Five Customer-Focused Steps to Increase Profitability in the Steel Industry

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Steel producers have experienced tough times in the past few years. The market has suffered from persistent weak demand amid increasing volatility. China’s exports as well as those from other emerging market producers are further changing the competitive landscape.

Now and in the past, many steelmakers have shied away from making fundamental improvements to their sales approach and from efforts to increase operational flexibility, despite the volatile market. Instead, they have favored short-term fixes such as tactical cost cutting, asset restructuring and incremental optimization. Sales were seen as a necessary evil to “fill the mill” and not a function to be improved. To increase competitiveness, steel producers need a fundamental paradigm shift that puts a priority on improving sales and operations.

To find out what changes are needed, Accenture examined the performance of major steelmakers globally. We identified five game-changing steps taken by companies in the lead. These companies:

Identify customer requirements under consideration of process volatility1

Understand the profitability range of products and services to reduce complexity2

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Segment customers based on service requirements and profitability3

Transform supply chains into highly reliable and agile ecosystems4

Adapt personnel, procedural and informational skills to facilitate the new approach

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Market situation

As it continues to face sluggish demand, the global steel market has been changing from a sellers’ to a buyers’ market. Capacity and production volumes have grown faster than global demand since the economic crisis of 2009.

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Utilization US Domestic Hot Rolled Coil (HRC) Average Prices

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Figure 1. Global steel capacity continues to grow despite increasing challenges in the market.

Source: Steel Business Briefing, 2016

The consequences are rising overcapacity and declining utilization while volatility remains high (see Figure 1). The seriousness of this crisis is further intensified by growing Chinese exports without ease in sight.

At the same time, prices linger at a low level, and steel users have begun to substitute competitive products like aluminum or plastic components. Prices have also been impacted by pressure

from automotive suppliers and original equipment manufacturers (OEMs) that have merged into buying powerhouses. Supported by sinking transportation costs and improving logistics capabilities, steel is now produced almost anywhere in the world and shipped at reasonable prices with reduced effort. In Europe, North America and many other markets, the increase in exports from China is putting further stress on prices. With a total

import volume of 95 million tons in 2014, for instance, Chinese imports in Europe were almost at the same level as total production from European steelmakers—approximately 100 million tons per year.1

1 Wocher, Martin. “EU wehrt sich gegen Stahl-Dumping,“ Handelsblatt, 13 May 2015.

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Further complication and traditional reactionHistorically, steelmakers have reacted with temporary price decreases and short-term cost reductions. This has taken a toll on profits for many producers in industrialized countries.

In the current situation, problems are hitting these mature markets all at once and producers are focused on establishing trade restrictions that are of no long-term value.

In addition, steelmakers in developed markets can no longer leverage product quality as a major competitive differentiator since quality of commodity steel from emerging countries is constantly improving. Considering this trend, it is critical to focus on the right service offerings.

Accenture research shows that quick fixes are no longer effective. What may have worked in the past—accommodating cyclical market fluctuations with a short-term focus—is no longer sufficient because of the permanently altered market dynamics.

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Leading practices for customer focusA long-term measure that will help improve profitability and reduce volatility is to align steel production with customer needs. The steelmakers that pursue this strategy will have a key differentiator in this new buyers’ market.

The approach of focusing on customer requirements is not new; however, to do it correctly, companies must go through a fundamental paradigm change. They must leave behind “fill the mill” thinking and begin to see themselves as companies that deliver as promised to the needs of the customer.

The first step is for steelmakers to understand that customer centricity is key to success. Uncertainty can be reduced by including customer needs into the strategic equation.

Often, what the customer needs is both a particular technical specification as well as production and delivery flexibility. Delivering this enhanced value proposition for customers—through a highly dynamic, flexible and agile supply and production chain—can, therefore, become a competitive advantage. This may mean making significant changes to production and delivery operations. In some cases, it will also mean improving inventory management so that capacity will be available on short notice when needed. In time, we believe successful steelmakers may even profit from ongoing volatility by preparing and adapting their supply chains so they can seize opportunities as they arise. In other cases, companies may need more targeted sales-related or research and development (R&D) services to differentiate themselves.

