BUSINESS CASE - TOGETHER WE MAKE THE DIFFERENCE - "The Steel Deal"
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“The Steel Deal”
BUSINESS CASE
TOGETHER WE MAKE THE DIFFERENCE
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The Steel Deal.
This document contains all information necessary to come to the best possible solution for our
additional capacity.
Assignment
Due to several improvements at two of our Oh production lines some additional capacity has come
available. Management has tasked you to form the optimal strategy for this additional capacity. You
have formed a cross-functional team of supply chain and (strategic) sales employees. It is up to your
team to identify which products should be produced and sold to which customers.
The following questions should be answered in your solution:
- How much do you produce of each product and why?
- What’s your (long/short term) sales strategy behind this?
- What are the expected profits?
- For which installation would you increase capacity even further (if this would have been
possible) and why?
Any additional findings, strategic trade-offs, calculation methods or insights into your decision
making process are highly appreciated.
Input
- Information document
- Steel Deal Excel Worksheet
Output
- A (5 min) presentation on a powerpoint presentation with your solution
- Your calculations on the answer sheet
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Description of the information
As can be seen in the information overview (next page), this case focuses on three production lines
(BOS Plant, Hot Strip Mill (HSM), Galvanising (HDG) Line). These lines can produce different products
with varying specifications. These products can be sold to different customers or market sectors, as
can be read below. In production the slabs serve as a substrate for the HSM which can produce
products Hot Rolled Coil (HRC) and Hot Rolled Pickled (HRP). Product HRP is a substrate for the
Galvanising Line, which can produce Product Hot Dip Galvanised (HDG).
Products & prices per market sector:
• Slabs can be sold in the spot market for EUR 180,- per tonne.
• HRC is mainly sold in the Lifting & Excavating sector for EUR 373,- per tonne
• HRP is mainly sold in the Construction sector for EUR 434,- per tonne
• HDG is mainly sold in the Automotive sector for EUR 490,- per tonne
Terminology used in the information overview:
• Available slabs: there is a total of 120.000 tonnes of slabs available
• Available time: added time available on installation due to improvements
• Added fixed costs: the added capacity has come at a price.
• Market demand: there is a maximum market demand for the specific products given.
• Price: current market price of this product
• Variable costs: cost per tonne of a specific product through the respective installation.
• Speed of work: amount of tonnes of a specific product an installation can produce per hour.
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BOS plant Hot strip mill Galv line
Information Overview
Available Slab: 120.000 tonnes Available time: 1500 hours Available time: 1250 hours
Added fixed costs: € 19.200.000 Added fixed costs: € 4.100.000 Added fixed costs: € 2.900.000
Hot Rolled Coils (HRC)
Market Demand 58.000 tonnes
Price: € 373,00 per tonne
Variable costs: € 12,00 per tonne
Speed of work: 65 tonne/hour
Market demand: 10.000 tonnes
Price: € 180,00 per tonne
Hot Rolled Pickled (HRP)
Market Demand 47.000 tonnes
Price: € 434,00 per tonne
Variable costs: € 22,50 per tonne
Speed of work: 57 tonne/hour Hot Dip Galvanized (HDG)
Market Demand 50.000 tonnes
Price: € 490,00 per tonne
Variable costs: € 30,00 per tonne
Speed of work: 35 tonne/hour
“The Steel Deal”
FACTORY INFORMATION
TOGETHER WE MAKE THE DIFFERENCE
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Production Lines
Tata Steel IJmuiden has a complex configuration of many production lines. For the sake of brevity, we will
elaborate on two consequent production lines only: the Hot Strip Mill (HSM), and one of our Hot Dip
Galvanising (HDG) lines.
