Sunday, August 26, 2012

Management as Well as Inputs Count

US Steel is a big dragon in the world steel industry. When I was a young school student, I heard my father talk about US Steel. Its production capacity and efficiency at that time was already a fine example for Asia.
However, in the fiscal year 2001 US Steel's total revenue was $6.38 billion, with a net loss of 218 million. And early in 1996, its 3rd largest customer Ford viewed USS as the worst in performance among its leading suppliers, and it threatened to end their 70-year supplier-customer relationship. Meanwhile,  POSCO rose to be the 2nd largest steel manufacturer and Indian Steel posed a potential risk with its cheap labor cost.
So what went wrong? There was something wrong with the supply chain management and collaborative commerce system. The former system is a close linkage and coordination of activities involved in buying, making, and moving a product while  the latter involves the use of digital technologies to enable multiple organizations to collaboratively design, develop, build and manage products through their lifecycles.
The problems were reflected especially in the order-taking process. Orders were often manual, very imprecise, and filled with errors. Secondly, the software was not integrated for each processor had its own tracking and order systems, and each assigned its own inventory codes, making tracking impossible on the whole. Thirdly, the communication process used a dial-up system which was both slow and unstable. Fourthly, when the data arrived, they had to be converted manually into a format recognizable by USS software, which took more time.
There were other problems. Some Ford plants are only 20 minutes away from the USS processors, but the shipping notices often came later than the shipment either because of recording errors or because of lag in communication time, making Ford inefficient in its production.
All these combined resulted in forecasting and inventory problems, causing unnecessary inventory and storage cost.
This was a poor picture for information management, but USS dealt with it smartly. US Steel tackled their problems in the following ways:
First, they improved their software system. One objective was to enable customers to electronically enter orders so that they would be accurate and easy to track and manage. Also, in this way customers would know cost and shipment dates immediately after entering the order. This was done using internet technology. In order to track orders, USS developed an event-driven system that recorded each step in processing an order and automatically triggering the nest step once the first step was finished. In order to capture information on product specifications and composition US Steel used order fulfillment and data management software supplied by the Oracle Corporation, plus its own software for capturing complex business rules and procedures. They connected three homegrown systems to track orders, record information and forecast future orders (the MOGS software). The concept of continuous flow manufacturing was thus created.

Secondly, the sales system was changed. A new division, Straightline Source, was set up to sell steel products directly to smaller customers thus bypassing service center intermediaries, enhancing interaction with customers and reducing the production cost.
Thirdly, a subsidiary was established to generate income from technology which is one generation behind what USS uses now. This neither weakened their competition position nor hindered development of other companies thus creating a win-win picture. In addition, this strengthened US Steel's position and extended its influence.
The information system was successively implemented to improve communication and decision-making, to strengthen customer relationship and create revenue streams. 
Although its labor cost remain high with huge medical and pension expenses, although its purchasing and shipping cost still occupy half of its production cost, although US Steel cannot move to a seaport to reduce the cost of shipment, although it has a large union which may prevent it from cutting the labor cost, although the raw materials it is using are more expensive than scrape steel which other companies are using, it can still take advantage of the modern technology and management methods and get to the edge of the world steel market.
Some of the things it may choose to do are: to focus more on customer services so as to differentiate it against the other steel makers, to subdivide the tasks to different divisions so as to cut more on the labor cost and increase efficiency, to take over a small motor car company to make full use of the steel capacity and gain more independence and flexibility.
US Steel may not have the location advantage as POSCO, it has something which POSCO does not have. Therefore, the strategy should be to bring the good side to its full stage. At the same time, more technology may be used to avoid the labor problem. Thus the outcome for US Steel to outperform POSCO becomes much brighter.      

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