Can Information Systems Save U.S. Steel?

In capacity U. S. Steel (USS) is the largest integrated steel producer in North America and the largest in the United States. Headquartered in Pittsburgh, Pennsylvania, it can produce about 27 million tons annually. The world’s largest steel maker, Europe’s Arcelor, produces more than 40 million tons annually, while South Korea’s POSCO, the second largest, produces about 30 million tons. In fiscal 2003 U. S. Steel’s total revenue was $9. 3 billion. Its third largest customer is the Ford Motor Company, an automobile manufacturer that requires an immense amount of steel.

In 1996, Ford viewed USS as the worst in performance amongst its leading suppliers, and it threatened to turn elsewhere for its steel supplies despite their 70-year relationship. “We were in danger of losing Ford’s business,” explained Gene Trudell, USS’s CIO. “It was that serious. ” Ford’s biggest complaint, among many, was that it was not notified when its steel shipments would arrive, leaving Ford unable to operate efficiently. To USS, Ford’s threat was a wakeup call causing it to examine its whole production cycle. USS identified a number of challenges beyond its notification system.

It knew it needed to lower production costs, including its cost per ton of steel and the number of hours per person required to produce a ton, as well as the costly size of its steel inventory. It had to return to profitability, and to accomplish that it needed to increase its share of the high-end steel market. Internally it needed to centralize management of the various USS businesses and factories and their information infrastructures, which in 1996 were locally controlled. USS’s major problems were reflected in its order-taking process. Orders were often manual, very imprecise, and filled with errors.

Moreover, once an order arrived, USS was unable to track it during processing. Processing began when one of its four plants transformed the raw materials in steel coils, which were then sent to USS’s processors to be turned into finished products. USS has over 120 processors (35 to 40 of which work on Ford products). A single piece of steel might be processed by up to five different processors as they treat, shape, and finish the products. The reason for the complexities is that these orders require blending and shaping of the materials, including manipulating such characteristics as

heat and tensile strength. USS was unable to follow each order as it was processed and delivered. One problem was that each processor had its own tracking and order systems, and each assigned its own inventory codes, making tracking impossible for USS. In addition, each processor communicated its processing data to USS over a dialup system. When the data arrived, they then had to be manually translated into a format that could be used by USS’s own system before the information could be sent to the customer. This translation took about 90 minutes per message.

It was a very expensive and inefficient system, and it left USS’s customers without enough information for their own production planning. USS did send advanced shipping notices (ASNs) to customers notifying them of the arrival time, but the ASNs often BAI TAP TINH HUONG – MON HE THONG THONG TIN QU_N TR_ – He D_i hc chinh quy Trang 6 / 16 arrived after the steel, too late to benefit the customers. Late made customers such as Ford more inefficient. Some Ford plants are only 20 minutes away from the processors.

If a truckload of steel arrived without an ASN, Ford employees would have to record the delivery information manually, a process requiring excess labor while increasing errors. The tracking system’s inadequacies also created forecasting and inventory problems, forcing the company to hold too much inventory, which in turn raised USS’s costs even higher. It needed to modernize its order taking tracking, and inventory systems. USS moved rapidly to solve these problems. One objective was to enable customers to enter orders electronically so that they would be accurate.

Using the Web, customers now can specify the product, quantity, price, composition, size, thickness, and even delivery date for their orders. To achieve all of this, the system had to handle information of production limitations such as metallurgical rules and production capabilities. It even had to calculate cost and delivery date. All of this had to be done rapidly so the customer knew cost and dates immediately after entering the order. USS even connected DecisionExpress software from LiveCapital to speed up credit authorization, enabling USS to reduce uncollectible debts while approving most orders.

To track orders, USS developed an event-driven system that recorded each step in processing an order, automatically triggering the next step when the current step was finished, including the steps performed by the external processors. The new system even triggered ASNs and the delivery of the order. One benefit was that USS was able to handle processor messages in 12 minutes rather than 90. Both USS and the customers knew exactly where the supplies were and how the processing was proceeding. USS now found that when customer orders and ASNs were correct, its customers were more likely to give the steel company repeat orders.

“You need a way to differentiate your business,” said Tom Zielinsky, senior director of IT strategy at competitor Weirton Steel, “and I think you can do that with repeatability of customer orders. ” David Sherwin, USS directory of order fulfillment, agreed, saying “Everyone was producing the same steel; how to fulfill orders would be different. “. All of this required very complex software, much of it home grown. In addition to information about price, quantity, and delivery date, an order must capture information on each steel product’s composition, size, and thickness.

