A supply chain strategy in order to reduce raw material stocks within Tata Steel Europe

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I

A supply chain strategy in order to reduce

raw material stocks within Tata Steel

Europe

Jeroen Hovius

Student number 1493086

Master Thesis

Technology Management

June 2011 Project company

Tata Steel Europe, Procurement department

Supervisors: Drs. K. Gerretse Ir. A. Farrand

University of Groningen

Faculty of economics and business 1st_{supervisor:
Prof.
Dr.
D.J.F.
Kamann}

2nd_{supervisor:
Dr.
X.
Zhu}

All rights reserved. This report contains of confidential information. After being published this report is the copyright of Tata Steel Europe. No part of this report or appendices may be reproduced, copied or published without the specific permission of Tata Steel Europe.

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Preface

This master thesis is the final project of my master degree in Technology Management. During my master degree I was enthusiastic about research study within an organisation based abroad. I was very glad to have the opportunity to do an internship for six months at the headquarters of Tata Steel Europe in London. The research project about purchasing and supply chain was challenging and I had the opportunity to visit different production hubs in England and the Netherlands. During the six months in London I learned not only from the purchasing and supply chain field but also from the English and the Indian culture, which opened my eyes to

multicultural companies.

At this point I would like to seize the opportunity to thank all the people who have supported me during my research project. Firstly, I would like to thank Kees Gerretse, the group director of procurement, who gave me the opportunity to finish my study in a challenging and dynamic environment in London. Furthermore, I would like to thank Anthony Farrand, director of raw materials, who provided me valuable support and feedback. It was always a pleasure to work with you and to learn from your positive management skills. Andrew Kirby, it was very pleasant that you guided me through the organization and had the patience to provide me with

appropriate information.

Moreover, I would like to thank my prof. D.J.F. Kamann for all his positive support and help during my research study. I would also like to thank Dr. X. Zhu who was my second supervisor. Finally, I would like to thank my parents, my aunt, and my girlfriend for all their support and encouragement during my research.

I hope that this report will provide you with useful and enjoyable reading.

Jeroen Hovius

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Executive summary

The subject of this research project is reducing raw material stocks (iron ore and coal) by means of a supply chain strategy. Tata Steel Europe (TSE) currently operates a push system, which is bound to high raw material stocks resulting in scarce cash resources, which hinder useful investments. TSE is changing the operating model towards one integrated and customer driven company operating a pull planning system. However, the management team is wondering whether this is the right supply chain strategy for the initial stages of the supply chain. Therefore, the research question of this study is:

How to reduce raw material stocks with a supply chain strategy?

This research is tackled by identifying the causes of the high raw material stocks in a multiple cause diagram for the production hub in Scunthorpe. The communication methods used are; semi-‐structured interviews, on-‐site visits, and questionnaires. Subsequently, literature research combined with the outcome of the communication methods guided this research study to the redesigned process.

The literature analysis demonstrated the most appropriate supply chain strategy and planning system to reduce inventories, which is applied to the procurement, shipping, and production department. Finally, a redesigned process provides the solutions on a strategic -‐ (months-‐years) and tactical level (weeks-‐months).

The causes of high stocks are: inaccurate forecast of steel and therefore raw material demand; inflexible supply chain planning of raw materials; and unrealistic predictions due to high targets and risk mitigation.

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flexible and to handle the forecast inaccuracy, such as backward integration, flexible contracts, trading and spot purchasing.

Applied to the tactical level, employees of the procurement, shipping, and production departments are able to alter the amount of supply with a quick feedback loop.

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List of abbreviations and vocabulary

B.C Before Christ

e.g. Exempli gratia (Latin); for the sake of example i.e. Id est (Latin); in this case

n.d. No date for the reference APS Advanced Planning System ERP Enterprise Resource Planning

SCM Supply Chain Management

TSE Tata Steel Europe TSG Tata Steel Group VSM Value Stream Mapping MC Multiple cause

Vocabulary steel industry

(Adopted from Oxford dictionary, 2010)

Blast furnace -‐ “a smelting furnace in the form of a tower into which a blast of hot compressed

air can be introduced from below. Such furnaces are used chiefly to make iron from a mixture of iron ore, coke, and limestone”.