These changes will influence the culture and long-term strategy of many steelmakers. It requires company-wide adaption of personnel, procedural and informational skills. All steelmakers are impacted by these developments, but those in North America and Europe will be impacted the most given the market situation. It is critical for these steelmakers to act quickly.

Therefore, Accenture proposes five elements for steelmakers to help master the paradigm change, improve commercial excellence and become leading producers. Steelmakers should:

1. Identify customer requirements under consideration of process volatility.

2. Understand the profitability range of products and services to reduce complexity.

3. Segment customers based on service requirements and profitability.

4. Transform supply chains into highly reliable and agile ecosystems.

5. Adapt personnel, procedural and informational skills to facilitate the new approach.

1 Identify customer requirements under consideration of process volatility

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Steelmakers can better understand customers’ plans by striving to understand their needs and communicating in a way that addresses those needs. For instance, if customers desire price certainty, producers can seek to offer it, rooted in a deep understanding of the steelmaker’s own costs throughout the internal supply chain.

Accenture has worked with many companies in the resources industries to explore both the obvious and obscure needs of the customer. We link those needs with the customers’ willingness to pay for customization and related services. We also help our clients change their sales approach and organization to hone in on this area of opportunity.

In a recent steel industry analysis, for example, Accenture collaborated with a client to jointly define and agree on their customers’ key buying criteria and how those related to basic factors, such as delivery reliability or product quality standards. After determining this, the team interviewed customers and developed an ideal offering that was linked to the customers’ willingness to pay. As a final step, Accenture developed pricing options for various services and products for the steelmaker.

The focus on customer needs will further improve the understanding of buying patterns in the steel value chain overall. Steelmakers can anticipate changes in demand based on early warning signs, allowing these producers to gain a short-term competitive advantage by adapting their own market behavior before their competitors can do so. Steelmakers can do this in addition to covering the basic factors and striving for delivery as promised.

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2 Understand the profitability range of products and services to reduce complexity

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Most steel producers have a supply and production chain that ranges from ironmaking to semi-finished and finished products. The diversity in steel grades, dimensions, production paths, mechanical properties, tolerances and surface treatments increases complexity in production planning and execution.

Unplanned downtimes, production breakdowns or changes introduced by the customer make production-as-planned an extraordinary challenge. It becomes even more complicated when steelmakers try to adjust production based on poor data—or, in some cases, no data at all.

With inferior or missing data, steelmakers exert a great deal of effort in an ad-hoc manner, as they try to make the supply and production chain more efficient (often attempting this manually). This threatens delivery performance and customer satisfaction, and it also leads to lower transparency about the “real” costs of production, lead times and ultimately customer/order profitability.

Considering this, it is critical to reduce complexity in the supply and production chain in order to become and stay profitable and to deliver as promised. One way to manage this is to analyze the portfolio and identify product priorities, while at the same time offering limited product customization based on the customer’s willingness to pay. This is a difficult balance to achieve.

Initially, providing a wide, unprioritized range of products may seem to be in the interest of both the customer and the steelmaker. But even if a wider range of products targets more customers and might be helpful for increasing the utilization of production facilities, a lack of prioritization will eventually endanger delivery performance and, with it, the customers’ willingness to pay prices for products and services that are profitable for the steelmaker.

Therefore, Accenture recommends a strong customer focus that results in limiting and prioritizing product offerings for customer segments. This approach provides many benefits for both the customer and the steelmaker. A detailed portfolio analysis of delivery performance, real efforts and margins highlights the steelmakers’ strengths in the supply and production chain. Those products and customers in the profitable range should become the “baseline.”

Products outside this range likely require greater effort to ensure quality and delivery as promised. They can still be offered to those customers that are willing to pay a premium to compensate for the steelmaker’s higher cost basis and the ripple effects in planning and production. However, capacity and capabilities in the production and supply chain, as well as pricing, have to be carefully evaluated to ensure the required margins are maintained for the steelmaker. Balancing product quality and reliability with controlled complexity and pricing are key capabilities to master.

