher customer expectations in the future.

• By investing in the service and distribution center network the company increase the

sales volumes, although the main reason for these investments is to reduce the volatility. Thus the effect from speculating distribution centers is decreased.

• So far, the Supply Chain Management initiative has not implied any significant financial

improvements, nevertheless the work is part of a pro-active effort for future potential benefits.

• Close collaboration, knowledge about customers and an effective distribution net are

significant barriers for the home market.

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4.1.1.4 Sandvik Materials Technology

• Revenue: 19.337 MSEK64 • Production: not relevant, too different steels and grades • Employees: 858565 • Niche: Advanced Stainless Steel • Customers: Petrochemical, medical, paper, oil & gas industry, knifes & razors • Strategy: Few and big customers, increased focus on niche products,

customer-orientation, enhanced production efficiency Sandvik is a global industrial group divided in three major areas, steel tools for metal working applications, equipment and tools for rock-excavation and stainless high-alloy steels. In this thesis the latter product area which is organized under the unit Sandvik Material Technologies (SMT) has been studied and referred to as Sandvik 66 Sandvik is a highly integrated stainless steel producer, which includes all activities from steel smelting to finished products. The strategy is to produce advanced value-added products where Sandvik has a possibility to become the market leader. SMT’s products are divided in three product groups: wire, tube and strip. Typical customers are found in the petrochemical, oil, gas and power industries as well as producers of applications with a need for special alloy grades, such as razor blade and knife manufacturers. 67 Like Outokumpu, Sandvik is very dependent on the various prices of alloys (Nickel, Cobalt & Tungsten) used in Stainless Steel production. The Nickel price fluctuation for example resulted in estimated losses of approximately 450 MSEK during 200768. As for Outokumpu the Stainless price depends on the steel base price plus an alloy surcharge, but the effect of increased alloy prices is not immediately transferred to the price of Stainless. This lag impacts Sandvik’s result negatively and enhances demand variations as customers adjust their orders to the current alloy surcharge.69 With the intention of being a provider of a complete range of products in the niche of Stainless Steel, additional steel products are purchased from other steel producers. Sandvik’s strategy is to concentrate the production in Sandviken on high margin products and to complete the assortment of less specialized steel from external producers. This is a part of the enunciated plan to increase the share of high-margin steel, a shift that aligns with the strategy to move away from bulk-like products. Manufacturing products that are difficult to produce with a maintained productivity in bulk-producing factories, is used as a strategy to avoid competition.70 64 Sandvik Annual Report 2006 65 Sandvik Annual Report 2006, p. 12 66 Sandvik Annual Report 2006 67 Sandvik Annual Report 2006 68 Sandvik Annual Report 2007, p. 12 69 Interview with Sandvik representative 70 Interview with Sandvik representative

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Branding is an important area and like “Intel inside” has become a phenomenon in the computer industry, Sandvik strives to create a similar perception among the users of Stainless Steel components. By aiming at the end-customer Sandvik tries to create a pull for their products throughout the value chain, where the end-user demand Sandvik’s steel.71 Most of the products are produced when an order is placed and only 20 % of the products are produced to be stocked. When products are ready for delivery they are first shipped to a main DC in Rotterdam and then distributed to local steel service centers (split points). From these service centers the steel is finally delivered to the customers. When large volumes are shipped they are often transported directly to the factory, instead of going via a distribution center.72 Transportation from the factory to the main DC is managed by well-known Third Part Logistics Providers (3PL), while transports from service centers to customers are handled by various local distribution companies. This structure is efficient from a transport logistics viewpoint but implies vast amounts of different invoices and thereby difficult handling (i.e. which transports correspond to which invoices). An EDI-broker is used for this purpose, which is further described in the SCM section “deliver”. 73 A simplification of the product flows from Sandvik to its global customers is shown in figure 10.

Figure 10 Value Chain Sandvik

SCM-EMPHASIS As for many of the other steel producers in this study, Sandvik suffers from problems with lead times and delivery accuracy. The people working at the factory are well aware of the problems and the two most important KPIs that are measured and displayed at every site are “delivery accuracy” and “the number of accident-free days”. A program was started in 2003 to improve operational performance under the name “SMT Business System”. This program affects some but

71 Interview with Sandvik representative 72 Interview with Sandvik representative 73 Interview with Sandvik representative

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not all of the defined areas within Supply Chain Management, but with the common intention to increase customer orientation and improve lead times and delivery accuracy. 74 SUPPLIER/ SOURCE Purchasing is one of the areas that is emphasized in the SMT Business System. Despite this the area was not mentioned as a prioritized area during the interviews and the reasons might be similar to those for the other steel companies, the dependence on world market prices. This makes it difficult to affect the price by introducing certain SCM methods. DESIGN The aspiration to produce more high-value products makes “design” an important area. Sandvik wants to be associated with quality and regarded as a market leader in innovation. Not only are the product characteristics important to improve, but also the knowledge of how the products can be used in end-user applications must continuously be elaborated75. The R&D function acts as the link to the customers, extracting information about needs but also as a provider of technical services and material advice. The emphasis on R&D is confirmed by the ownership of one of Europe’s largest stainless steel research centers.76 This function is also under the influence of the “SMT Business System” with the intention to increase focus on customers’ real needs. MAKE With the introduction of the “SMT Business System” many of the methods within Lean production have been implemented at Sandvik. Examples of these are Kanban, continuous improvements and customer-order driven production, which is supposed to have improved lead-times significantly. One of the big issues is to decrease the working capital in the production and concepts like WIP (Work In Progress) seem to be permeated throughout the entire organization. This is also a reason for the focus on reduced lead-times in the production, which would decrease working capital. Another method that is used at Sandvik is the concept of letting bottlenecks set the pace for the production. Much like at SSAB Oxelösund, the production is currently utilized to 100% of capacity, which calls for bad delivery accuracy in case of any minor problem. The company therefore focuses on bottlenecks in combination with customer-driven production. Instead of fully booking the production there is a close communication with sales & marketing and in case of a lack of capacity the efforts are shifted to increasing prices immediately.77 DELIVER Sandvik uses an external service provided by an EDI-broker in order to increase control over the shipping process information and invoice handling etc. The broker furthermore works with all the 3PLs and brings together information about where the trucks containing Sandvik’s products are at any time. This information is only available for the routes populated by the large 3PLs.

