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September 14, 1998

Less Complexity, More Cost-Efficiency

Metals and natural resources companies are making big investments in Web technologies and ERP

By Edward Cone

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METALS & NATURAL RESOURCES

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With data from Hoovers Online

When it comes to IT innovation, the metals and natural resources industry might fall into the up-and-coming category. Thin margins and bruising global competition have stymied the use of many emerging technologies and the launch of sexy mega-projects. Technology has to be a pretty sure bet before companies make an investment.

"Our industry has been conservative due to cost pressures," says John Rudin, CIO at Reynolds Metals Co. in Richmond, Va.

Patrick Stewart, CIO of Weirton (W.Va.) Steel Corp., explains the economic realities. "The prices of a lot of our products are down over the last 10 years, so our cost has got to go with it," he says.

But things are starting to change. After lagging behind in IT for much of the '90s, when the focus was on reducing the workforce and modernizing plants and equipment, the metals and natural resources industry is making some substantial investments to implement Web-based technologies and enterprise resource planning systems aimed at increasing efficiency and widening profit margins.

Mid-August saw the unveiling of MetalExchange (www.metalexchange.net), a Web-based trading post for the metals industry that will initially offer products for sale from Weirton Steel, LTV Steel, and Steel Dynamics. The site, set to open in phases beginning this fall, will be open to any metals-producer that wishes to join.

"We'll start out with companies representing about one-eighth of the U.S. steel market, and we hope to double that within a year," says Stewart, who's serving as interim president and CEO of MetalExchange. Weirton spearheaded the project, spending more than $3 million and two years on development and committing another $2 million to launch the site.

At first, MetalExchange will feature secondary and excess products, but will soon add prime and made-to-order products, along with offerings from other producers, including diverse metals, such as copper, aluminum, and zinc. Stewart expects sales to reach $500 million a year from now.

Other metals companies are also starting to realize the value of IT. "We haven't done much in the past, but we're about to invest a lot of money in the IT area," says Cheryl Bogenschutz, an IT manager at Stamford, Conn., paper giant Champion International Corp. "We are working with key customers to develop Internet access to inventory and scheduling systems in order to bring significant productivity improvements for Champion, our customers, and suppliers."

Such IT investments are a clear sign that the industry is moving forward, says Marc Liebman, president of AIM Market Research, a steel industry research firm. "IT presents an extremely important opportunity," he says.

But make no mistake about what drives almost every decision in these businesses. "Cost is king," says Jim Frias, controller at Nucor Corp.'s Crawfordsville, Ind., facility, who's relying on an ERP system and a robust intranet to add efficiency to his operations. The new-wave steelmaker is so decentralized that it lacks a corporate IT function; each unit operates with almost complete autonomy.

With ERP, Frias says the goal is to "minimize complexity" while increasing efficiency. "We're playing catch- up," Frias says. "We had a dinosaur of a custom system that we're building around to add new financials, order-entry, and purchasing systems."

Squeezing costs while increasing efficiency is also the goal at USX-U.S. Steel Group in Pittsburgh, where projects to overhaul systems for forecasting, master planning, order entry, and scheduling will help improve its relationship with its customers, says Bill Kelly, general manager of business process reengineering.

"It's driven by the need to provide better customer service, including better lead time and cycle time," Kelly says. The company has been able to keep a tight budgetary leash on a new ERP system. "We've done it for tens of millions of dollars instead of hundreds of millions, and we're proud of that," he says. The company has taken a deliberate, multiyear approach to the project to keep costs under control. U.S. Steel is using systems from Oracle and i2 Technologies for these supply-chain initiatives.

The steel business and ERP aren't necessarily an easy fit. "We don't have a standard parts list," Kelly says. Steelmakers order a variety of products with different properties for their customers, while ERP software deals best with standardization, he says.

Adds Weirton's Stewart, "We're recipe-based, not process-based, which is what most ERP systems are built for." For that reason, some big steelmakers are treating ERP as unsuitable to their industry. "We're not interested in a global ERP approach," says Bethlehem Steel's director of IT, Tom Conarty, who doesn't want to compromise quality to get a prepackaged solution. "We are very interested in best-of-breed, highly linked software. To get that, we're doing some roll-your-own, some customized, and some off-the-shelf."

Worth The Effort
Still, companies such as U.S. Steel and Weirton say the payoff from ERP is worth the hassle, although the two are approaching the problem differently. Weirton is building its own front end to an ERP system, while U.S. Steel eschews customization as a dead-end that limits future flexibility.

ERP is also coming to the nonferrous metals business. At Reynolds, which restructured itself last year into five global units, "we're focusing on our principal businesses and looking at how to do business on a global basis," says CIO Rudin. "The reorganization provides an opportunity on the IT side to hone in on business strategy and make sure it's aligned with business." Rudin is considering two ERP vendors for a system the company can standardize around for the future, a system that will replace the fragmented, unit-by-unit approach on which Reynolds relies.

"We find ourselves with multiple systems for order entry and planning," Rudin says. "That's an expensive environment to work in."

Internet technologies and electronic commerce are also making strong inroads at resource and metals companies. Champion is using real-time Internet access to manage drivers and equipment changes and to address inventory reduction. "We're working to reduce redundant costs across companies," Champion International's Bogenschutz says.

Major steelmakers such as Bethlehem and U.S. Steel also rely on electronic data interchange to improve efficiency and customer satisfaction. "EDI is important because we manage almost the whole supply chain for some customers and deliver it on a just-in-time basis," U.S. Steel's Kelly says.

Bethlehem has been an EDI proponent for many years, and deals electronically with hundreds of trading partners, banks, and suppliers. "EDI allows us electronically to look very much like an integrated arm of our customers' business," Conarty says. Bethlehem relies primarily on dedicated networks for these relationships. One set of dedicated links is with General Motors, a huge customer with which Bethlehem can share information among engineers, designers, and manufacturing partners.

"We're still uncomfortable with the scalability of the Web," Conarty says. "We can't have a trucking notice snarled up in Web traffic for a couple of hours." Web security, he adds, is another lingering concern.

Weirton, by contrast, is an industry leader in Web commerce. "We were the first steel company to sell over our Web site," Stewart says. "We started almost two years ago; now we're doing about $60 million in online sales and are looking to take our entire catalog onto the Web."

Weirton is building its own front end to its Oracle ERP system. So far, Weirton has about 150 online customers, who now can order a variety of secondary and excess products. "We see the Net as a customer service tool," Stewart says. "We're getting really good feedback from our customers-and we're seeing people bid on products and check on order status into the wee hours of the morning."

Technology investments are justified on business grounds, Stewart says. "We spent a significant amount of time and money researching the needs of our customers, using surveys and mapping the processes that buyers go through. This is a way we can achieve value for our supply chain. It's a way that IT can help contribute to profitability and customer service."

Improving communication internally is important at Nucor's Crawfordsville facility, which is using a new fiber-optic network that binds his 800-acre campus together. "It's very robust, and everybody in the the plant has E-mail and access to records and instructions on the system," Frias says. "They can also get production information as needed. This is an important part of our upgrade plan."

One area in which natural resources companies may have a leg up on other industries is in year 2000 issues. Most companies, with their relative lack of reliance on IT for core functions, have a good jump on solving the problem, and few anticipate missing the Jan. 1, 2000, deadline.

With their tight focus on cost and insistence on return on investment, natural resources and metals companies offer some basic business lessons for other industries. "If you can't compete on a cost basis, that's one less player on the field," says Brad Rosencrans, global managing partner for forest products at Andersen Consulting. "The issues in our industry can't be fixed by IT, but IT is part of the solution."

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