Management in action - Crisis in the steel sector: a lesson in survival
A REPORT RELEASED by Ernst Young Australia in January 2013 highlights the threats facing steel manufacturers in a globalised world, where there is an oversupply of steel and old-fashioned facilities are not cost-effective to operate. Most vulnerable are companies operating in countries where overall costs are pushed up by high labour costs. For example, in 2011, high labour costs were cited as one reason Chinese steel manufacturer, Ansteel, withdrew from an agreement with the Western Australian government to build a steel mill near Geraldton. Around the same time as Ansteel withdrew from the agreement, Australia's largest steelmaker, BlueScope Steel, announced some 1400 job losses as the company rationalized production.
Perhaps some lessons can be learned from the ArcelorMittal takeover of the failing Burns Harbor plant on the edge of Lake Michigan in Indiana. One of America's largest steel mills, the Burns Harbor plant was built by Bethlehem Steel in 1962. The mill covered 13 km2 and housed a power station, rail lines and furnaces. For a number of years it was very profitable and a major contributor to the local and American economy. Over successive years there was considerable investment in upgrading the facilities at the plant; however, there were also challenges.
In 1993 Bethlehem Steel was fined US$6 million for pollution transgressions in what a federal judge described as 'long standing and wilful violations' of environmental protection standards. High overheads and increasing pressures from lower cost imported steel and the waning manufacturing sector, particularly car manufacturing, contributed to Bethlehem Steel filing for bankruptcy in 2002. Potential buyers lost interest when they discovered that the pension and healthcare obligations to employees amounted to a total of US$6 billion. In 2003, the International Steel Group became America's largest steel producer when it bought the mill, but it sold the Burns Harbor plant to Mittal Steel in 2005.
Mittal, owned by Indian billionaire Lakshmi Mittal, was one of the world's largest steel conglomerates and the business had been built from buying rundown facilities and streamlining them by cutting costs and improving productivity. In 2006 Mittal merged with Arcelor SA, a company formed in 2002 from the mergers of Usinor, Aceralia and Arbed, from France, Spain and Luxembourg respectively. ArcelorMittal is one of the largest US steel manufacturers; it has 25 operations spread across 12 states and employs 18 000 people. Worldwide the company employs 245 000 people and operates in 60 countries. The Burns Harbor mill employs 3700 workers, down from 6700 workers in the mid-1970s and it currently produces 4.7 million tons of raw steel annually.
So what strategies has ArcelorMittal used to resurrect Burns Harbor? At the start of the economic downturn in 2008 and following negotiations with unions, 500 workers left the Burns hub plant voluntarily, whereas 900 others agreed to a reduced 32-hour working week, thereby cutting costs. The other strategy to improve productivity was pairing the Burns Harbor mill with a European plant. Twinning the two plants meant the poorer performing plant, the Burns Harbor mill, would lift its standards to the better performing plant; whereas the better performing plant had to keep working harder to stay ahead of its paired rival.
In 2008, US engineers from the Burns Harbor mill were sent to a modern plant in Ghent to learn from the Belgian plant. Interestingly both mills started operations in the 1960s, but the Belgian plant had received significantly more investment in technology infrastructure to the point that the Ghent mill employed robots, rather than people, for many of its functions. This meant that even though wages were higher in Belgium, labour costs were lower.
ArcelorMittal claims that the Ghent mill is one of the most modern plants in the world. The engineers from Burns Harbor were tasked with benchmarking the Ghent mill, to identify and implement similar improvements in the US. One way ArcelorMittal measures productivity is by assessing the number of worker hours per ton of production. These days the average in the US is 2; at Burns Harbor it is 1.32, which lags behind the Ghent facility, which operates at 1.25.
Some of the changes brought back to Burns Harbor from Belgium were simple; one example was moving nozzles on hoses used to clean steel so they were closer and operated at a different angle. The change meant less water and less energy for pumping water and an estimated annual saving of US$1.4 million. Getting workers to cut rough steel off the sides of coils saved 725 coils annually. Burns Harbor started to implement computerized programs and mill workers attended computer modelling classes. Scheduling improvements increased production rates of 298-ton cauldrons of molten steel from 42 to 50 daily, leading to operational savings in the order of US$1.3 billion yearly. The workers' roles have changed significantly; as one union representative says, 'Steel working used to be 80% back and 20% brain, now it's the other way around'. Notwithstanding the gains that have been made, company executives are pushing for greater productivity. Overall, the company has invested US$150 million in capital improvements at Burns Harbor and there have been no further layoffs. From bankruptcy and difficult times during the global financial crisis, this company is demonstrating manufacturing in America can be revitalised. Burns Harbor has closed the gap significantly with the Ghent mill, but still has further opportunities to improve its use of technologies, such as through the implementation of robotic cranes. Production per employee has improved to 900 tons annually; however, productivity at Ghent has improved even more so to 950.
FOR DISCUSSION
1. What other advantages and disadvantages are likely to affect both the Burns Harbor and Ghent Mills from ArcelorMittal's twinning program? Explain your answer.
2. To what extent do the changes at the Burns Harbor plant follow the control process shown in Figure 14.4 ? Discuss your response.
3. Create a balanced scorecard for the Burns Harbor plant. What SMART goals (see Chapter 5 ) would you use as standards to assess performance in the four categories in your scorecard? Develop one SMART goal for each scorecard category.
4. To what extent does the control program being used at Burns Harbor follow the key points for a successful control system? Discuss your answer.
5. Do you agree with the strategy used by ArcelorMittal? Do you think this strategy would work in other organisations or sectors that you are familiar with? Would it work equally as well for Australian companies such as BlueScope Steel? Explain your answer.
6. What implications does such a strategy have for improving teamwork and motivation among workers (you may wish to refer to Chapter 11 (on motivation) and Chapter 12 (on teamwork).
7. Identify what you think are the three most important takeaways from this case? Explain your rationale.
Sources: Better times on horizon for steelmakers who survive, Ernst Young (EY) Australia, 21 January 2013.
Assignment Files -
https://www.dropbox.com/s/6z9vhonc2j6biqr/Assignment%20Files.rar?dl=0