74 Peter Gossas presentation – SMT – Capital Markets Day 2007 75 Interview with Sandvik representative 76 http://www.smt.sandvik.com 77 Interview with Sandvik representative

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In order to increase the service offered to customers, a track and trace system might be introduced throughout the transportation system. This would be equivalent to when private individuals purchase goods over the internet today where they can monitor the delivery process and track the parcel all over the world in real time. One aspect that makes this solution difficult to implement is the low IT-maturity by many of the transport companies, on the other hand successful implementation would mean a substantial competitive advantage. From a Supply Chain Management perspective Sandvik uses many best practice methods. Examples of these include the above-described EDI-solution, Wave-picking and Cross-docking. By using these strategies, and thereby filling trucks, the company optimizes the transport cost. In addition the setup with local distribution companies, that transport the goods to the customers, ensures a high service level.78 RECYCLE The area of recycling has received little attention at the Sandvik interviews. As for many of the other interviewed companies the volumes that could be transported back to production facilities are relatively small and therefore make out low potential for savings. Nevertheless this area could allow for improvements as environmental demands will become stricter in future. 79 CUSTOMERS The customers are few and large and have often been faithful buyers of Sandvik’s steel for several years. There is an apparent emphasis on relationship management with a focus on customers’ processes and applications. The market organization has recently switched from being organized by product area to a market segment grouping, a step in order to ease the procurement processes for customers. With the new organization buyers only need one contact person at the market unit for all products that are purchased, instead of one contact person for each product category. This is an action taken, as a part of the company-wide process, to increase end-customer relationships. The global sales organization has direct contact with the steel plant and no intermediaries are used, a step to further increase and maintain the close connection with the customers.80 ANALYSIS The emphasis on SCM areas is visualized in figure 11 below.

78 Interview with Sandvik representative 79 Interview with Sandvik representative 80 Interview with Sandvik representative

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Suppliers Design Source Make Deliver Recycle Customers

Working Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 11 Supply Chain emphasis Sandvik Design, Make and Customers are areas that are emphasized by Sandvik. Although Deliver is not a part of the improvement program it is another area that is prioritized and very well elaborated. Many SCM methods are used in addition to and under surveillance of this program, although it does not permeate the organizations units to the same extent as during the interviews with Outokumpu. There is a large focus on decreasing working capital in the production as part of the program, but the general objective is to increase revenues through larger shares of niche products and customer collaboration.

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

• Focus on collaboration with end-customers through close cooperation between R&D

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

• With the aspiration to be a market leader in innovation and associated with the latest

technology a lot of attention is placed on the developing new products, making design an emphasized area.

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

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

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4.1.1.5 Uddeholm Tooling

• Revenue: 2.220 MSEK81 • Production: 70kt82 • Employees: 84083 • Niche: Tool steel • Customers: Tool makers, automotive industry, OEM • Strategy: service, global presence, quality

Uddeholm Tooling is a leading producer of tool steel for industrial tools and dies used to produce millions of products, such a cars, CDs, computers and cell-phones. Since 1991 Uddeholm is a subsidiary to the Austrian company Böhler-Uddeholm AG, a global producer of tool steel with a market share of 34 %. Customers range from larger OEMs to small local producers of steel tools, and no customer constitutes more than 2% of the total volume sold. The most important segment is automotive, that accounts for around 50 % of Uddeholm Tooling’s production and sales.84 Like many other Swedish steel producers Uddeholm Tooling possesses a strong brand that stands for quality. There might be other producers that can make steel with superior characteristics, but Uddeholm’s strength is the unvarying quality. When customers buy steel from Uddeholm they always know what to expect and can be certain that the steel will behave the same, regardless of when the steel is purchased.85 There is also a tendency to increase the forward vertical integration. Uddeholm holds a factory with machinery to enable some modular production. By making the products more sophisticated the next performer in the value chain, the tool producers, can decrease the lead time for their production. At the same time as Uddeholm strives to increase the integration, a strategy to distinguish themselves, they are keen not to integrate too far and be perceived as a competitor by the customers. The level of integration also depends on the country Uddeholm operates in. In general more processed steel is requested in the north of Europe where manual labor is more expensive.86 The trend to produce more value added products is apparent at Uddeholm Tooling. Products are classified into three categories depending on the value of the steel and there is a shift of the product mix into the more sophisticated grades. Nevertheless, the increased alloy prices have resulted in a higher demand for more bulk-like steel.87 As more of the modular industries, such as mobile phone production, is outsourced to low cost countries Uddeholm needs to be present locally with stocks and services in those regions. Finding 81 Affärsdata (for 2006) 82 Rolf Stålberg 83 http://www.jernkontoret.se 84 Sweden Today, no 3 2005, Steeled for global growth 85 Interview with Uddeholm representative 86 Interview with Uddeholm representative 87 Interview with Uddeholm representative

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other segments where the high quality steel can be used is another attempt to retain sales volumes. Collaboration with other steel companies is further a part of an attempt to increase sales. For example, a new tool steel has been developed in joint venture with SSAB to live up to the specific requirements when processing the new high strength steel (by SSAB). Customers are guided to pick the best tool steel from Uddeholm when buying steel from SSAB.88 SCM-EMPHASIS SUPPLIER/SOURCE Scrap and alloys are the two most important inputs in the production process. When purchasing scrap Uddeholm turns to JBF (Jernbruksförnödenheter), a cooperative organization that provides input material to several of the Swedish steel producers. The organization was established in the beginning of the last century by the leading steel producers with the intention of bringing order to the shaky scrap market. The scrap allocation has always been the main task for the organization even if other sourcing duties have been assigned to the organization over the years (e.g. other raw materials)89. When purchasing raw materials Uddeholm uses fixed order points. It is necessary that the production at Uddeholm never halts due to a lack of resources; a stop in one of the bottlenecks would be far more expensive than the cost of keeping some extra inventories. About 20% of the products sold by Uddeholm are produced at other facilities. Sub-contractors are used when there is an insufficient capacity in the steel plant and some products are purchased due to lack of capability. These complementary products are sourced in order to provide a complete selection of tool steel. 90 DESIGN Uddeholm aims at presenting two new steel products every year. The emphasis on design is regarded as one of the competitive advantages held by the company and there is an extensive investment of capital in this field.91 MAKE The most commonly used production method at Uddeholm is the drum-buffer-rope practice i.e. the production line is adjusted after the bottlenecks, with buffers in front of critical operations. The production philosophy deployed at Uddeholm aims at running the production with full capacity at all times, even if there is a cut in demand. This way of managing the production results in increased inventories during less busy periods. Increased working capital due to stocked products is less expensive than an eventual lack of steel later on when demand might increase. A lost hour in the production could never be retained and therefore bottlenecks are run regardless of