Coke oven – “it provides a solid fuel made by heating coal in the absence of air so that the

volatile components are driven off”.

Coking coal – “a combustible black or dark brown rock consisting mainly of carbonized plant

matter, found mainly in underground deposits and widely used as fuel”.

Flux – “a substance added to a furnace during metal smelting or glassmaking that combines with

impurities to form slag”.

Iron – “a strong, hard magnetic silvery-‐gray metal, the chemical element of atomic number 26,

much used as a material for construction and manufacturing, esp. in the form of steel. (Symbol: Fe)”.

Iron Ore – “a rock or mineral from which iron can be profitably extracted”.

Limestone – “a hard sedimentary rock, composed mainly of calcium carbonate or dolomite,

used as building material and in the making of cement”.

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electrical and thermal conductivity (e.g., iron, gold, silver, copper, and aluminum, and alloys such as brass and steel)”.

Sinter – “a solid material that has been sintered, esp. a mixture of iron ore and other materials

prepared for smelting”.

Steel – “a hard, strong, grey or bluish-‐grey alloy of iron with carbon and usually other elements,

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Table of figures

Figures

Figure 1.1: World steel production nations 2009……….…..10

Figure 1.2: Top ten steel producers 2009……….………11

Figure 1.3: New operating model TSE (2010). ………..12

Figure 1.4: Organization structure TSG……….….…12

Figure 2.1: Scope of the Scunthorpe supply chain within TSE……….………..…15

Figure 2.2: Research framework……….…...…18

Figure 3.1: Multiple cause diagram high raw material stocks………..….……19

Figure 3.2: Production process raw materials……….………..……..……20

Figure 3.3: Brief overview flow of raw materials in supply chain Scunthorpe….………..……21

Figure 3.4: Planning horizon..………..….23

Figure 3.5: Strategic level, annual planning TSE……….…….….25

Figure 3.6: Tactical level, information flow and planning……….…...26

Figure 4.1: Theoretical framework……….…...28

Figure 4.2: Road map of supply chain integration………...30

Figure 4.3: Future steel supply chain……….32

Figure 4.4: Agile versus Lean grid………....39

Figure 4.5: Value principles for leadership………..……….42

Figure 4.6: Matching supply chain strategy with product………..………48

Figure 4.7: MC diagram procurement………..…………51

Figure 4.8: Kraljic matrix and the strategic directions………..…………52

Figure 4.9: MC diagram shipping………..…………..56

Figure 4.10: MC diagram production………..………….57

Figure 4.11: Annual plan versus actual production level blast furnaces………..………..58

Figure 4.12: Iron ore stocks Scunthorpe………..……….…59

Figure 4.13: Multiple cause diagram and solutions………..……...60

Figure 5.1: Integrated and extended steel supply chain………..…….61

Figure 5.2: Strategic level, future annual planning TSE………..………63

Figure 5.3: Creating flexibility in procurement and shipping activities………..….65

Figure 5.4: Tactical level, future information flow……….…67

Figure B.1: Market share suppliers………..…...82

Tables

Table 3.1: suppliers and products 2010-‐2011………..………...22

Table 4.1: Functional or innovative product………..34

Table 4.2: Functional product TSE………....35

Table 4.3: Efficient or responsive process………..….36

Table 4.4: Physically efficient process TSE………...37

Table 4.5: Lean and agile distinguishes attributes………..38

Table 4.6: Lean supply chain approach TSE……….40

Table 4.7: Categories of organisational openness………..41

Table 4.8: Characteristics push supply chain………..45

Table 4.9: Characteristics pull supply chain……….…47

Table A.1: Top ten steel producing nations of the world……….………..81

Table A.2: Top ten steel producing companies of the world……….………..81

Table E.1: Questionnaire procurement, shipping and production department..………..84

Table D.1: Actual iron production versus annual plan iron production……….…..85

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Introduction

The aim of this research project is to reduce raw material stocks at Tata Steel Europe (TSE) with a supply chain strategy.