Hot Strip Mill
Hot Strip Mill
Available extra time 1500 Hours
Fixed Costs 4.100.000 Euro
Variable Costs HRC 12 Euro per tonne
HRP 22.50 Euro per tonne
Speed of Work HRC 65 Tonnes per hour
HRP 57 Tonnes per hour
*All given figures are purely fictional
At Tata Steel IJmuiden, the Hot Strip Mill is one of the biggest factories on site. Hot rolling is
a metalworking process that occurs above the recrystallization temperature of the material. After the
grains deform during processing, they recrystallize, which maintains an equated microstructure and
prevents the metal from work hardening. The starting material is usually large pieces of metal, like semi-
finished casting products, such as slabs. Before the rolling process starts, the slabs are reheated at ovens
in front of the HSM.
In IJmuiden hot rolling is mainly used to produce strip products. Other typical uses for hot rolled metal
includes truck frames, automotive wheels, pipe and tubular, water heaters, agriculture equipment,
strappings, stampings, compressor shells, railcar components, wheel rims, metal buildings, railroad
hopper cars, doors, shelving, discs, guard rails and automotive clutch plates. When the hot rolled coils are
processed further at one of our other lines (such as the HDG lines) numerous other applications can be
thought of.
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The Hot Strip Mill at Tata Steel IJmuiden can produce both Hot Rolled Coil (HRC) and Hot Rolled Pickled
(HRP), however they are produced at slightly different speeds and costs. The mill has a large additional
fixed cost base of 4.1 million euros. After the improvements to the line the mill has 1500 hours of
additional capacity available.
Hot-Dip Galvanising
Hot-Dip Galvanising
Available extra time 1250 Hours
Fixed Costs 2.900.000 euros
Variable Costs HDG 30 euro's per tonne
Speed of Work HDG 35 Tonnes per hour
*All given figures are purely fictional
After the production of Hot Rolled steel, the coils can undergo a galvanising step in which a layer of zinc is
added to the surface by immersing the steel in a bath of molten zinc at a temperature of around 450 °C.
The zinc layer protects the steel underneath from further corrosion. Before galvanising, the coils are
processed by a cold-rolling mill, which in this case is left out for the sake of brevity.
Through the galvanising process, Hot Dip Galvanized coils (HDG) can be produced and sold at a premium.
After the improvements, the hot dip galvanising line (HDG) at Tata Steel IJmuiden is capable of producing
35 tonnes of HDG per hour. Zinc is a costly material, which is why the ‘variable costs’ for galvanised
products are substantial. The HDG line has fixed cost of 2.9 million euros, and a predicted additional
uptime of 1250 hours for the upcoming period.
For the production of slabs (which are afterwards hot rolled by the HSM line), the costs are fixed at 19.2
million Euro for 120,000 tonnes. Variable costs for slabs do not have to be considered for this case.
Sensitivity: general“The Steel Deal”
MARKET SECTOR INFORMATION
TOGETHER WE MAKE THE DIFFERENCE
Sensitivity: generalSector Automotive
Fundamental to Tata Steels strategy is the ambition to grow strong positions in premium market
segments that are less exposed to competition from aggressively priced imports. As a consequence
Tata Steel has strong ambitions to gain share in the Automotive market both in Europe and in targeted
global locations. Growth is being enabled by a strong focus on operational service and quality
performance, a rapidly enhancing product range (meeting Automotive design needs), technical
marketing and strong customer focus.
Steel has for long been the material of choice for automakers worldwide. The usage of steel has
allowed automobile manufacturers to achieve desired standards of strength and safety for their
vehicles at relatively low costs vis-a-vis other materials. However, given the increasingly stringent
regulations pertaining to automobile emissions and fuel efficiency, reducing the weight of
automobiles has become an extremely important consideration for automakers. Steel is facing
increasing competition from aluminium and other materials, as automobile manufacturers look to
reduce the weight of their vehicles, in order to conform to these regulations.