USS used order fulfillment and data management software supplied by the Oracle Corporation, a product configuration system from Concentra, plus its own software for capturing very complex business rules and procedures for handling the intricate mix of product specifications and prices for customers. The business rules “required thousands of hours of interviews and logic revisions,” because “much of the knowledge was resident in the minds of our metallurgical engineers,” explained Trudell.

When the system was completed, USS’s need to revise orders dropped by two-thirds while greatly reducing ordertaking staff time. USS replaced its order fulfillment system with i2 Technologies’ Factory Planner forecasting software, which the programmers connected to their order system. They also connected three homegrown systems, including iTrac, which tracks orders as they go to processors or customers and an automatic order generation system for repeat customers called MIGS (Mechanical Item Generation System). MIGS reduced BAI TAP TINH HUONG – MON HE THONG THONG TIN QU_N TR_ – He D_i hc chinh quy Trang 7 / 16

inventory by improving the forecasting of demand for finished goods at the customer’s location. When MIGS was first used, it reduced inventories from 33,500 to 24,000 tons. The system has been upgraded and is now called MOGS (Mechanical Order Generation System). U. S. Steel now keeps only 20 days of inventory on hand to meet demand, while it required 33 days of inventory on hand in five years ago. Overall, this whole system, known as continuous flow manufacturing, made the company the vanguard of the industry.

According to Michael Shanahan a consultant to USS from the Boston Consulting Group, the sweep of these order tracking and inventory systems for a continuous flow manufacturing business such as steel is “astonishing. ” These systems can go from the shop, through U. S. Steel’s own production facilities and third-party service centers to customer, managing the entire supply chain through a single integrated system. USS created a subsidiary called USS Engineers and Consultants (now called UEC Technologies) in 1969 to generate additional revenue from the technology and services USS developed I-house.

UEC’s principal products are an order-fulfillment system for businesses in the metals, glass, and pulp and paper industries; a set of supply chain software toolsets jointly marketed with i2 Technologies that can help other steel companies manage their suppliers; and a tool to help companies set up an extranet for customers to place orders, check status, exchange electronic contract documents, and provide shipping information. To maintain USS’s competitive edge, UEC sells technology that is one generation behind what USS actually uses.

According to UEC President Chris Navetta, the venture has been highly profitable. USS has continued to upgrade itself. One example is Mon Valley Works, one of its four plants, which is located on the Monongahela River valley 10 miles south of Pittsburgh. It was originally built in 1875 and upgraded several times since, the last project occurring from 1998 to 2000. This was a $36 million project that replaced the computer controls and the mechanical equipment, including, for example, its laser sensors that are central to current steel making.

The plant’s output had been boosted from 270 tons per hour to 335 tons per hour. It had needed 9,300 steel workers to tend the blast furnaces and presses, but that has been reduced to only 2,100 in this half-mile long plant. In 2001, the U. S. Department of Energy’s Office of Industrial Technologies named Mon Valley Works the “Plant of the Year. ” Has U. S. Steel’s use of information technology solved its problems? The company’s systems investments have definitely helped the company streamline operations, consolidate purchasing and raw material sourcing, and support customers from its various facilities.

The company has become very efficient, as shown by the time it takes to produce a ton of steel. USS requires about three person hours for one ton while in Germany it is 4 hours (a 33 percent increase), Japan 4. 5 hours, and POSCO 4. 8 hours (a 63 percent increase). Although countries like India need 34 person hours, their hourly labor rate is much lower. And still, USS’s labor costs remain higher than competitors such as POSCO. Many observers claim that one reason is that USS spends $40 per ton for retiree health care costs.

New labor agreements with the United Steelworkers of America have enabled U. S. Steel to reduce the cost structure of its domestic business and reduce employee headcount from 28 ,000 to 22,000 as of December 31, 2003. According to Daniel Ikenson, the senior trade analyst at the Cato Institute, a conservative BAI TAP TINH HUONG – MON HE THONG THONG TIN QU_N TR_ – He D_i hc chinh quy Trang 8 / 16 Washington, D. C. , think tank, “U. S. Steel’s biggest problem is it doesn’t have the same economies of scale that its foreign competitors have.

