Bolstering steel industry profits
Published: 2020
By Soumik Das & Milton Ghosh, dss+
Published: 2020
By Soumik Das & Milton Ghosh, dss+
Across the steel industry, production losses caused by inefficiency and poor quality are
equally significant, if not greater than losses
from downtime. Yet the effects of process and
production slowdowns and in-process product
defects are rarely quantified and analyzed. To
equip steel manufacturers with the skills to
recognize these losses and optimize capacity,
costs and revenues, dss+ has developed a comprehensive
production loss accounting (PLA) program. This
approach guides steel producers in allocating,
measuring and addressing the full range of
potential production losses, driving larger profit
margins and significant business value.
Identifying the right levers for optimization.
Profit margins in the steel industry are heavily
dependent upon input costs and market
conditions. New challenges in the market, shifts
in value chains and companies’ own balance
sheets continually arise, spurring manufacturers
to identify levers that can mitigate these issues
by reining in costs or increasing revenues. Steel
manufacturers have a long list of levers to pull
on both sides of the cost-revenue equation,
from strategic partnerships and new product
development to lean manufacturing and strategic
sourcing.
As they investigate new opportunities for
efficiency, producers may not be able to influence
the high fixed costs associated with raw materials
or labor, but there is likely to be untapped
potential within the roughly 21% of the revenue
breakdown, that comes from plant operations.
This is where production loss accounting (PLA)
presents tremendous opportunity.
In order to increase throughput and revenues,
PLA focuses on loss accounting at various stages
of production, thereby maximizing capacity
utilization and minimizing losses and waste in
the system. After all, if a company can increase
volume without adding costs above a marginal
increase in raw materials, profits will rise.
Conversely, if a company is able to recognize and
minimize various systemic losses, margins will
also rise.
There’s no question that today’s producers
have room to improve throughput and increase
production efficiency by decreasing loss and
waste. A dss+ analysis of
eight leading Indian steel producers’ data found
that some were utilizing as little as 66% of their
available capacity.
PLA brings clarity and action to hidden losses.
Steel manufacturers are accustomed to tracking
mechanical and operational availability losses
caused by planned overhauls, standby time or
line shutdowns. When a furnace is offline, it is
immediately reported and the impact measured.
However, rate and quality losses—which in many
plants can account for nearly double the value of
downtime losses—are generally not dynamically
tracked. These issues may be addressed in
quarterly P&L reports and balance sheets, but
not in a manner that allows immediate remedial
action.
PLA gives producers the means to track these
harder-to-gauge losses at the shift level, as well as
identify the most advantageous opportunities for
improvement. If equipment is ever operating at
a reduced rate—due to idling, minor stoppages,
ramp up or even process inefficiencies—lost
opportunity is tracked and quantified. Similarly,
whenever defects lead to rework or waste, issues
are logged for analysis. By allocating losses into
appropriate categories and attaching dollar
values to the impact, PLA provides visibility into
precisely where and how much potential revenue
is being lost.
Beyond traditional root cause analysis.
While introducing the PLA concept, dss+ teams have been asked
why this approach is necessary, given that
steel operations are already applying root
cause analysis (RCA), the Five Whys or similar
techniques. It’s important to note that PLA is not
intended to replace, but to supplement and build
upon these tools with a comprehensive program
based on improvement, not just individual
problem solving.
Analyzing the causes contributing to loss are, in
fact, an important part of PLA. However, while
most companies apply these tools only to work
stoppages, PLA utilizes RCA to determine the
source of slowdowns and quality problems.
Through PLA, a majority of losses are identified
and categorized, providing visibility and
minimizing the “if you can’t track it, you can’t fix
it” effect.
Production loss accounting in action.
PLA is based on dynamic, floor-level reporting
of any challenges that arise throughout the
day. At the close of every shift, field reports
and operational issues are logged into the
PLA system. A dashboard allows slowdowns
and reprocessing to be coded and grouped
into predetermined buckets, which compiles
production and loss data, then integrates metrics
and reports into the management operating
system. Root cause analysis is performed, the
financial benefit of remediation is calculated,
and potential costs and benefits are reviewed
against business needs. For any bad actors in
which corrective action or preventive measures
are deemed appropriate, solutions are developed
and actions are logged as modifications proceed.
Ongoing impact analysis supported by advanced
analytics is carried out to ensure continuous
improvement.
As PLA progresses and the manufacturer
systematically finds and eliminates losses,
solutions can be replicated across units, plants,
sites and the whole company, enhancing
production levels across the organization.
Embedding PLA throughout the organization.
Increasing volume in steel manufacturing requires
near-universal input and effort. From shift team
leaders and shift supervisors to operations
engineers and front-line workers, everyone has a
role to play.
Production Loss Accounting touches every
function, including:
• Operations
• Maintenance
• Reliability
• Production accounting
• Business optimization
• Supply chain and operations planning
dss+ has defined clear
change and communication processes to drive
alignment and engagement at every level.
This three-phase program begins with leadership
buy-in and efforts to “push” the idea through PLA
team leaders and area champions. Ultimately, as
shift leaders and front-line workers learn to value
the process, they amplify the effort by helping to
“pull” initiatives through the organization, leading
to sustainable benefits.
A Phased Approach to Realizing Value from Production Loss Accounting
Phase 1: Align Leadership
Create a shared vision of the future.
• Create a vision for change, including fiscal year
targets and priority initiatives
• Form a coalition of powerful, top-tier members
and align on targets, priorities and executional
responsibilities
• Create a roadmap of key milestones and
governance processes that integrate priorities
with performance management
Phase 2: Mobilize Champions
Create an environment for change.
• Communicate the vision and create excitement
among business units and specific functions
• Energize the organization and empower action
through change teams charged with distinct
initiatives
• Create quick wins by focusing on high-impact
efforts
Phase 3: Engage Across the Organization
Create and sustain change across the company.
• Build on change by rolling initiatives out across
all units
• Make the transformation sustainable
by embedding PLA reporting into the
organization’s management operating system,
tracking KPIs, meetings, systems, processes,
etc.—for example, by including PLA variances
in cascaded reviews
• Train people in how to use PLA to ensure
sustainability
Benefits across critical KPIs.
When we look at the wide range of business case
levers that can impact value, dss+ clients have seen PLA have a positive
impact on many of the components of the value
driver tree.
Because a robust PLA program provides
actionable visibility into all forms of production
loss, this approach helps pinpoint and close the
gaps between what steel manufacturers are
ideally capable of producing and what is actually
being sold. Fine tuning this important supplyside
lever to maximize capacity utilization can
significantly improve cash flow and profits—an
especially important consideration in times of
business or market uncertainty.