March 24, 2016
Cost management: Why improved real-time cost visibility and management is fundamental to becoming a high velocity steel enterprise
By: Dr. Andrew Zoryk

Steel companies are facing relentless pressure to remain competitive in a low-growth business environment. This is the result of continued volatility and dynamics in the world economies, driven in part by the end of China’s rapid economic growth cycle as well as changes in commodity prices and increasing regulations.

In a previous blog, I discussed the importance of having a sound, fundamental approach to product master data for two key reasons: (1) as a means to improve business transparency, process efficiency and simplification of master data management, and (2) as an enabler for digital business transformation. Coupled with this, most steel companies have set the ambition of having a “single source of truth” for their business—a requirement that demands structured visibility of production costs.

In today’s increasingly competitive markets—both domestic and export—it is also critical that steel companies have a firm grasp on their real cost to serve customers. This means not just after delivering the order (“actual costs”), but also before and while accepting the order (“planned costs”). Furthermore, this means not just one time per month, but also in real-time.

Often companies lack a systematic management process around their annual budgetary calculation of production costs; therefore, the insights gained from variance analyses using standard costs are not consistent across business units and only allow limited insights into past business performance. In addition, inconsistently set standard costs can potentially distort product pricing and thus directly impact profit and loss (P&L).

This all leads to business requirements in several areas, examples of which include:

  • Profitability analysis. Understanding the expected profitability at the time of sales order entry and actual order profitability after delivery and invoice. This includes margin objectives and follow-up at different business levels.

  • Performance of production-related activities. Performance objectives and their measurement for production activities (direct and indirect) at every step of manufacturing.

  • Inventory valuation. Correctly valuing stock with the objective of having a meaningful number that provides the company with an accurate valuation at any given moment in time.

Today, many steel companies find it difficult to achieve the above objectives without intensive manual effort, and they are also not able to do so in real-time. As a result, companies are often basing decisions on “averaged” information at month-end, which lacks the desired level of granularity to enable improved cost management.

So, in terms of business processes and enterprise resource planning (ERP) applications, what are some of the key enablers to provide these improved capabilities? Two that I would like to highlight are the following:

  • Integrated cost planning and budgeting. To improve the quality of the standard costing and budgetary planning processes, the process should be tightly integrated to the company’s sales and operations planning (S&OP) process. This will help ensure a more accurate view of the next 12-18 month rolling time horizon for demand and constrained capacity, product mix, and available planned allocation of capacity across different product groups. This planning can then be directly integrated with the shorter-term planning based on an actual order book situation, creating the revenue and cost planning model that more accurately reflects factors such as routings, yield and capacity utilization.

  • Product structure alignment. Improving cost planning and control will require good alignment with the product definition modelling and structures within an ERP system. By this I mean, for example, how the bill of materials (BOM) and routings for a given material are defined. For the steel industry, the use of configurable materials modelling in an ERP system allows us to build a multi-level BOM structure, which supports not only the order-level planning and costing of materials, but also allows us to create a model that integrates directly to the S&OP and budgetary planning levels. The rules for managing this across all these processes at a characteristic (material attribute) level can be managed within a single, consistent set of product definition rules

A structured approach to product costing can help steel businesses better navigate the challenges facing them in today’s highly competitive markets. It will also act as a basis for developing the digitally-enabled capabilities needed to become a high velocity enterprise. 

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