” Ikenson says U. S. Steel is quite efficient but is simply not large enough to equal its foreign competitors. Another issue for USS is that Nucor and other innovative U. S. steel makers use scrap steel as inexpensive raw material forcing USS to make higher-grade steel from coal and iron, the type of steel used in automobiles and skyscrapers. USS has stated it would like to combine with Bethlehem Steel, National Steel, and maybe even Weirton Steel, but only if the U. S. government takes over about $10 billion of their cost of benefits.

These “mini-mills” oppose this because they are non-unionized and don’t have the medical and pension expenses of the bigger companies. Dan Dimicco, Nucor’s CEO, said that the U. S. Steel proposals are “nothing more than an attempt to get the government to help a couple of companies at the expense of the rest of the U. S. steel industry and the taxpayers. ” Comparison with South Korea’s POSCO might further help explain USS’s problems. In the nineteenth and early twentieth centuries, U. S. steel companies located themselves near the sources of iron and coal.

However half the cost of producing a $210 ton of steel today is for purchasing and shipping raw materials, while energy is 6 percent, labor 6 percent, and the remaining costs of 38 percent are for such factors as maintenance, information technology, and administration. Today companies locate themselves on Atlantic, Pacific, and Mediterranean coastlines to reduce their largest single cost. In 1966, as South Korea was attempting to modernize and rise out of third world status, its government decided to establish a steel industry, even though it has almost no domestic iron or coal.

It invested $296 million (U.S. ), eventually named the company POSCO, and situated the factory at Pohang on its Pacific coastline to keep its costs low. Pohang has the harbor depth to handle the largest container ships. South Korea later built a second production facility nearby. It built very modern facilities, and then 18 years later upgraded them. In 1999, according to Sang-Boo Yoo, POSCO’s chairman, the company undertook a $247 million project, named Process Innovation. Its purpose was to enable the company to use the Internet for all aspects of the company’ activities, including booking and monitoring its fleet of 44 ships.

In 2000 POSCO became the largest steel producer in the world, although it was surpassed in 2001 when Arcelor was created by merging three large European companies. POSCO’s costs are about $175-$180 per ton versus $240 a ton at USS and about $210 a ton by Arcelor. Its advantages are its seaport location, and its late start, enabling it to start with more modern equipment and information technology. Frank Voelker, CEO of Alstom Power Conversion, who has worked on botha POSCO and USS systems, says USS’s are every bit as good as POSCO’s and better than most of its competitors.

But USS cannot do anything about its lack of a seaside location because of the high cost of moving its facilities. “I’d love to have a seaport paid for by the government, just like POSCO,” but it would cost too much, said Usher. During the past few years, U. S. Steel benefited from strong global economic conditions and surging in demand in the United States, China, and other countries. But the steel industry is very cyclical. What will BAI TAP TINH HUONG – MON HE THONG THONG TIN QU_N TR_ – He D_i hc chinh quy Trang 9 / 16

happen when demand cools down, as it inevitably will do? Will U. S. Steel’s systems and processes be enough to keep it competitive in the global marketplace? Sources: http://xnet3. uss. com/corp/customer/about_Steeltrack. htm, accessed February 26, 2005; U. S. Form 10K for Year Ending 2004, www. ussteel. com, accessed April 12, 2005; Lehman Brothers Equity Research, “United States Steel Corp,” February 16, 2005; “Suddenly Steel Has Industrial Strength,” Business Week, October 18, 2004; Mel Duvall, “U. S. Steel: Selling Tech—or Selling Out?

” Baseline, June 18, 2002; John McCormick and Mel Duvall, “U. S. Steel Tries Tech Alchemy,” Baseline, June 17, 2002; Mel Duvall, “U. S. Steel: Why the Red Ink? ” Baseline, June 17, 2002; Mel Duvall, “POSCO: The Next Big Steel,” Baseline, June 17, 2002; Kim S. Nash, “Enterprise Servers: HP’s Alpha Division,” Baseline, June 17, 2002; John McCormick, “At U. S. Steel, New Computers Revive Old Plant,” Baseline, June 15, 2002; Sean Gallagher, “Gotcha! Managing Continuous Flow Manufacturing,” Baseline, June 15, 2002.

Questions: 1. Summarize U. S. Steel’s current competitive situation. 2. How are information systems related to the way U. S. Steel runs its business? What role is played by supply chain management systems? 3. What management, organization, and technology factors were responsible for USS’s inability to compete with other steel manufacturers? 4. Describe how USS has responded to its global and American competition. 5. How helpful were information systems in addressing USS problems?