X 1000
Trends in Steel Usage in the Automotive Industry
As per the World Steel Association estimates, the automotive sector accounts for roughly 12% of the
overall global steel consumption. Tata Steel is one of the leading global producers of automotive steel,
accounting for around 16% of Europe’s automotive steel sheet market in 2015. Steel is the dominant
material in automobile manufacturing, accounting for roughly 60% of the weight of an average
automobile. Trends regarding suppliers generally show that automotive manufacturers have
significant power in the supplier market, making it possible to demand very high standards. Due to
the leverage of the automotive OEMs, they pursue long term intensive relationships with strict
contractual agreements. This has an enormous effect on the general risk intensity and profit margin
for steel manufacturers (Service levels, Error yield, Upstream visibility) in comparison to for instance
the spot market.
These facts lead to the following aspects which are generally demanded of competitive steel suppliers:
• Long term relationships (typically agreements per car model), annual pricing.
• High quality standards, typically 50-1000 ppm (parts per million) error yield.
• Dedicated delivery time slots which vary between 3 hours to 15 minutes.
Sensitivity: general• The slightest failure to meet initiated contract requirements potentially leads to break clauses,
high penalties and exclusion for future automotive contract tenders.
• Fulfilling the high standards in the automotive sector also leads to higher rewards for the
suppliers in comparison to other markets.
• The Automotive Sector has a large customer base for HDG. The contractually bound demand
for this product is 10.000 tonnes.
Sensitivity: generalSector Lifting & Excavating
Another key market of Tata Steel is the ‘Lifting & Excavating’ market. Tata Steel produces steel that is
being used for the production of safe and robust machines. Tata Steel aims to achieve a position in
which our customers know that they can rely on us for steel that is suited for the production of
construction equipment.
We work closely together with our customers to identify and provide the right steel solution for their
job. Our services include providing opportunities for customers to simplify their procurement chain,
extend their capacity and maximise their manufacturing flexibility. Part of this strategy involves Early
Vendor Involvement, in which Tata Steel works closely together in the OEM’s product development
stage. Technical Customer support with regard to fulfilling specific demand for achieving efficiency,
productivity and robustness improvements are key.
The lifting and excavating industry is characterised by abrasive conditions, which is why our products
are developed to increase the service life of critical components. This reduces the effect of
unscheduled maintenance and minimises the life-cycle impact of machinery. The main developments
in our products lie in both resistance to abrasion, and steel strength while reducing weight or
increasing length (e.g. for crane arms). Products are generally quite heavy, with steel plate thicknesses
ranging from 3 to 20 mm.
Market developments
The current global business environment for the heavy equipment market has been softened in the
second half of last year, however industry executives and analysts deem the long-term (global) outlook
as good. In the long run the heavy equipment market will strengthen as overall economic conditions
improve, resulting in the need to build homes, factories and highways as well as new investment in
mining and farming. However, that outlook depends on a series of interwoven market factors. For
instance, a recent slowdown in the farm economy has led to lower profits for agricultural equipment.
The relative advantage American, Western European and Japanese construction equipment (CE)
manufacturers have enjoyed over other competitors is narrowing. Chinese CE sector manufacturers
in particular have made steady progress in building more productive, reliable and technologically
advanced products while still maintaining a cost advantage relative to the United States and others.
Sensitivity: generalAnalysts say that its global future continues to hold great promise in the longer term. In a more short
term prospect there are a number of weaknesses which provide uncertainty within the market.
Problems as a weak agricultural sector, Low oil prices and record levels of cheap imports are
weakening the profit margins. The heavy steel for the CE market is mainly locally sourced by the
OEM’s.
Global heavy machinery unit sales
X 1000
These facts lead to the following aspects which are generally demanded of competitive steel suppliers:
• The Lifting & Excavating sector is mainly supplied with product HRC, there is a contractually
bound minimum demand for this product of 11.600 tonnes.
• Short term contracts (6-12 months), annual pricing with indexation on raw-materials and in
some cases market steel-price fluctuations.
• Commodity: medium quality standards.
• Steel products are often locally sourced.