Firstly, in order to get acquainted with the TSE an introduction of the organisation is given in Chapter 1. The research design is described in Chapter 2 and includes the problem statement, the research question and all the methodologies that have been used to execute the research project. Chapter 3 discusses the current logistic and planning process in the initial stages of the supply chain of TSE. Thereafter, a theoretical analysis of different supply chain strategies is elaborated to identify the most appropriate strategy for TSE (Chapter 4). In addition, Chapter 4 applies the supply chain strategy and planning methods to the procurement, shipping and production department. Chapter 5 gives a clear overview of the redesigned supply chain strategy and planning process. Finally, the conclusion, the recommendation, and the reflection of this research study are spelled out in Chapter 6.

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Chapter 1: Introduction organisation

Introduction

Tata Steel Europe (TSE) is the second largest steel producer in Europe with its main steel-‐making operations in the Netherlands and the United Kingdom (U.K.). The sales offices and service centres are spread out over forty different countries, and there are approximately 37,000 employees worldwide. The annual turnover of TSE encompasses approximately £ 9.1 billion (65,843 Rs crores1_{),
and
a
crude
steel
production
of
14.4
million
tonnes.
TSE
is
supplier
to
the}

most demanding worldwide steel markets including steel for construction, cars, packaging, mechanical and engineering (internet Tata Steel Europe , 2010).

Company history

Corus was formed in 1999 as a merger between British Steel Plc and Koninklijke Hoogovens N.V. Tata Steel Group bought Corus in 2007 for £ 8.44 billion (intranet Tata Steel Europe, 2007). The acquisition made Tata Steel Group in 2007 the second largest steel maker in India and the sixth-‐ largest steel producer in the world (Economic times, 2008).

Market

The worldwide steel production in the year 2009 was 1,220 million metric tonnages in total. The top ten steel producing nations are presented in the following figures. In figure 1.1 the

allocation of the production share is shown (World Steel Association, 2009).

Table A.1 in appendix A presents the growth and decline of the steel production in each producing country (World Steel Association, 2009). China is the most significant player in the steel industry. In addition, the positive growth of steel output in China and India are remarkable compared to the other nations (see table A.1 in appendix A).

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The steel market is extremely volatile and competitive. Figure 1.2 shows the top ten steel producers in the world (Steel Business Briefing, 2009). As a result of the recent substantial growth in China, major shifts appear in the ranking of the different steel companies. Tata Steel group transferred from the 8th_{largest
to
the
10}th_{largest
steel
producer
in
the
world
during
the}

years 2008 to 2009, which is illustrated in table A.2 in appendix A.

Figure 1.2: Top ten steel producers 2009 (Steel Business Briefing, 2009)

Supply chain

TSE operates in an extremely competitive market and is dependent on a small number of powerful raw material suppliers (See Appendix B). Customers are powerful, since they can negotiate with many different steel producers. Therefore, customers often switch steel suppliers, increasing the uncertainty of customer demand. This makes it difficult for TSE to determine a good supply chain strategy for raw materials.

Currently, TSE is undertaking a significant change in its operating model, which is depicted in figure 1.3 (intranet Tata Steel Europe, 2010). In the new model TSE will become an integrated customer driven company. Many alterations in the company’s operating model are required to achieve this transformation.

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Figure 1.3: New operating model TSE (2010)

Vision and strategy

“We aspire to be the global steel industry benchmark for value creation and corporate citizenship (intranet Tata Steel Europe, 2010). The focus lies on respect for people, respect for the environment, creation of value for customers, and differentiation based on an innovative approach.

Structure organization

The Tata Steel Group (TSG) consists of four steel production subsidiaries that are presented in figure 1.4. In the new operating model TSE is divided into three main areas: production hubs, supply chain and marketing/sales.

Figure 1.4: Organization structure TSG

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Chapter 2: Research design

Introduction

This research design concerns an overview and definition of this research project.

Firstly, the problem statement is required to describe the research objective and deliverables. Subsequently, the research question, the way the data is gathered, and its scope can be formulated. Finally, a research framework will provide an overview and the steps that will be taken (De Leeuw, 2001; Cooper and Schindler, 2003).