Furthermore, long-term profitability requires a portfolio that meets evolving customer needs. In order to retain profitability, R&D efforts must serve as an enabler to the paradigm change and be in sync with customers’ willingness to pay. Accenture analysis shows that today steelmakers approach R&D very differently. We see no direct relation to improved profitability, which is based on one of two reasons:

1. Either R&D efforts only led to incremental rather than breakthrough innovation, or

2. Customers have not been willing to pay for results of extensive R&D investments.

R&D provides the foundation for high-quality products and related service offerings. The focus must, however, shift to collaborative R&D. Rapid innovation can have an immediate impact. As such, steelmakers that successfully operate a short innovation and R&D cycle can capture market share by immediately responding to customer needs.

Since this approach is in line with the current market situation, it becomes clear that the “filling the mill” mentality that worked in the past may actually harm profitability. Instead, profitability can be boosted by focusing on customer needs, providing the right services and delivering as promised. These are more important than a singular focus on production volumes and utilization.

3 Segment customers based on service requirements and profitability

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Figure 2. Multidimensional, needs-based customer segmentation boosts effectiveness and efficiency in sales.

NeedsAttractiveness

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Source: Accenture project experience

The concept of customer segmentation is not new to the steel industry. It has been practiced with varying complexity and effectiveness for decades. We are suggesting an additional element to boost effectiveness of customer segmentation approaches for steelmakers.

The underlying goal is to fully capture customers’ willingness to pay for products and services. To achieve this aim, steelmakers should segment customers and define product and service offerings based on multiple dimensions (see Figure 2). This segmentation approach can only be done if basic promised quality and delivery performance are already met. However, this is not only difficult to achieve, but it also requires constant monitoring and updating when requirements and collaboration modes change.

Providing high delivery reliability for customized products is more complex and capital intensive than for standard

products. It requires production and delivery processes that are based on data from different systems that can help estimate capacity and ensure the processes remain profitable. In addition, steelmakers must align these processes to the promised service levels.

While regional and industry considerations should be embedded in any market segmentation, including customer requirements is the key to improving sales effectiveness. This needs-based approach does not mean offering services and support to all customers for a set price. It should, however, include clearly structured service bundles that are offered to groups of customers based

on factors such as their profitability and strategic importance as a customer.

Once customer segmentation is executed, the next step is to focus on new sales opportunities by reaching out directly to end customers, instead of going through service centers and traders. Selling to the end customer provides an opportunity to reap higher profits on sales, but it also means understanding downstream markets by rigorously gathering market and customer intelligence through data.

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Source: Accenture project experience

Figure 4. The three dimensions of understanding the customer support the entire sales process based on actionable segmentation.

How can current customer segments be integrated to the new approach and future segments be treated di�erently?

What product and service o�erings are profitable?

What marketing e�ort and approach is e�ective with di�erent segments?

What channel fits with customer segments, products and services?

What number of sales resources will be allocated to each customer segment?

How should sales resources prioritize time between customer care and future opportunities?

What cross-sell or up-sell opportunities exist per customer segment?

What support is required to retain customers, considering their requirements, characteristics, attractiveness and willingness to pay for products and services?

Segmentation preparation

Product & service o�ering Marketing Channel

operationSales operation

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KNOW YOUR BUYER – The three dimensions of understanding customer needs:

Figure 3. The paradigm change cycle displays the interlinked factors to achieve sustainable change in the steelmaking industry.

Source: Accenture project experience

It is important to remember that customer segments cannot be developed only once. They must be in constant evolution—just like the organization that is built around meeting the needs of these evolving customer groups. This approach will require companies to dynamically adjust customer segments, processes and related business rules (see Figure 3).

Steelmakers must truly understand their buyers to successfully execute the sales process. This starts by knowing customers’ product needs and requirements. Actual customer behavior, such as frequent exception handling and rush orders, should also be scrutinized to define customer characteristics. Furthermore, it is essential for steelmakers to carefully assess customer profitability, order volume and trends in order to derive current and future attractiveness. These three dimensions—customer requirements, characteristics and attractiveness, including willingness to pay—feed the entire sales process on a continuous basis (see Figure 4).

Profitable and Prioritized Portfolio

Customer Segments and Business Rules

Implementation in Processes and Systems

Customer Requirements and Willingness To Pay

4 Transform supply chains into highly reliable and agile ecosystems

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To meet the requirements of each customer segment and benefit from the new sales approach, steel companies must be redesigned to turn “reactive” production and a “reactive” supply chain into a highly reliable and agile system.