88 Interview with Uddeholm representative 89 http://www.jbfab.com/omjbf.html 90 Interview with Uddeholm representative 91 Interview with Uddeholm representative

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the real demand. As long as there is no need for excess cash due to approaching investments, the reduction of working capital will not be a highly prioritized area. Orders in the production are executed as they arrive by the “first in first out” policy, although products assigned to customers are given priority to orders made to be stocked. Products are not held for important customers nor saved for more lucrative markets; if the steel is available when requested, the sales unit who has placed the order receives the goods. Running production is on the one hand about maximizing the filling degree in each operation and on the other hand about minimizing the total lead time for each product. Some operations take several hours and launching small series, to increase the individual products’ lead time, will occupy the equipment. At the same time, waiting for sufficient material to fill up operations will increase the non-value adding time for products that are waiting to be processed. One rule of thumb that is deployed is to never produce more than what can be consumed by the next operation during one shift. 92 DELIVER The distribution net is regarded as one of Uddeholm’s competitive advantages. Few other tool-steel producers have a global presence and can provide steel for all markets. Even if the sales organizations manage all the cooperation with the customers, the physical transportation of the steel is transferred directly from the steel plant out to the consumers, as can be seen in figure 12 (for Europe only). All the transportation by land is managed by 3PLs and the overseas shipments are handled by a partly owned shipping company. Delivery accuracy is an important area, although not as big of a problem as for other companies in this study. The delivery accuracy KPI is measured in two ways, how many orders that are delivered on time and how many of the standard products that are available at a given time.93

Figure 12 Value Chain Uddeholm

RECYCLE 92 Interview with Uddeholm representative 93 Interview with Uddeholm representative

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Even if recycling mainly takes place in-house today, there is a potential in encompassing end-users in the reverse flow of material. The characteristics of tool steel makes it favorable to recycle since the steel is kept intact in the tool and is not mixed with other materials when it is used in applications. Locating the steel is a complex issue because the end-consumers of the steel are not the customers directly supplied by Uddeholm and therefore difficult to locate. Another issue is the way scrap is treated. When the steel is to be thrown aside at a factory, it is often bunched together with the rest of the steel scrap that is sourced and therefore difficult to distinguish.94 CUSTOMERS When Uddeholm became a part of Böhler Uddeholm AG a new organization was outlined. The sales organizations were separated from the production unit and they now act as different divisions, with decentralized responsibility for profits. By implementing the reorganization the board tried to make each site more efficient and to eliminate waste. One problem that has occurred because of the effort to make the company more efficient, is the lack of transparency. The production unit only controls its own inventories and is only supposed to serve the sales units when they place an order. This breakdown, into decentralized organizations, implies that one product can be available at one sales unit and short at another. No one has the overall responsibility to communicate and even out these misallocations and the result is sub-optimization. The decentralization of the organization has also increased the bullwhip effect throughout the company. The production only receives information of how much the sales units intend to buy, not how much steel that will actually be sold to the customers. This gap of information leads to a perceived variation in demand that is greater than the variation among the end consumers of tool steel. Another implication for increased bullwhip effect is the unsynchronized optimization of inventories. At the end of each year the sales units try to minimize inventories in order to show good financial results. Larger orders are then placed at the beginning of the next year to compensate for the lack of products. This makes scheduling in the production more complicated and harder to forecast, with amplified variation as a result. Although this way of outlining the supply chain makes no sense from a logistic point of view, the decentralized responsibility has forced the sales units to be more careful and not waste capital. The benefits from a decentralized organization are regarded, by the board, as more important than the upside of an optimized communication between sales and production units. Although the sales units are treated as customers the real consumer of the steel is the tool makers. The collaboration with these end consumers is an important part of the sales and marketing function for Uddeholm Tooling. Application engineers are used to help customers and develop their processes. A pull strategy is used to create a demand for Uddeholm’s products by focusing 94 Interview with Uddeholm representative

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marketing operations on the user of the tools. A great bargaining position arises when big tool users like Nokia and Volvo demand their tool makers to use steel from Uddeholm. 95 ANALYSIS The three most important areas are Design, Deliver and Customers all focusing on increased revenues in priority to working capital and costs.

Suppliers Design Source Make Deliver Recycle Customers

Working Capital

Revenues

Costs

Strong emphasis Medium emphasis Some emphasis

Figure 13 Supply Chain emphasis Uddeholm

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

• Possessing a strong brand and providing high quality products are more important than to

be perceived as a cost leader. Therefore the design process is regarded as highly important.

• The distribution net (deliver), with global presence, is regarded as a necessity in order to

reach out to all the customers and is one of Uddeholm’s competitive advantages. • Tool producers are historically small companies. This has put Uddeholm in the position

where they can sustain high prices due to the low bargaining power of customers. At the same time collaboration with end-customers is an important aspect of the marketing pull-strategy.

95 Interview with Uddeholm representative

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4.1.2 Case Study Conclusions - Common Characteristics In The Swedish

Steel Industry The following characteristics are common findings among the companies that have been interviewed for this thesis. A summary of the emphasized areas within the interviewed companies is presented in figure 14 below. “Design” and “Customers” are the two areas that receive the most attention, followed by “Make” and “Delivery”. The most prioritized areas are unanimously focused towards increasing revenues. One should bear in mind that focus on revenues might be a result of the flourishing economy in the past years, and a shift to more cost effective approaches is likely when the economy sours. “Supplier/Source” and “Recycle” receive by far the least attention. Recycling, in terms of reverse flow of material outside the own production, is taken care of by established networks specialized in this field. Costs related to establishing own infrastructures, outweigh the benefits of an integrated reverse flow. Regarding sourcing/suppliers, the raw materials for steel producers are largely bought at world market prices and are hence difficult to affect. Furthermore, stops in production are much more critical than a slightly increased sourcing cost, especially when capacity restricts the sales volume (more can be sold than produced).

Figure 14 - Summary of Supply Chain emphasis Other common findings are:

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

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• Product focus rather than process focus - to produce products that are difficult to

produce in an efficient way. The Swedish based steel companies can never compete by efficiency; hence they seek to manufacture products that are too difficult to produce with a high productivity in the international competitors’ (often bulk producers) production systems. Most Swedish steel companies strive to produce high margin products, steel used in applications where a higher quality is requested.