2.1 Problem statement

One of the main reasons TSE would like to achieve a new operating model is that major inventories from the current push planning system result into high working capital2_{and
scarce}

cash resources. TSE is currently cash constrained and would like to convert stocks into liquid cash resources to achieve a healthy financial situation.

The Boston Consulting Group (BCG) discovered that 58% of the stock in trade level consists of raw materials. Furthermore, they argued that the long steel products in Scunthorpe are solely produced on a push system and under-‐perform in comparison with competitors. In addition, BCG argued that a review of the current process of raw material planning with its link to sales and production planning is needed (Boston Consulting Group, 2010). The management team of TSE would like to know which strategy (e.g. lean, agile, pull, push) in the raw material supply chain results in the lowest raw material inventories and what the consequences will be on the planning practices, purchasing -‐, transportation -‐ and production decisions. The elaboration of the supply chain strategies will be depicted in the literature review.

The problem by the management team of TSE is stated as follows:

Is there a possibility to alter the strategy of raw material supply chain in order to reduce high raw material inventories and enhance the scarce cash resources, and if appropriate what are the consequences for the planning practices?

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2.2 Research objective and Deliverables

The problem as stated by TSE leads to the following research objective. To reduce raw material stocks with a supply chain strategy.

This research project results in the following deliverables.

Deliverables:

• Practices of the current supply chain process of raw materials

• Theoretical analysis for supply chain strategies, and the associated planning systems • Practices of the future supply chain strategy and associated methods for the purchasing,

transportation and production department

• Recommendations for further development and implementation

2.3 Research question

The challenge of the research project is described in the following research question. How to reduce raw material stocks with a supply chain strategy?

Sub questions are formulated to answer the essential question.

1. In which manner is the current logistic process and planning system of raw materials organised and what are the causes of high raw material stocks?

2. Which supply chain strategies and appropriate planning practices minimise inventory levels in literature?

3. What should be the most appropriate supply chain strategy for the raw material chain of TSE and will it have consequences for the manufacturing, shipping and purchasing department?

4. What recommendations can be made concerning the execution and management of the supply chain planning process of raw materials?

The following two sections show the scope of the research project and the way in which the information is gathered to answer the sub questions and subsequently the research question.

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2.4 Scope

In order to narrow down the research project, the supply chain from the first tier suppliers of TSE until the blast furnaces in the production process of Scunthorpe will be chosen as the focus area, whereas, the production level of the blast furnace can be seen as customer demand. The scope within the supply chain is depicted in figure 2.1.

Figure 2.1: Scope of the Scunthorpe supply chain within TSE

The raw materials coal and iron ore will be the scope of the research project, because these materials are the most significant spend of the TSE within the procurement department (57%). The emphasis of the planning process of the raw material supply chain will be on a strategic and tactical level, which can be divided into a few months to a few years and in weeks to months respectively (Ivonov, 2009; Simchi-‐Levi et al., 2008).

Simchi-‐Levi et al. (2008) argued that these levels consist of: the way the flow of materials is organised, as well as purchasing decisions, production decisions, and transportation decisions. These areas are relevant for this research.

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2.5 Data Gathering

The important thing is not to stop questioning.

Albert Einstein (1879 – 1955)

The data is collected following on-‐site visits and observations at the plants, interviews, internal documentation and data from the information systems of TSE.

Moreover, the literature data is gathered from both books and different scientific databases such as: Science direct, Emerald, JSTOR and EBSCO host Complete.

The search strategy in the named literature data was mainly focused on the following terms; supply chain strategy; supply chain management; steel supply chain; raw material supply chain; push supply chain; pull supply chain; lean supply chain; agile supply chain; reduction of

inventories or raw material stocks. Recent literature has been used to support this research project.

On-‐site visits and observations

The three different main production hubs in Europe of TSE were visited during the first months of the research in order to get acquainted with the production process of the raw material supply chain. The plants are based in Scunthorpe (U.K.), Port Talbot (U.K.) and IJmuiden (NL). As mentioned before, the production hub of Scunthorpe is the scope of this research project.