• Delivery performance is key for customers.
• Customers can be both OEM and the outsourcing partners of the OEM.
Sensitivity: generalSector Construction - Building Envelope
Construction is the single largest market for Tata Steel. Our diverse range of products includes
structural hollow sections; steel floor decking; and metal building envelope systems. For this specific
focus area Tata Steel strives to accelerate by investing heavily in digital technologies, technical
excellence and through continued research in order to provide construction components that enable
sustainability. We have an active team educating and influencing the market to make best use of our
products. Occasionally this results in iconic buildings, but majority of our products end up in industrial
buildings. Our approach to this business is unique within its market as we aim to differentiate to meet
specific segment demands. Due to our strong customer-focus strategy combined with strong R&D
innovations the developments help us to build long-term collaborative relationships with our supply
chains, to create new success for them by adding value to their business and helping them perform in
their markets.
The term “building envelope” refers to the external walls, windows, roof, and floor of a building.
This barrier between indoors and outdoors is important with regards to ventilation and insulation of a
conditioned space. A “tighter” envelope (i.e. one with a
narrow gap between inside and outside wall through which
air can flow) more effectively keeps conditioned air in,
reducing the load on the Heating Ventilation & Air-
Conditioning (HVAC) system, and therefore increasing the
efficiency at which it operates. Similarly, insulation helps
slow the conduction of heat through walls. Improving the
efficiency of the building envelope is generally a low-cost,
high-return method for increasing efficiency in buildings.
Buildings consume approximately 45-50% of our global energy (and related CO2 gasses), therefore
improvements in buildings are critical to ensure sustainable living as stated in the Paris climate change
agreements. Without decisive action, energy-related emissions of carbon dioxide (CO2) will more than
double by 2050, and increased fossil energy demand will heighten concerns over the security of
supplies. We can and must change our current path, but this will take an energy revolution and low-
carbon energy technologies will have a crucial role to play. In light of this path the current construction
industry has set deadlines for achieving zero carbon buildings and thereby pressuring the current
market to build more sustainable solutions. Our steel is a great way to meet these new standards.
- High-energy efficient building components (sandwich panels)
- Long life expectation
- Steel is extremely well recyclable – even low standard products can become high end product
(upcycling). Currently >90% steel recycling rates of buildings.
- Steel construction enables sustainable energy generating solutions.
Sensitivity: generalTrends in Steel Usage in the Building envelope Industry
Within the Building envelope industry Tata Steel accounts for a market share of roughly 25% of the
European consumption. This is mainly due to three essential factors:
- in-house R&D developments.
- in-house downstream commercial organisation.
- high level of customer service.
Market developments
With innovative technologies such as advanced facades solutions, highly insulating windows, high
levels of insulation, well-sealed structures, and cool roofs in hot climates, the need for interior
conditioning can be reduced in many parts of the world, including some of the fastest-growing regions
in hot climates.
Current Research & Development is offering improved performance and greater economic viability.
This has resulted in many products and technologies that are cost-effective and ready for deployment
today. It is expected that the demand for steel applied in the Building Envelope market is going to
grow extensively after the Paris climate change agreements.
Tata Steel R&D developments are seen as industry benchmark. These are characterized by innovations
as: integrated solar panels in building envelope, integrated solar film with guided warmth and energy
generation and Air tight building envelope technology.
These facts lead to the following aspects which are generally demanded of competitive steel suppliers:
- Premium products: high quality standards; typically guarantees ranging between 15-40 years
dependent on the construction location (exp. coastal areas 15 due to salt water erosion risks).
- In the construction sector we mainly sell HRC and HRP. HRC is mainly sold as a commodity and
HRP is a premium differentiated product. The contractually bound demand for HRP is 9.400
tonnes.
- Long term relationships: typically more than 10 years, quarterly pricing.
- High profit margins in a growing market.
- Because of our strong position now and our advanced range of products for the future we can
set market standards.
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