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

• Collaboration with end-customers is emphasized as a part of the niche strategy

implying for Forward Vertical Integration. A common service offered by a majority of the steel companies is application engineers, provided to help customers develop products containing steel or their processes. The focus on service and added value in terms of know-how are strategic moves to differentiate the products. Eventually the steel produced by companies in low cost countries will be of the same quality and the steel itself will no longer be a competitive advantage. The knowledge of how the steel can be used in specific applications will then constitute the leading edge. In order to achieve this high level of collaboration with end-customer, presence in the latter part of the value chain (Forward Vertical Integration) is necessary.

• End-customer marketing. The marketing pull-strategy is widely used in the steel

industry. Promotions aimed at the customers’ customer to create a pull through the value chain are deployed by a majority of the steel companies. Even though steel is a commodity, sold business to business, the marketing and branding activities play an important role.

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4.2 SURVEY The results from the survey are summarized in the three sub-sections of this chapter. First the most relevant methods for each supply chain area are presented and analyzed, followed by the AHP analysis and general conclusions obtained from the survey. Altogether the number of respondents is 16 and they are listed in appendix 3.

4.2.1 Tools Deployed Following chapters describe methods used within each of the SCM-areas according to the analysis model described in the theory chapter. For each SCM-area the two most commonly/least used methods - and additionally all methods with over 70% usage - are displayed in a table with the percentage of high extent users shown in parenthesis. The complete results from the survey can be seen in appendix 7. SUPPLIERS Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to increase

integration (80%) • Reduced number of suppliers

for non-critical products (80%)

• Increased suppliers for critical products (56%)

• Working actively to increase integration (100%)

• Increased suppliers for

critical products (67%) • CPFR (40%)

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

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

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

Working actively to increase integration with suppliers receives great importance among all companies, 100% of the Steel Service Centers rate this question “high extent” while the same number for Steel Producers is 80%. Despite this fact, most listed methods concerning increased integration (information sharing: MRP, open book, etc.) are used to a very low extent. Methods concerning reduced risk and price (flow of materials: adjusted number of suppliers) for purchased goods are used to a higher extent by all companies.

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DESIGN Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to make

Design more efficient (67%) • Customer-demand-driven

(90%) • Design for Environment

(56%)

• Working actively to make Design more efficient (50%)

• Design for Environment

(80%) • Design for Manufacturing

(80%) Used to a low extent • Innovation Blowback (0%)

• Open Innovation (0%) • Open Innovation (0%)

67 % of steel producers are working actively to make the design-process more efficient and 50% of the SSCs are working actively with this. The service centers are more concerned about how the products are developed in order to ease the own production process (DFM) than the steel producers are. On the other hand steel producers use customer driven design to a much larger extent than service centers, even though the service centers are closer to the end-customers. SOURCE Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Focus on working capital

(89%) • Costs prioritized for non-

critical products (78%)

• Focus on working capital (100%)

• Sourcing solely based on prognosis (83%)

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

• Merge-in-transit (0%)

• VMI (0%) • Wave-Picking (0%)

Even though both groups state that there is a large focus on reducing working capital, the best practice methods are used to a very low extent. MAKE Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to make

production more efficient (100%)

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

regarding variation in

• Working actively to make production more efficient (100%)

• MTO (100%) • Buffers & intermediary

inventories minimized (83%)

• Lean (83%)

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demand (70%)

• Muda (70%)

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

inventories minimized (30%)

• Demand-Pull Manufacturing (17%)

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

100% of producers and SSCs focus to a high extent on making this area (Make) more efficient. Steel producers use best practice methods to a higher extent than SSCs. Methods deployed by producers focus more on securing the production and flexibility than minimizing working capital by a lean production. DELIVER Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to make

Deliver more efficient (89%) • Real Time Inventory control

(80%) • Shelf Ready format (70%)

• Working actively to make Deliver more efficient (100%)

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

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

• Cross Docking (22%) • VMI (33%)

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

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RECYCLE Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to improve

recycling (100%) • In-house Product Recovery

(78%) • Waste products sold to 3rd

part (78%)

• Working actively to improve recycling (83%)

• Waste products sold to 3rd

part (100%) • In-house product recovery/

reverse logistics (67%) Used to a low extent • Reverse Logistics (40%)

• Production system includes reverse flow of materials (44%)

• Production system includes reverse flow of materials (20%)

• Package Recovery (33%) Although recycling is an area that most producers and Service centers regard as important to improve, very little is done to create a reverse flow of material for products outside the own production. The reverse flow is handled by existing scrap recyclers and the potential for each producer to locate and bring back their own steel is very low. CUSTOMERS Methods Steel producers (stage 1-2) Service Centers (stage 3) Used to high extent • Working actively to increase

integration with customers (80%)

• End user marketing (44%) • ATP (30%)

• Working actively to increase integration with customers (83%)

• CPFR (40%) • End user marketing (33%)

Used to a low extent • Compatible MRP/ERP (10%) • CPFR (20%)

• Compatible MRP/ERP (17%)

• ATP (17%) More than 80% of the Producers and SSCs rate integration with end-customers as an important area to improve. End user marketing receives relatively little attention by the companies participating in the survey although the area has been highlighted during interviews. The will to increase collaboration with customers is not about implementing compatible IT-systems (MRP/ERP) but more about establishing relationships and global sales presence.

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

0%

5%

10%

15%

20%

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

SCM-score

EBIT%

producers

SSC

0%

10%

20%

30%

40%

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

SCM-score

ROCE%

producers

SSC

Figure 15 SCM score vs. metrics Apparently there is no correlation between SCM-score and the financial metrics, EBIT and ROCE neither for producers nor for the SSCs. The results for a more Supply Chain Management specific metrics, however, indicate some correlation. A higher SCM-score often results in higher stock turnovers according to figure 16, although only for steel producers.

Producers

0

2

4

6

8

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

SCM-Score

Sto

ck T

urn

s

SSCs

0

3

6

9

12

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

SCM-Score

Sto

ck T

urn

s

Figure 16 SCM score vs. Stock Turns

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4.2.3 AHP - Potential Cost Savings And Profit Possibilities In this section the results from the AHP are shown, i.e. the relative potential of the different Supply Chain Management areas. For example a potential of 16% (Customers) versus 8% (Deliver) means that the Customer area is regarded to have twice the potential compared to the Deliver area. Once again, the results have been presented separately for producers and service centers (SSC).