Interviews

Different communication methods to collect qualitative data were required in order to determine the problem areas, and visualise the current methods and processes. The current information flow between the different departments had not been visualised before this research project.

According to Cooper and Schindler (2003) there are mainly three different communication methods in the collection of data, namely, personal interviews, telephone interviews and self-‐ administrated surveys (questionnaires). In this research project these three communication methods have been used to acquire the information.

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investigative questions of a specific study area. In addition, the semi-‐structured interview method allows the interviewer to use a set of questions, but is also willing to explain and add extra questions, whereby the respondent is not limited in giving replies (Cooper and Schindler, 2003). The semi-‐structured interviews have provided valuable information. The emphasis of these interviews laid on the problem, the causes and the solutions.

In these interviews it became very clear how the departments worked together and what the source of the problem was. The following managers and employees have been interviewed during the research project:

Procurement raw materials (London): -‐ Director raw materials

-‐ Manager raw materials

-‐ Managers/buyers coal (3x) -‐ Managers/buyers iron ore (2x)

Bulk shipping raw materials (London): -‐ Manager bulk shipping

-‐ Manager bulk shipping planning -‐ Analyst bulk shipping

Production and planners raw materials -‐ referred to from now on as production department -‐ (Scunthorpe)

-‐ Manager production raw materials -‐ Coal technician

-‐ Iron ore technician

-‐ Planner’s raw materials (2x)

Finance group control (London) -‐ Director group control

-‐ Group business controller

The questions in the questionnaires were closed ended question, and were measured with the aid of the rating and the multiple choice response strategy, which is depicted in appendix C. The acquired data gives an indication of the mind-‐set of the different respondents in the

departments. However, the most useful information is gathered in the semi-‐structured interviews.

Internal documentation and data from Information systems

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2.6 Research Framework

In order to decide the most effective way to reduce raw material stocks with a supply chain strategy, the following stages have to be executed.

Figure 2.2: Research framework

The research design in chapter two is the foundation of this research project and is already described. Chapter 3 discusses the current process and the problem areas of the research topic. Afterwards, a literature review and applicability analysis will be done in order to find out which supply chain strategies are appropriate for TSE and are able to reduce raw material stocks (Chapter 4). It is important to relate the appropriate purchasing, transportation and production decisions into this strategy. The appropriate future supply chain strategy and practices can be visualised in the redesigned process (Chapter 5). Finally, chapter 6 depicts the answers of the research and sub questions in the conclusion. Recommendations are elaborated for future research, and a reflection is represented to evaluate the research project.

As-‐is

To-‐be

Chapter 2:

Research design

Chapter 3:

Current process and

problem areas

Chapter 4:

Theoretical - and

applicability analysis

Chapter 5:

Redesign the process

Chapter 6:

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19 Chapter 3: Current process and problem areas

Strategy without tactics is the slowest route to victory.

Tactics without strategy is the noise before defeat.

Sun Tzu, 544 B.C – 496 B.C, Chinese military commander and author (adopted from MC Neilly, 1996)

Introduction

This chapter describes the current raw material supply chain within TSE. Firstly, the physical process from the supplier market to production is elaborated focused on the problem areas. Secondly, the structure, the information flow and the planning procedures of the procurement, shipping and production departments are explained. The data in this chapter is collected with the aid of the different communication methods as described in the section data gathering.

3.1 Problem areas and causes

The gathered information from the semi-‐structured interviews have shown that multiple causes affect the high raw material stocks. Therefore a multiple cause diagram is depicted in figure 3.1 to oversee the complexities of the problem.

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The dark blue shapes in the figure characterise the main causes of the high raw material stocks in the supply chain and the departments. However, these causes are too vague and need to be divided into the different sources of the problem. Numerous causes are visualised, however, the most significant of which are computed in this research project:

• Inflexible supply chain planning raw materials • Inaccurate forecast steel and raw material demand • Risk mitigation and security of supply is a top priority • High amount of products and suppliers

-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ • Production breakdowns

The cause -‐ production breakdowns -‐ is because of the scope not extensively described in this research study. The other main reasons for highs stocks form a continuous item in the following paragraphs. In order to understand the process of raw materials orders a clear overview of the initial stages of the raw materials supply chain has to be visualised.

