HONG KONG – As the global economy fluctuates after Brexit, we feel the urge to share the relevant learnings from an event attended weeks ago, in the mid of June 2016 – Industrialist Forum: Re-industrialisation and Industry 4.0, hosted by Federation of Hong Kong Industries (FHKI) and KPMG.
The forum held a very diverse group of speakers, ranging from senior management positions of different industries such as metal and recycling, government officials from the Innovation and Technology Bureau, and also leaders from some public technology research institutes like ASTRI. After all, it is clear to us that there is a strong need for industrialists to embrace technology in their supply chain management and manufacturing practice. Companies must have a long-term perspective in their growth strategy and re-think their relationship with society.
Given the notion of “sustainable supply chain helps the steel industry”, in this article we will break down the ‘long-term perspective’ into two types of supply chain management focuses, and discuss how each of them benefits industrial companies today. As per our expertise in steel products, we will focus on the steel industry with reference to the current challenges happening globally, and relate the industry to the two growth strategies.
Supply chain managers and industrial engineers exploring new insights on the upcoming 5-year growth strategy, as well as corporate sustainability practitioners who want to pick up an industrial acumen, can use this article as a starting point.
Current Challenges in the Steel Industry
According to the World Steel Association (WSA), the global steel industry has doubled in production between 2000 and 2010. In spite of that, as the world population keeps expanding and nations such as China, India, and Malaysia keep developing, more steel will be needed. There is still a huge demand for steel in infrastructure, high-rise buildings, mass transit systems, etc. On the other hand, there are no specific shortages of raw materials, so the overall outlook for this industry seems to be pretty positive.
When we look into the growth of the steel industry, most of the additional capacity is from China. However, over-capacity criticism is the problem that comes after its aggressive expansion. Low quality of steel and low incentive for efficiency are two of the by-products of the nation’s rapid growth and rapid output in this international trade market. Moreover, in recent years, China is experiencing a slowdown in economic growth, with annual GDP growth from 9.5% to 7.3% between 2011 and 2014. This means we are essentially tackling the production and distribution problems.
Secondly, the environmental regulation is getting more strict and the whole world is requesting a much more comprehensive measure of industrial impacts. This covers greenhouse gas emissions, water use, energy use, waste management, hazardous chemical emissions, and more. Companies are operating in a much more difficult situation and it takes money, time, and expertise to work on this issue.
The third problem is transparency and supply chain management. From the WSA’s article, the fact that raw material prices and finished steel product prices are published daily for different markets around the world indicates a transparent market. This impacts steelmakers’ profitability and pushes for efficiency. From the white paper of IBM Global Business Services, it shows that the transformation agenda of Europe and India are both about visibility and planning. Yet, they are both facing the internal resistant to change and working towards the appropriate optimization model.
On top of that, IBM proposes the highest-level goal for companies, ‘collaborative excellence’, from the maturity curve for supply chain planning. This includes alignment with all external and internal partners, optimization across the supply chain (inventory, margin, etc.) and sustainability models centred on ‘green’ impact. We also agree to the theory and will later relate it to the industrial practice in the following discussion.
Taking a Long-Term Approach
Before we explore further actions, it is important to recognize that long-term approach, or sustainability, is not against doing business and creating value. In fact, here at Steel Available, we think sustainability is different from corporate social responsibility and environmental protection (or philanthropy). To companies, sustainability means a stable growth now and in the future (yes, that’s it).
Harvard Business Review (HBR) has published an article about sustainability’s importance to a company. It points out that executives often misunderstand sustainability as doing less bad, and that the way we focus on short-term gain is also risky to us.
When we look into the future, some of the long-term competences for companies will definitely be the ability to innovate (be open-minded) and iterate (embrace failure). This is especially true for a traditional industry like steel.
Digitalization is certainly the biggest opportunity and threat deciding if the traditional industrial companies will thrive or barely survive after 10 years. This includes Internet of Things (IoT), robotics, artificial intelligence, big data, cloud computing, and additive manufacturing (AM).
As a matter of fact, big players such as GE have already tested the power of AM in the aviation industry a few years ago. They chose to employ AM in manufacturing the nozzles, due to less material usage, lighter parts, and significant fuel savings. The computer-controlled laser shoots pinpoint beams onto the bed to melt the metal alloy in the desired areas, which is way faster than conventional techniques to make complex shapes. “It’s really fundamentally changing the way we think about the company”, says GE’s CEO Mark Little.
Another HBR article states that digital industrial revolution is already increasing the margins of German manufacturers. By 2030, it is estimated for manufacturers worldwide to potentially realize an estimated USD 1.4 trillion upside. We have summed up some of the main points. For more information, here is a quick article on big data.
In terms of idea and production, design and change data are integrated closely in the production process. Engineers can simulate the production and thus estimate the effect of performance changes and the cost needed for those changes.