Figure 17 Relative potential of SCM areas (AHP) For the producers the three areas with the most potential are Customers, Make and Design. The latter two are regarded as equally important, but more than twice as important as for example Source (26% vs. 10%). The SSCs on the other hand rate Customers, Supplier and Design highest, although with a more equal distribution amongst the remaining areas than for producers. The fact that supplier collaboration (“Suppliers”) receives greater ratings amongst SSCs is much due to the nature of their business, this is their core competence. While the steel producers mostly source their commodities from large corporations at market prices, the SSCs buy more value added products. This enables a larger bargaining opportunity for SSCs, which would explain the results. On the contrary the production is the producers’ main activity, explaining why the area receives higher ratings than for SSCs. Furthermore the area “Source” receives higher ratings relative other areas for SSCs than for producers. This could be explained by the fact that speculation constitutes a large part of the service centers’ business, while the producers strive to avoid speculation by sourcing in level with the true need.

SSC - Relative potential of SCM areas

20%

20%

15%

15%

8%

5%

16%

Supplier

Design

Source

Make

Deliver

Recycle

Customers

Producers - Relative potential of SCM areas

9%

26%

10%26%

9%

5%

15%

Supplier

Design

Source

Make

Deliver

Recycle

Customers

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4.2.4 Survey Conclusions – Methods deployed Below are the conclusions from the survey results. Tools deployed (from section 4.2.1)

• Generally the methods deployed are rather about directly reducing risks and costs than

about increased transparency and information sharing (Source and Customers). • Methods deployed by producers focus more on securing the production and flexibility

than minimizing working capital. In other words the focus lies on providing customers with a high level of service instead of offering low prices through a cost-effective production process. Hence, products are prioritized above processes (Make).

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

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

SCM-score (from section 4.2.2)

• A correlation exists between the SCM-score and stock turns for steel producers, but when analyzing the impact on financial metrics this pattern can not be seen. This would imply that the use of best-practice methods has impact on Supply Chain efficiency, although other aspects than SCM are more important for value creation. The independence between the SCM-score and stock turns for SSCs might be a consequence of the SSC’s business. Since speculation is incorporated, minimized inventories are not necessarily desirable, thus affecting the stock levels.

AHP-Analysis (from section 4.2.3)

• Areas with most potential, for cost savings and profit generating possibilities, amongst

the producers are Design, Make and Customers.

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4.3 VALUE CHAIN – WHERE IS THE GOLD IN THE STEEL INDUSTRY? This section explains the reasons behind Steel companies’ positioning strategies in their value chain. For this purpose the value chain has been divided into three stages that are characteristic for the steel industry.

4.3.1 Profit Along The Value Chain One obvious question is whether there is a correlation between value creation and positioning in the value chain. In other words if there are areas in the steel value chain that are more value adding and also more profitable than others.

Positioning vs. Profit

Companies are sized by revenue

0%

5%

10%

15%

20%

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

ROCE %

EB

IT %

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

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

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

Figure 18 Positioning vs. Profit There is no clear correlation between either the EBIT-margin nor ROCE when compared to the combination of activities encompassed in a company (i.e. extent of integration throughout the value chain). Notable is that the size in terms of turnover seems to be greater for fully integrated companies. This could be a given result of the capitalization that takes place when more activities are performed. It could also be that growing companies seek to expand vertically rather than growing within the existing activities.

Exploration and Mining

Smelting and Slab production

Rolling, Hardening & Finishing of metal

Coiling/Coating/-Formatting

- SSC - Cutting, Stripping,

Welding, Bending of Metal

Modular Production

STAGE 1 STAGE 3 STAGE 2

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Positioning vs. Profit

Companies are sized by revenue

0%

5%

10%

15%

20%

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

ROCE %

EB

IT %

Stage 1 (11 companies)

Only Stage 3 - SSC (8 companies)

Others (10 companies)

Figure 19 Positioning vs. Profit When all companies that encompass stage 1 are bunched together (figure 19) it is evident that they appear all over the spectra. Steel production itself does not mean high margins which might imply that products rather than processes are main drivers for value. The cluster of SSCs, with similar margins in figure 19, further underlines this conclusion. As the SSCs distribute several different products, the product related value is eliminated and factors like global steel and alloy prices take over as value drivers. In general a financial comparison between the Swedish steel companies is very ambiguous due to the extreme differences in size and type of products. Even within the sector containing the largest and fully integrated companies, which have been interviewed, there is a large diversity in margins. This further underlines the conclusion that integration itself does not mean high margins. The margins are instead largely a result of the type of products created by each company.

4.3.2 Value Chain Conclusions - Reasons Behind Value Chain Positioning Strategies

• There is no distinct correlation between positioning and value creation. • Steel production itself does not mean high margins. This implies that products rather than

processes are the main drivers for value. The even margins among SSCs’, where the variety of products eliminates product related value, further underlines this.

• Margins are lower for SSCs than for steel producers, hence there are no obvious financial

incentives for forward vertical integration by steel producers. The reason for this might be that brands belong to the producers while SSCs act more like wholesalers. The niche steel is not a generic product that can be re-branded by wholesalers like some consumer goods.

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

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

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

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

• Forward integration is used as an approach for marketing and product

development rather than as a Supply Chain Management strategy – relationships exist but are not used to their full potential. The academic theory argues that a system wide optimization, instead of regarding each part as independent units, will be beneficial for all constituents. To achieve this state, it is essential to share information openly along the supply chain. In general, the steel companies have established close interactions with customers, for marketing and development purposes, but the advantages of these close relationships are not used to the full potential. Information about inventory levels, capacity and demand is not shared as widely as possible to achieve optimal planning and forecasting.

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• Product focus rather than process focus, due to niche strategies. The Swedish steel

companies have chosen to focus on high value niche products since they can never compete with low cost bulk producers. The focus on developing leading and customized products has put efficiency efforts aside.

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

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

• Delivery accuracy low due to absence of a top performer. The number one issue at all interviewed companies is low delivery accuracy. Even though all companies are aware of this problem and strive to get better, the absence of a top performer in the industry might take away the pressure for real improvements. Another explanation might be the acceptance by customers. It is widely accepted that orders must be placed a long time in advance and with some uncertainty regarding delivery times. An underlying reason for the low delivery accuracy might be the shift from a traditional process industry, to an MTO industry with highly customizable products. Process oriented machines are used to produce individual products, thereby not in an optimized way. To improve the delivery accuracy larger inventories can be held, on the other hand this implies more working capital. Instead of using backlogs in production planning, the use of planning systems that incorporate capacity restrictions along the entire supply chain, would possibly improve this without the issue of larger inventories.