Figure 3.2: Production process raw materials, (intranet Tata Steel Europe, 2010)

A simplistic overview of the production process within TSE is shown in figure 3.2 to give a clear idea of the physical process of raw materials. The fluxes that are presented in this figure are not a part of the scope for the reason that the financial impact is substantial lower in comparison with coal and iron ore.

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Figure 3.3 shows a schematic overview of the flow of raw materials in Scunthorpe and the stages with the most substantially stock levels, and an estimation of the value of the inventories is presented in the table within the figure.

Figure 3.3: Brief overview flow of raw materials in the supply chain in Scunthorpe

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Table 3.1: suppliers and products 2010-‐2011 Supplier market

The amount of suppliers and different products of coal and iron ore is substantial within TSE caused by powerful suppliers. The technicians stated that the higher the different amount of products, the higher the overall stock levels of raw materials would be. The supplier market is known as a sellers market; a few

gigantic suppliers determine the price and mostly have the best qualitative products. Procurement stated that TSE is extremely dependent on these raw material

suppliers and it is difficult to create flexibility within the contracts. However TSE is currently trying to integrate backward, in fact, they own shares of some raw material mines.

The goal is to have long-‐term contracts with around 100% of the raw material suppliers in order to build to a valuable relationship and appropriate product quality. The interviews have shown that the fixed volumes in the contracts lead to an inflexible supply chain. Table 3.1 gives an overview of the different suppliers and products of raw materials (excluded trials) related to the ideal amount of products. According to the production department is the amount of products in the table ideal to reduce stocks.

Shipping

Both commodities have to be transported from the coal and iron ore mines to the load ports, where they can be sailed to the terminal in Immingham. Lead times can vary from 11 weeks to 28 weeks included nomination, sailing and berthing. According to TSE it is difficult to become more flexible in the supply chain planning of raw materials due to high lead times.

The vessels can be chartered on the spot market and on a contract base, whereby 75% is covered on a contract base. The goal is to full load the available space within the vessels due to utilisation costs, which can lead to additional volumes and result in higher stock levels in the production plant.

Production process

The highest stock levels are in the port, the stockyard and in the blending areas. Stocks are often deliberately quite high due to the enormous costs of stagnations of the coke ovens and blast furnaces. Blast furnaces and the coke ovens have to process continuously to avoid millions of pounds to restarting the process. However the production level of the blast furnaces will vary

Product # Product sort Ideal # products (production)

# Suppliers

Coal 17 6 10

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over time due to the fluctuation of demand. In addition there are difficulties with stabilizing the production level due to the breakdowns and alterations in the blend strategy. Production stated that when fewer raw materials are needed they still have to accept the amount of supply as procurement already having bought the materials. This is a conflict of interest between the two departments.

The following paragraph elaborates the current supply chain strategy and the planning procedure and information flow between the three different departments in the value chain.

3.2 Current supply chain strategy and planning process

As described earlier, the current supply chain strategy of the raw material flow is push oriented, however, TSE is considering whether this is the most appropriate strategy to reduce raw

materials. Furthermore, they named that the planning system is extremely inflexible due to the long-‐term forecasts, significant high lead times and fixed contracts.

In order to visualise the current planning process it is important to describe the structure for each division, the people involved, their responsibilities and the objectives for each department on a strategic and tactical level (see figure 3.4). Most of

the interviewed people stated that the goals and the financials targets within the initial stages of the planning system through the supply chain of raw materials are not quite clear.

Procurement raw materials (London)

Objectives purchasing: Quality versus cost minimisation of materials

The procurement department of raw materials is completely centralized. The lead buyers (5x) of raw materials in London are responsible for all the purchasing activities of all the production hubs in Europe. The structure of the procurement department is already in line with the strategy of the board. Procurement suggested that the prices of the commodity market influences the purchasing of raw material. The key planning activities for the purchasing team in London are the following: communication of market analysis with production hub, collating the production

requirements, determining and negotiating alteration in supplier contracts and monitor contract performance, and taking action when needed.

