The digital revolution will transform the steel industry

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Yvonne Zhou, Partner and Managing Director, Boston Consulting Group & Lisa Hu, Partner and Managing Director, BCG

---

Digital technologies are changing the world and dramatically improving the way that organizations operate. Today, steel and metals manufacturers face a huge opportunity to transform their operational model by implementing digital technology, enabling them to improve operational efficiency, customer service, inventory levels and profit margin.

Based on our experience, typical benefits of an improved and digitized value chain include better customer interaction and up to a two-fold increase in service levels, 2-4% improvement in EBITDA, and inventory reductions of 10 days and more.

Capturing these benefits does not require a full IT transformation. Rather, companies can quickly capitalize on new technologies like predictive analytics and data lakes through agile pilot tests, and begin generating results in months or even weeks. In addition, most companies can begin generating a positive ROI in their first year, a notable improvement from a traditional IT investment.

1. Challenges in the industry

Value chains in the steel and metal industry are extremely complex. Companies must contend with a large number of interconnected volatile assets, a vast amount of product units, a diverse customer base with varying service and quality requirements, and complicated distribution channels with different margin implications.

Asset utilization is often considered a priority and incentives are structured accordingly, yet these decisions often don’t factor in all business drivers influencing profit margin, service levels, or working capital.

Plants and assets often operate in silos, rather than being integrated to meet a larger strategic objective. Supply chain executives have little access to real-time information, leaving them unable to anticipate changes in the market. As a result, companies perpetually act defensively, without the ability to anticipate and mitigate risk or jump on short-term opportunities, which leads to significant value losses.

Steel and metal companies have been continuously trying to solve these issues, but traditional operational improvement methods are close to their limit. To break through the human ability bottleneck in monitoring complex systems and perform extensive real-time calculation, digitization becomes perhaps the only solution for the current seemingly dead end.

2. Digital as a solution

The era of digitization in the steel and metal industries has arrived. Cost of data acquisition, storage and analysis has dropped dramatically in the past five years. Consequently, multiple digital solutions are available today and relatively inexpensive to implement.

Moreover, companies can launch a smaller-scale pilot test that focuses on a single business unit, asset, or geographic market. The pilot can start with several digital use cases, helping to prove the value of the digital approach and therefore establish internal confidence and alignment. This approach puts business needs ahead of the technology, rather than the other way around.

As a digital technology, predictive analytics has already demonstrated its potential to revolutionize the operational model, in terms of speed, cost, and ease of implementation. It uses advanced, self-learning algorithms to sift through large volumes of data generating insights and identifying patterns.

In sales, it enables the demand forecast use case – based on a detailed understanding of customer needs and demand drivers – to allow companies to reduce inventory and improve margins while delivering better service.

The analytics techniques break down demand into component drivers and enable independent forecasts for each driver. By aggregating these factors, the company can create a far more accurate and richer demand forecast than the conventional method.

Prediction models get back-tested for accuracy, and the algorithms adjust based on real-world results to improve accuracy over time. A typical 20-30% improvement in forecast accuracy is generally expected, which would enable steel companies’ account teams to focus on what matters – the customer.

In operations, predictive maintenance use cases help companies to predict equipment breakdowns (a common headache of steel and metal companies) and optimize maintenance frequency.

The traditional prediction method depends on people’s experience, where limited data is collected and analyzed, and no thought through mechanism has been built up. With sensors and machine learning algorithms, digital solutions can greatly improve prediction accuracy and allow extra time before unplanned shutdowns to fix potential issues.

3. How to land the opportunity

To successfully implement and benefit from these new digital possibilities, one needs to consider three elements:

⦁ Harnessing the power of data through digital technologies

⦁ Building the digital “muscle” in the organization

⦁ Maintaining a relentless focus on direct business value

Harnessing the power of data

To effectively deploy digital technologies, it is important to break the problem down into specific independent topics. These so-called “use cases” can be deployed sequentially and allow companies to capture value early without waiting for the full scope being implemented.

Building the digital muscle

While companies can achieve quick-wins with pilots, the gains of digital will only become sustainable through broader organizational measures. Changing cultures and behaviour can be difficult but it is critical to fundamentally improve performance. Departments can no longer function in silos; digital allows for collaboration across the company, but only if silos are opened up to foster a more comprehensive view of the value chain.

Furthermore, companies will need to develop their digital capabilities, by putting the right people into three key roles:

⦁ Product owners: the “CEOs” of a given project, who require both business and digital competency

⦁ Data scientists/business analysts: experts who execute analytics projects, gather data, construct models, and maintain the actual algorithms

⦁ Scrum masters and agile coaches: experts who can create the right environment at the beginning of a project and help teams work in a more agile fashion.

Some of these roles can be filled through training initiatives for internal talent, but it also requires attracting new talent and building up new functions.

Maintaining a relentless focus on direct business value

To capture the full promise of digital, companies need to focus on a clear path to value by linking all initiatives to quantifiable benefits and actively tracking against it. Digital enables companies to quickly create value by deploying agile teams that use the insights created to change ways of working already in the concept development phase. This creates buy-in for the broader initiative by winning over sceptics. It also funds the journey, allowing companies to go further and move faster in their embrace of digital.

4. Summary

Compared with other industries, such as media and retail, digitization in the steel and metal industries is still lagging behind. But it also means that the first mover will gain a clear competitive advantage. Companies that recognize the opportunity from digital and take deliberate moves to capitalize on it will give themselves a sustainable advantage. Those that don’t, risk falling behind.

How to make a suitable digital strategy is not an easy-to-answer question. We do not suggest putting huge investment and thus, expecting it is a one-off effort. The digitization is a long journey instead of a quick jump forward. Agile deployment of some market-proven tools and initiatives can help companies test the water and solve existing problems, preparing the company for the future large-scale digitization.