An agile supply chain will help improve order-to-delivery times and increase flexibility when customer orders change, for instance, by decoupling production at certain points and creating reserved production capacity.

Decoupling can take place at the point in the material flow where a material becomes linked with a specific subsequent product or even the final material/product in the customer order (see Figure 5). Before decoupling points are identified, steelmakers must narrow down the product offering by customer segment by defining the pre-products for each group.

Decoupling results in shorter lead times, decreased inventory levels for finished goods and increased flexibility for the steelmaker and customers. In addition,

defective production and downtimes can be better compensated for because the steelmaker has the flexibility to achieve the customer specification later in the production process (e.g., through cutting or grinding the material), as long as suitable decoupling points and products were chosen.

Decoupling points can be well executed for so-called “runner” products, which are simpler to forecast (e.g., due to stable base demand from a certain customer group). Short-term changes, unexpected downtimes, special requirements and products that cannot be operated through decoupling points still endanger the guarantee of delivery-as-promised. When this guarantee is made, it means steelmakers must hold back capacity for unexpected

events. This unused capacity in the production plan of each line generates flexibility and agility for all unplanned matters that come up, including downtimes and orders with special requirements for lead time, dimensions, grades and additional treatments.

The key challenge here is to eventually utilize all available capacity even though some has been held back in reserve. In other words, there is nothing wrong with filling the mill, as long as it is not at the cost of on-time delivery. With these points in mind, it is only possible to decouple production and create a reserve production capacity if digital, end-to-end processes enable better management of the supply chain.

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Figure 5. Decoupling points and focused products are two major levers to realize and ensure shorter order-to-delivery times and flexibility toward order changes.

Source: Accenture project experience

5 Adapt personnel, procedural and informational skills to facilitate the new approach

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To achieve a fundamental paradigm change, processes, roles and technology must be closely aligned. Enterprise resource planning (ERP) systems must deliver timely and efficient management reporting and analytics to enable integrated planning, such as planning for machine utilization, staff deployment and purchasing of primary materials.

This will help reduce costs and downtime by optimizing resources.

Defined roles and responsibilities are specifically needed in a process-driven organization that is integrated from end-to-end. Sales, operations and supply chain management must work together to meet customer requirements and demand. This will entail disrupting the traditional relationships between these departments, likely requiring redesign of decision making, target setting and performance management approaches to elicit the desired behavior.

Even though implementing a new, integrated sales and production approach does not immediately require a holistic digitalization of the organization, steelmakers should consider it for creating an agile production and supply chain, and for reducing the risks inherent with scattered processes and systems in the organization.

One benefit for both customers and steelmakers is increased delivery reliability through process and data transparency from real-time or near real-time monitoring of the production and supply chain. Any production delays can be reported early to the customer, and capacity that has been held back in reserve can be used if necessary.

We recommend steelmakers begin now to streamline and strengthen their system, data and process landscape, while planning ahead for a larger digital overhaul that will ensure a leading position in the future.

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The empowered position of the customer in the new buyers’ market means the business strategy and operating model of steelmakers must change. The usual measures will not be sufficient to sustain profitability.

Combining Accenture's research results and project experience, we have addressed the starting point for the required paradigm change. It is to focus on customer needs in connection to their willingness to pay. Offering the right services and delivering as promised become the key success factors for improving steelmakers’ margins and competitiveness.

Our five-element approach supports steelmakers in their transformation initiative—from strategy definition via execution to operational excellence. They will be constantly driven by customer centricity and offer the right service portfolio based on customer needs and their willingness to pay. The defined service portfolio will be aligned with the supply and production chain to deliver as promised, and the company can work toward improving the bottom line with a lower cost base.

Conclusion

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Copyright © 2016 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

AuthorsChristian SeyfarthManager, ResourcesAccenture Consultingchristian.seyfarth@accenture.com

Patrick EisermannConsultant, ResourcesAccenture Consultingpatrick.eisermann@accenture.com

Dr. Julia OppermannSenior Manager, ResourcesAccenture Consultingjulia.oppermann@accenture.com

Götz ErhardtManaging Director, ResourcesAccenture Consultinggoetz.erhardt@accenture.com

Visit us www.accenture.com/naturalresources

About AccentureAccenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions – underpinned by the world’s largest delivery network – Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 373,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.

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This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.