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Planner’s raw material procurement (Scunthorpe)

Objectives: Security of supply, minimisation of stock-‐holding cost

In addition the two main planners, who are responsible for the stock levels and the orders of raw materials for the production side are based in Scunthorpe and are part of the procurement division. They plan with neither the aid of clear defined safety stocks, nor do they not have clear financial targets for the inventory holding costs. They argued that there is no a hard policy from the finance department for a working capital ratio or a trade off between purchasing

advantages and inventory holding costs. The planners of raw materials make use of a Material Requirements Planning (MRP) to determine the optimal reorder quantities. However, the planners suggested that, no trade-‐offs are made between transportation costs and inventory holding costs. Currently, they are developing a mathematical formula for a more accurate and beneficial safety stock. The planners are responsible for the following activities: collecting

demand of iron from technicians, determining optimal order quantity of raw materials and controlling stocks.

Shipping (London)

Objectives: cost minimization and reliable supplies

The centralised planners (2x) within the shipping department of TSE are based in London. The planners are responsible for the deliveries of raw materials from the load port to the unload port. The main responsibilities of the shipping planners are: collating the hub requirements,

negotiating delivery times with Scunthorpe and suppliers and managing the shipping programme.

Production process raw materials (Scunthorpe)

Objectives: sufficient amount of stock and high blend quality

The three technicians of the production process of raw materials are approximately for 30% responsible for the planning process of raw materials and for 70% responsible for the selection of the blend of raw materials. The technicians argued that they tend to require high levels of inventories due to risk mitigation. The responsibilities of the technicians are the following:

Collecting demands iron from the steel production planning department, determining blend strategy and tonnages raw materials, keeping the plants utilised with sufficient stocks.

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After the main objectives and responsibilities of the involved managers are elaborated, the planning activities on a strategic level and tactical level can be visualised.

Strategic planning (months-‐years)

The planning activities, over more than one year, are the long term contracts (>1 year) and production plans that cover 1 year in advance. The technicians, the planners of raw materials, the buyers and the shipping planners come together every year to determine an annual plan (figure 3.5). The technicians will provide the requirements of the materials (volumes and blend) with the aid of linear programming, excel spreadsheets, and information of the amount of iron that will be available for the forthcoming year. The buyers will provide a market analysis with the aid of information from suppliers and the strategy department of TSE.

The shipping planners stated that they present an overview of beneficial routes and parcel sizes, but they do not have significant influence on this annual plan. After approximately six months the buyers and the technicians will have agreed on the next annual plan. The production plan and raw material plan will be mainly re-‐evaluated every six months by the technicians.

Figure 3.5: Strategic level, annual planning TSE

Procurement Market analysis Production Material requirements Shipping Beneficial routes Annual plan (Volume & product)

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Tactical level (weeks-‐months)

The planning process through the different departments on a tactical level is mapped in figure 3.6 by using the decision mapping method of Davies (1993).

Figure 3.6: Tactical level, information flow and planning

Technicians have monthly stock meetings for coal and iron ore with the raw material planners in Scunthorpe. The plan is updated weekly from the spreadsheets of the technicians to the

procurement and shipping department. However, production stated that the demand of raw materials could seldom be altered through the supply chain of raw materials.

% materials & product sort Volume iron make Develop Blends strategy Availability Chemistries Certain products Technicians Planning decision Develop demands plan Planner RM Financial & Operational Constraints Develop shipping plan

Arrival time & volumes product Planners shipping Ship schedules Availability ships Operational constraints Monitor suppliers Procurment Contract performance supplier Planning decision Planning decision Planning decision Linear programming spreadsheets Performance sheet Suppliers RM Shipowners Order volumes Bulk shipping planners (2x) Purchasing team RM (5x) Planner RM Business purchasing manager Manager process iron

Technical expert coal Technical expert iron ore Technicians RM

Shipping Planning RM

Procurement RM

Responsible employees planning process

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In addition, the shipping and procurement department come together on weekly base to discuss alterations to the plans. Finally, the shipping department is developing an advanced planning system for the complicated planning decisions; currently it is done with spreadsheets. The procurement department monitor the contract performance of the supplier, so they can alter the orders of the supplies when needed.