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• “Design” and “Customers” are univocally the two most important areas for steel producers, with most potential for increased income possibilities. The case studies reveal design and customers as by far the most emphasized areas (followed by make) and the AHP analysis shows that design, make and customers are regarded as areas with the most potential. Currently, the focus lies on increasing revenues in favor of cost savings and capital rationalizations. This is probably a result of the current favorable market situation, but if the economy should turn down, focus might shift to a more cost saving perspective. Thereby Supply Chain Management strategies, like increased information sharing, could become necessary for the steel industry.

• “Source”, ”Supplier” and “Recycle” are less emphasized areas and regarded by the

steel producers to lack potential for increased revenues and cost savings. The raw materials for steel producers are largely bought at world market prices and are hence difficult to affect. Furthermore, stops in production are much more critical than a slightly increased sourcing cost, especially when capacity restricts the sales volume (more can be sold than produced) and is once again a result of the favorable market situation.

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

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6 CRITICAL REVIEW AND SUGGESTIONS

The major conclusions are drawn from qualitative interviews at the largest steel producing companies in Sweden. A minor drawback of such an approach is that some viewpoints are always missed, although the targets have been chosen to reflect large parts of each organization. Even though sourcing questions have been considered during the interviews, a more coherent academic approach would have included interviews with responsible persons in this area. It can be added that initially, during interviews with the Swedish steel trade organization, this area came off as somewhat less important, which has affected the decision to exclude sourcing managers. Furthermore, for the analysis of the survey, the number of respondents was relatively low, resulting in some statistical uncertainties. The hit rate, with 16 respondents out of 29 possible, is acceptable and the number of companies is difficult to affect as including more small steel producers would not bring more context to the thesis. It must therefore simply be accepted that the uncertainty is part of the nature of this paper. Supply Chain Management has also become a wide concept with many different meanings. To state that this paper constitutes an investigation of Supply Chain Management in the steel industry is therefore quite ambiguous. Rather, frameworks from SCM theories have been used for the analysis of the companies. Each SCM-method contains too much analysis for a single thesis to cover all of them more deeply than has been made here. This leads up to a general suggestion for further interesting investigations in this area. For example, an interesting approach would be to investigate more in-depth the delivery accuracy for any single steel producer and suggest how specific SCM methods (e.g. VMI) can be applied and the consequences thereof. Another possible research suggestion would be a benchmark between the steel industry and another process industry regarding delivery accuracy.

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7 REFERENCES LITERATURE Ansari S.L. & Bell J., Target Costing: The Next Frontier in Strategic Cost Management, 1997 Lindh C. Logistik och Supply Chain Management, KTH, Stockholm, 2004 Simchi-Levi D. et al, Designing and Managing the Supply Chain – Concepts, Strategies and Case Studies, McGraw-Hill, New York, 2007 Stadtler H. & Kilger C., Supply Chain Management and Advanced Planning: Concepts, Models, Software and Case Studies, Springer, Berlin, 2005 Womack J. & Jones D., Lean Thinking - Banish Waste and Create Wealth in Your Corporation, 2003 Olhager J., Produktionsekonomi, Studentlitteratur, 2000 ARTICLES Ahmadi R. & Wurgaft H., Design for synchronized flow manufacturing, Management Science, 1994, accessed 2008-05-12 via http://www.jstor.org Cachon G P; Fisher M Supply Chain Inventory Management and the Value of Shared Information Management Science, Vol. 46, No. 8. (Aug., 2000), pp. 1032-1048. Accessed 2008-05-12 via http://links.jstor.org/sici?sici=0025-1909%28200008%2946%3A8%3C1032%3ASCIMAT%3E2.0.CO%3B2-C Chen F. et al, Quantifying the Bullwhip Effect in a simple Supply Chain: The Impact of Forecasting, Lead Times and Information, Management Science, 2000, accessed 2008-05-12 via http://www.jstor.org Christopher M. & Towill D., Supply Chain Migration from Lean and Functional to Agile and Customized, Supply Chain Management: An International Journal, vol.5 nr.4, 2000, accessed 2008-05-12 via http://www.emerald-library.com Hagel J., Seeley Brown J., Innovation Blowback: Disruptive Management Practices from Asia, The McKinsey Quarterly, 2005, accessed 2008-05-12 via http://www.johnseelybrown.com/innovationblowback.pdf Jernkontoret, Det svenska stålet behövs, 2006, accessed 2008-05-21 via http://www.jernkontoret.se/informationsbanken/vara_publikationer/pdf_info_utb/jkfakta_svensktstalbehovs.pdf

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Kale et. al, Alliance capability, stock market response, and long-term alliance success: the role of the alliance function, strategic management journal 23, 2002, accessed 2008-05-12 via http://www.jstor.org Logistics Management, Merge-in-transit yields benefits, Logistics Management Journal, 1998, accessed 2008-05-12 via http://www.logisticsmgmt.com/article/CA145699.html Nyquist O., Jernkontoret, The recent restructuring of the Swedish special steel industry, 1998, accessed 2008-05-21 via http://www.jernkontoret.se/informationsbanken/presentationer/pdf/restruct.pdf Potter A. et al, The evolution towards an integrated steel supply chain: A case study from the UK, International Journal of Production Economics, 2002, accessed 2008-05-12 via http://www.sciencedirect.com Supply Chain Council, SCOR Overview version 9.0, 2006, accessed 2008-05-12 via http://www.supply-chain.org Smith W. & Lockamy A., Target Costing for Supply Chain Management: An Economic Framwork, Journal of Corporate Accounting & Finance, John Wiley and Sons, 2000, accessed 2008-05-12 via http://www.interscience.wiley.com Standard & Poor’s, Industry Survey – Metals: industrial, 2007, available at http://sandp.ecnext.com/coms2/description_RS_MEI_ITM Sweden Today, Steeled for global growth, no 3 2005, accessed 2008-05-21 via http://www.uddeholm.com.ar/files/Sweden_Today3-2005Uddeholm.pdf PRESENTATIONS Peter Gossas presentation – SMT – Capital Markets Day 2007: http://www3.sandvik.com/pdf/ir/capital/070904/Sandvik_Materials%20Technology.pdf E&Y, SCM footprint, 2008-01-16 FINANCIAL SOURCES Affärsdata: http://www.ad.se ANNUAL REPORTS Outokumpu: http://www.outokumpu.com/39836.epibrw Sandvik: http://www.sandvik.se/ar2007 SSAB: http://www.ssab.se/templates/PressRelease____813.aspx?releaseid=337118 Uddeholm: http://www.bohler-uddeholm.com/english/3177_ENG_HTML.htm