In terms of sales and delivery, big data demand forecasting techniques enable manufacturers to analyse different information along the downstream supply chain in real-time, such as customers’ online configurations, third-party data, CRM systems, etc. This hugely improves forecasting models and is better than the usual built-to-stock logic. Assembly line utilization also greatly benefits from the real-time simulation and feedback loops between the shop floor and engineering.
Facing the challenge from China, manufacturers are now cutting costs (mainly labor), while maintaining efficiency and quality. Along the value chain in the steel industry, raw materials will undergo different mechanical and chemical processes such as forging and welding. The surface, strength, chemical composition, temperature, and so forth will be inspected and monitored. Sensors and cloud computing can then be a starting point for manufacturers to go digital.
Being more transparent with the help of technology does not mean disclosing more secrets. With a better connection across suppliers, transport companies, and distributers, we can better allocate our resources in production and save time from non-valued-added procurement processes. It helps us in building a long-term supplier partnership and ultimately a more integrated supply chain. After all, no one wants to see the bullwhip effect.
Turning Externalities into Edges
In a professional practice, manufacturers usually want to be more lean and efficient in its supply chain. They also want to get rid of wastes, as it incurs company costs in multiple ways along the supply chain stages. With wastes, transportation and disposal are needed, which are not value-creating activities. Besides, companies need to comply with strict disposal regulations, so it can almost be treated as ‘fixed’ costs anyway.
Nowadays, industrial companies have been active in avoiding the “by-products” or “residue” (a new term for waste) in the first place. Tata from India has made emission reduction a priority shown by high operational investments, such as the new H Blast Furnace in Jamshedpur to improve efficiency and reduce pollution. Tata understands that raising efficiency to a large extent equals lowering by-products. Investment in utilization rate of equipment and raw materials comes with lowered cost to handle by-products.
It is true though, that many by-products cannot be avoided due to the chemical process’ nature. Recovery/Recycling then becomes the focus, where steel scrap is captured to produce new steel. This is also a cheaper way than turning ore (raw material) to steel. To deal with ever-increasing costs, utilizing by-products is an innovative way to cut down.
The two aforementioned approaches show how companies can transform from complying with environmental regulations of production wastes, to creating further value from the by-products. The mind-set change, that executives become aware to the sweet spot between planet and profit, is the fundamental goal we would like to see. This can drive companies to a new area of innovation and efficiency, resulting in a longer competitive lead in the market.
An industry under-pressure
While those in-factory approaches have been adopted for years, the industry is still under pressure to be transparent and responsible in both social and environmental aspects along the supply chain (and even all scopes of operations). This means we need to ensure our stakeholders, customers, workers, and primarily suppliers (1st tier, 2nd tier and sometimes 3rd tier) to follow suit.
To businesses, it seems they are pulled away from value-creating activities. However, this is not true.
Often required by different sustainability advocates nowadays, companies need to adopt ‘ethical sourcing practice’. Therefore, they have to select suppliers with high economic, social, and environmental value and work with them. Recall a principle from operations management: a stable partnership with only a few suppliers is usually more favourable. Along the process of selection, suppliers with similar values and operation systems can be relied on and even grow together in the long term. This pushes for mutual reliance of supplier and buyer, achieving a better power balance in the buying process as well.
Moreover, ‘checking’ suppliers has been a well-accepted model. In industry standards, we care about quality management system (ISO9001), environmental management system (ISO14001), and many more trade and testing certificates (ASTM, CE). All of this because we need to ensure a quality, safe, environmentally friendly, legal and eligible product to procure and export. In fact, this not only brings barrier to trade, but also helps companies acquire an edge in international trade and manage their production. The same now applies to the social aspect, such as human rights, minimum wages, and maximum hours, etc. It is the managers’ decision to treat it as a responsibility, or engaging workers to optimize productivity and loyalty. For further details of engaging stakeholders, visit the Supply Chain Sustainability Report of BSR.
Becoming a Purpose-driven Business
Back to the topic, ‘Why a Sustainable Supply Chain Matters in the Steel Industry’?
The steel industry is one of the most traditional and fundamental industries supporting many others, like oil & gas, power generation, construction, etc. We need more steel (products), of higher-quality and improved safety to advance our quality of life. However, there is no point to achieve it while sacrificing someone else’s quality of life. That is why we must be sustainable. That is why companies must look beyond current paradigm, and create innovation within to go digital.
We believe in company with a purpose. Going digital or utilizing idle resources should only be a process, not the goal. The company’s vision that it aspires to realize in 10 or 20 years later is the ultimate long-term driver for it to overcome these challenges. Applying a long-term approach will thus surely be a natural choice.
The White Paper of SGS is providing a review of the key issues and challenges that organizations may experience when sourcing from emerging economies, and an overview of paths towards responsible and sustainable sourcing.
Please notice that you might be interested in the related articles we have published:
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