The following chapter discusses the literature review and the applicability analysis.

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Chapter 4: Literature review and applicability analysis

Introduction

Existing literature studies are used to document the most appropriate supply chain strategies for TSE (see chapter 2 for search strategy). Firstly, the definition of supply chain management and the need for supply chain management in the steel industry are discussed. Secondly, a literature review of methods used to determine the most effective supply chain strategy is described. Finally, an applicable literature analysis is done for the procurement, shipping and production department in order to become aware of the ideal methods associated with the supply chain strategy for these departments. Every item is related to the situation in TSE to get a more direct interaction between the current state and the ideal world. The following topics are presented in the theoretical framework in figure 4.1.

TSE TSE TSE TSE TSE TSE Supply chain management

Applicability analysis SC strategy

Supply chain strategies and characteristics

Definition SCM

Need for SCM steel industry

Product and process characteristics

Supply chain strategies

Visibility and information sharing

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4.1 Supply chain management

Definition supply chain management

Supply chain management (SCM) is extensively described in literature, and most authors describe the supply chain as a network and all the stages involved which directly or indirectly fulfil a customer request (e.g. Skjøtt-‐Larsen et al., 2007; Simchi-‐Levi et al., 2008 and Hugos, 2006). The term logistics network is referred to the supply chain, which consists of suppliers, manufacturing centers, warehouses distribution centers, retail outlets, raw materials, work-‐in-‐ process inventory and finished products that flow between the facilities (Simchi-‐Levi et al., 2008).

Moreover, the term supply chain management has been used to clarify the planning and control activities not only internally within a company, but also externally between companies (Cooper et al., 1997; Fisher, 1997).

This research project encompasses the initial stages (see figure 2.1 scope) of the logistic network and supply chain management. However, it is important to understand what the definition of the supply chain is according to literature. The following definition is meant when the term supply chain is used.

“Supply chain management is a set of approaches utilized to efficiently integrate suppliers,

manufacturers, warehouses, and stores, so that merchandise is produced and distributed, at the right quantities, to the right locations, and at the right time, in order to minimize systemwide costs while satisfying service level requirements” (Simchi-‐Levi, et al., 2008, p.1 ).

Supply chain management TSE

The intended supply chain department within TSE only covers the allocation of products from the customer to the different production hubs, which is only a fraction of all the supply chain management activities as suggested by the definition of Simchi-‐Levi, et al. 2008.

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Figure 4.2: Road map of supply chain integration (Tirkman et al., 2007 and Lockamy and McCormack 2004)

According to Skjøtt -‐Larsen et al. (2007) the supply chain responsibilities are in the linked stage assigned to functional areas. Integrated supply chain responsibilities are assigned to the manager of a process. Tirkman et al. (2007) argued that supply chain costs and customer satisfaction improve as the supply chain stages becomes more integrated and extended. This approach is mostly applicable to lean type supply chains (Tirkman et al., 2007)

In an integrated supply chain there is a lot of cooperation on an organisational level between the different elements in the supply chain. Supply chain management systems and procedures are used to significantly reduce the cost within a supply chain significantly. Collaborative forecasting with other participants in a supply chain is an example of a supply chain management practice. However, in an extended supply chain, the collaboration between companies is on the highest level and supply chain management teams work with common goals and objectives (Tirkman et al., 2007 and Lockamy and Mc Cormack, 2004). TSE has to work towards a more integrated and extended supply chain management. The current supply chain process of TSE is not in line with the goals and policies of the organisation. Kamann (2001) stated that the policies and organisational goals (P), organisational structure (O) and its process (P) should correspond with each other. The POP model for this supply chain process is not used by TSE. Hence, the present supply chain process has not been matched with the new operating model, the integrated and customer driven company.

A supply chain strategy in order to reduce raw material stocks within Tata Steel Europe

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