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SOURCES TO COMPANY SELECTION Jernkontoret: http://www.jernkontoret.se/informationsbanken/vara_publikationer/pdf_info_utb/foretag_och_adresser_2008.pdf Statistiska Centralbyrån SCB: http://www.scb.se/templates/Listning2____35024.asp INTERVIEW SOURCES Jernkontoret– Interview: 05-02-2008 Matthias Ternell (Director International Affairs) SSAB Oxelösund – Interviews: 20-02-2008 Carl-Johan Wahlgren (Manager External Logistics) Per-Olof Stark (Director Marketing & Sales) Ola Hägglund (Head of Division & Director Production) SSAB Tunnplåt – Interviews: 11-03-2008 Peter Strandberg & Malin Fridell (Logistics Controller) Riitta Pettersson (Coordinator Warehousing & Distribution) Hans Åkerblom (Business Area Manager, Nordic Market) Göran Hugard (Manager Marketing Communications) Outokumpu – Interviews: 19-03-2008 Tommy Acimovic (Head of production, steelworks) Anette Löfgren (Logistics Director / SCM) Per Stinessen (Sales & Marketing Manager) Sandvik Materials Technology – Interviews: 17-03-2008 Anders Forslund (Global Distribution Manager) Martin Mueller (Global Product Manager, strip) Uddeholm Tooling – Interviews: 15-04-2008 Rolf Stålberg (Marketing Director) Stefan Sjögren (SCM / Logistics Director)

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Appendix 1 – Descriptions & Best practices The various abbreviations from the survey are shortly described in this section according to their use in this thesis, including the source for the best/leading practices. Alliance & Leverage The concept of cooperating with other companies to achieve

economies of scale Kale et. al

Available-To-Promise (ATP)

An availability and feasibility check for customers. The ATP is the uncommitted part of a company’s inventory and planned production over time. Customers can retrieve information about available supply as ATP provides lead-time quotations based on current supply chain status.

Simchi-Levi, Stadtler & Kilger

Backward Integration (vertical)

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

Simchi-Levi

Collaborative Design Collaboration among companies to develop new products E&Y

Collaborative Planning, Forecasting and Replenishment (CPFR)

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

Simchi-Levi

Cross Docking To increase inventory velocity and to minimize storage space the receiving and shipping processes are linked together in a DC. Every inbound shipment has an outbound shipment scheduled and the incoming goods are moved directly to the order pick up area without any intermediate storage.

Simchi-Levi

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

Womack & Jones

Demand-Pull Manufacturing

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

Womack & Jones

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

E&Y

Design for Manufacturing (DFM)

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

E&Y

Drum-Buffer-Rope The production is managed in regard to bottlenecks (buffers used in front of bottlenecks). The drum (bottleneck) sets the pace for entire production line in order to maximize throughput and minimize work-in-progress (WIP)

Olhager J

Electronic Data Interchange (EDI)

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

Cachon G P, Fisher M

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Enterprise Resource Planning (ERP)

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

Simchi Levi Potter A et. Al

Ethical Sourcing Considering ethical aspects when evaluating suppliers E&Y

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

Forward integration (vertical)

Increasing or decreasing the level of control between a company’s value chain and its distributors’/customers’ value chains.

Simchi Levi

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

The McKinsey Quarterly (Hagel & Seeley Brown)

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

Womack & Jones

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

E&Y

Material Resource Planning (MRP)

A set of techniques to calculate requirements for material by using inventory data, product data and master production schedule. Information systems could be more or less compatible with the customers’ systems.

Simchi Levi Potter A et. Al

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

Logistics Management

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

Not best practice

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

Not best practice

Muda Actively eliminating all sources of waste (every activity that is not value-adding). Part of Lean theory

Womack & Jones

Open Book Open sharing of information regarding sourcing prognosis with suppliers

Potter A, et al / Towill

Open Innovation The concept of selling/sharing research (e.g. as patents) that is not used by the own company to develop new products

E&Y

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

Chen et al / Simchi-Levi

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

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

E&Y

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

Stadtler & Kilger

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

E&Y

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

E&Y

Single Minute Exchange of Dies (SMED)

Single Minute Exchange of Dies. An approach to reducing changeover times

Womack & Jones

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

E&Y

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

Womack & Jones, Ahmadi & Wurgaft

Target Costing (product development)

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

Ansari & Bell / Smith & Lockamy

Target Costing (supplier integration)

Here referred to as the concept of setting a target cost for the to be sourced product (depending on end-price) and then help selected supplier achieve that price. “The allowable amount of costs that can be incurred on a product and still earn the required profit”

Ansari & Bell / Smith & Lockamy

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

Supply Chain Council

Vendor Managed Inventory (VMI)

The supplier has access to customers’ inventory data and is responsible for maintaining a predetermined inventory level

Simchi-Levi, Supply Chain Council

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Appendix 2 – Description of SCOR areas The information below is quoted from “Supply Chain Management and Advanced Planning” (Stadtler & Kilger) (Plan) Plan covers processes to balance resource capacities with demand requirements and the communication of plans across the supply chain. Also in its scope are measurement of the supply chain performance and management of inventories, assets and transportation among others. Source Source covers the identification and selection of suppliers, measurement of supplier performance as well as scheduling of their deliveries, receiving of products and processes to authorize payments. It also includes the management of the supplier network and contracts as well as inventories of delivered products. Make In the scope of make are processes that transform material, intermediates and products into their next state, meeting planned and current demand. Make covers processes to schedule production activities, produce and test, packaging as well as release of products for delivery. Furthermore, make covers the management of in-process products (WIP), equipment and facilities. Deliver Deliver covers processes like order reception, reservation of inventories, generating quotations, consolidation of orders, load building and generation of shipping documents and invoicing. Deliver includes all steps necessary for order management, warehouse management and reception of products at a customer’s location together with installation. It manages finished product inventories, service levels and import/export requirements. Return In the scope of return are processes for returning defective or excess supply chain products as well as MRO products. the return process extends the scope of the SCOR-model into the area of post-delivery customer service. It covers the authorization of returns, scheduling of returns, receiving and disposition of returned products. In addition return manages return inventories as well as the compliance to return policies.

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Appendix 3 – Companies: Interviewed/Surveyed

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Appendix 4 – Survey

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Appendix 5 – Calculations & Source Data

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

2006 2005 2004 2003 2006 2005 2004 2003

Outokumpu Stainless AB 10580000 8079000 7123000 5319000 5052000 2870000 2536000 2115000

Sandvik Mat Tech

SSAB Tunnplåt 4911000 3893000 3998000 4168000 3183000 2881000 2388000 2178000

SSAB Oxelösund 3394000 3618000 3223000 3017000 2020000 2176000 1553000 1311000

Ovako Steel AB 684780 848932 515464 381922 590871 644716 556800 553034

Ruukki Sverige AB 770853 567787 346642 258396 549942 452495 231502 211678

Höganäs 555000 445000 420000 255000 479000 450000 379000 317000

Ovako Bar AB 317507 345151 416850 262280 372390 320644 401619 304369

Outokumpu Tubular 893300 688600 394100 294700 604100 477300 340600 254700

Uddeholm Tooling 315861 383168 327060 239871 647035 625098 523861 468657

Fagersta Stainless 626000 144900 278700 162400 477200 214300 286700 230500

Erasteel Kloster 270500 303700 228200 112100 300600 272700 301100 183500

Surahammars Bruks AB 154421 132688 103141 107426 119297 105409 77735 66905

Haldex Garphyttan 216073 212876 178634 160014 84903 78361 56664 62749

Scana Steel Björneborg AB 241149 200479 199373 211487 128348 92878 79730 66502

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

Structo Hydraulics AB 190280 170730 156232 168526 70101 60818 46138 46331

Boxholm Stål AB 66519 57220 63819 44699 60874 54485 64391 39111

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

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

Tibnor AB 1432400 1283900 1302600 887400 878900 773900 791400 565800

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

Lindab Steel AB 263792 225713 278529 176262 142829 82483 156997 97327

Plannja AB 260500 168400 210800 152300 127000 79200 126500 85200

ThyssenKrupp Materials AB 172245 123853 112509 93681 63878 65971 59611 60606

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

Acerinox Scandinavia AB 1830458 752801 581561 439138 1151985 686215 657388 360889

Kanthal AB 1109741 609060 380209 280498 711363 435028 392846 338275

Burseryds Bruk AB 152608 79991 101931 75454 49331 42358 27334 40741

InventoryCurrent Liabilities

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

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

Sandvik Mat Tech 19337000 17003000 14423000 12467000 2324000 1729000 1354000 750000

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

SSAB Oxelösund 9563000 8544000 6565000 5280000 2007000 1799000 692000 361000 7440000 6897000 6116000 5702000

Ovako Steel AB 3940337 3546381 3057724 2457292 345812 152155 62543 -333903 2153373 2056822 2057429 1923521

Ruukki Sverige AB 3478692 3109091 1550586 1224320 103104 82760 46503 11037 1611730 1443204 617376 494559

Höganäs 3033000 2686000 2357000 2067000 295000 413000 373000 418000 4693000 4820000 4391000 4485000

Ovako Bar AB 2457399 2284692 2242725 1732780 332917 250195 219940 92420 1195112 1216872 1282671 1075295

Outokumpu Tubular 2346300 1861000 1354800 1099100 43100 -54500 65700 18600 2046400 1831200 1457700 970100

Uddeholm Tooling 2220324 2286820 1860744 1470110 180203 160700 94793 32773 2116147 2171096 2009005 1564345

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

Erasteel Kloster 1535000 1459000 998000 761000 30100 118700 97300 -5000 1006600 1031700 998300 868000

Surahammars Bruks AB 967196 916943 680518 782240 56147 52407 -15885 -2704 563157 493278 430141 446535

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

Scana Steel Björneborg AB 658459 558458 429405 427219 72909 49327 6113 -725 393592 324861 319997 352076

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

Structo Hydraulics AB 407137 422031 389846 342825 745 3785 16108 -9382 221196 207847 191070 193646

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

Scana Steel Söderfors AB 193325 192443 157141 140144 3001 11359 -822 -5407 189876 197382 190003 173323

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

Tibnor AB 7851800 6308800 5529400 4388500 678200 388200 368700 57200 2902900 2546800 2614900 2055700

BE Group Sverige AB 3639074 3191130 3009805 2315597 275297 151846 162252 84568 1180209 1278866 1812324 1374295

Lindab Steel AB 1562696 1269895 1171664 1042596 224035 158938 118646 68880 291327 262716 383875 284362

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

ThyssenKrupp Materials AB 513075 446119 362208 396780 -9945 7751 -1501 -3950 186212 159585 155241 132738

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

Acerinox Scandinavia AB 3046681 2202151 1724279 1207698 200418 -3306 91412 34591 2377853 1146027 884160 673434

Kanthal AB 1805207 1462791 1287649 1006253 71542 60257 82129 99548 2014679 1593299 1457882 1495105

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

Revenues EBIT ASSETS

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CALCULATIONS

Revenues EBIT AVG ROCE AVG Stock Turns SCM-Score

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

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

SSAB Tunnplåt 14824000 16,6% 37,1% 4,9 53%

SSAB Oxelösund 9563000 14,9% 35,5% 4,2 62%

Scana Steel Björneborg AB 658459 5,3% 23,0% 5,7 56%

Ovako Steel AB 3940337 0,4% 4,6% 5,5 52%

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

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

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

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

Surahammars Bruks AB 967196 2,2% 5,7% 9,3

Burseryds Bruk AB 548110 15,3% 29,1% 12,7

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

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

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

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

Structo Hydraulics AB 407137 0,6% 5,4% 7,1 59%

Boxholm Stål AB 333764 7,3% 30,3% 5,2

Scana Steel Söderfors AB 193325 0,8% 1,7% 6,5

Höganäs 3033000 15,3% 9,0% 6,3

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

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

BE Group Sverige AB 3639074 5,3% 23,8% 9,6

Acerinox Scandinavia AB 3046681 3,6% 20,2% 3,0 62%

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

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

Plannja AB 995700 4,8% 20,7% 8,2 58%

ThyssenKrupp Materials AB 513075 0,0% 0,0% 6,9

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

Gustav Terland

72 (74)

A

PPEND

IX 6

Appendix 6 – AHP methodology

Gustav Terland

73 (74)

A

PPEND

IX 6

Gustav Terland

74 (74)

A

PPEND

IX 7

Appendix 7 – Survey Result