The overarching objective of our strategy is to further strengthen the competitiveness and hence ultimately the earning power of Klöckner & Co and so make Klöckner shares an attractive long-term investment for shareholders. We are following two main thrusts in our realignment: Higher value-added products and services, and end-to-end digitalization of our supply and value chain. In this way, we aim to increasingly break free from the grip of sector-wide overcapacity and volatile steel prices while regaining a faster rate of growth. We intend to generate over 50% of our sales online within the next five years. In addition, we are pressing ahead with systematically implementing our KCO WIN optimization program.
Digitalization
There are currently around three billion Internet users worldwide. Two billion more are set to come online over the next five to ten years. There will then be over 50 billion networked devices. This is a competitive game changer, also for traditional industries. Machines will communicate with each other across corporate boundaries in real time and business models will be altered or revolutionized as suppliers and customers link up. This process is already far advanced in industries like the media where it is easier to go digital, while others – such as steel – still lag well behind.
To this day, the supply chain in our industry is highly inefficient. Customers place orders by phone or fax as they did decades ago and so far there have been hardly any attempts at end-to-end digital order and process management. The only novelty is that more and more orders come in by e-mail, yet this has not produced significant change. The upshot is not just high inventory levels, which tie up large amounts of capital, but also high process costs. These inefficiencies also lengthen time from production to delivery, thus leaving further income potential untapped.
Klöckner & Co 2020
Growth and optimization Differentiation
Operations External & internal growth
Digitalization Products and services
KCO WIN and further optimization of pricing
External growth with focus on higher value-added business Internal growth with focus on US market
Accelerated expansion of higher value-added products and services Digitalization of supply chain
Klöckner & Co SE Annual Report 2014
Taking what for us is a typical customer such as a small building firm, the ordering process today works like this: The first step is for the builder to quantify requirements on the basis of dimensions, with the aid of a design manual. If they are a Klöckner & Co customer, they can already access a design manual including a materials calculator online today using our iSteel app. The building firm then asks a number of local steel distributors for prices on the various steel products. There follows a wait until all the offers are in. After choosing the offer with the best combination of price and delivery date, the builder then contacts the distributor concerned. This all wastes a lot of time that the builder could put to productive use in getting on with the job itself. As we have no information on what steel products the builder will need when, we have to hold substantial quantities at our local stockyards for last-minute availability. That is on top of inventories held at a central distribution hub and by the producer. The resulting transfers and shipments incur high logistics costs and tie up large amounts of capital.
Very soon, builders will be able to complete the entire order process online using the Klöckner & Co customer portal. They will receive a price offer straightaway, can pull up historical data and are able to check the current order status at any time. Test reports are similarly managed in the system automatically and can be queried at any time using a range of search terms. Customers who have contracts with us can look up the status of those, too. Builders can spend the time saved thanks to the streamlined ordering system more profitably elsewhere, such as on site. This all makes ordering patterns far more predictable and this alone already results in tangible reductions in stockholding levels as well as improvements on the logistics side. Increasing integration with wholesalers and producers, with direct access to their distribution centers, too, further cuts stockholding and logistics costs along with tied-up capital.
Within the next five years we may have reached the stage where all orders for a construction site are generated completely automatically. The building plans will be available in their entirety in digital form. From these, the system will generate parts lists for all trades and send the data on its way in good time. There is no longer any need to determine requirements from dimensions with the aid of a design manual and materials calculator. In step with the construction work schedule, the steel products are on hand at the nearest stockyard at the times planned. All products supplied are fully traceable thanks to the use of QR codes, RFID and other technologies, making detailed construction progress visible in the virtual system and more readily manageable. Subsequent quantities are called off smartly and automatically. As well as just-in-time logistics, deliveries for other trades are optimally coordinated. With requirements known in full before building starts, quantities can be requested from wholesalers and producers on a timely basis so that most steel products do not arrive at regional stockyards sooner than they are needed. In this way, stockholding costs, logistics costs and tied-up capital can be cut to a minimum.
Just as machines are connected in Industry 4.0 or the “Internet of Things”, so are construction projects and suppliers. All those involved are linked in via an industry platform that integrates not only steel and metal distributors but also suppliers of “C” items and so on. If, in our example, there are change orders or modifications to the project with short-notice shifts in requirements, a supplier is automatically selected via the platform according to specific priorities (delivery date, price, etc.).
For an industry that today is hardly interconnected at all, this sounds like a distant pipe dream. Yet we expect that the processes of change will rapidly gain momentum across all industries. It is therefore imperative that we start giving thought today to how our business model might look in five years’ time in order to develop and implement the appropriate strategies.
We have so far made significant progress in the right direction: A case in point is our web shop, which we have already successfully implemented in several European countries. It is currently being enhanced into a full-scale customer portal. On the procurement side, too, we are in the process of linking up with additional suppliers and producers. In the reporting period, following up on a number of wholesalers, we obtained the commitment for full EDI integration from a major steel producer. But this again is only an intermediate step. As on the customer side, we will deploy a supplier portal and gradually replace individual EDI interfaces in the future.
To bring together and systematically drive forward all digitalization and networking-related projects and initiatives under a single roof, we have launched kloeckner.i GmbH in Berlin. kloeckner.i serves as our Group Center of Competence for Digitalization, overseeing the development and international rollout of digital solutions. In this way, we can ensure that our innovative solutions are available at all locations. We aim to recruit up to 20 e-commerce experts and software engineers by the end of this year. Our staff at kloeckner.i in Berlin will not work in an ivory-tower think tank, creating solutions that customers and the workforce only get to see when they are finished.
Klöckner & Co SE Annual Report 2014
Instead, our specialists work jointly with customers on the ground to evaluate how we can collaborate more efficiently. Based on that, we first develop basic prototypes which, to start with, deliberately only cover the main functions. In an iterative process with the customer, we then see whether and how far the tool in question meets requirements. Only then do we go on to program the full solution.
In the world of start-ups, this entire process is known as the “lean start-up approach”, the prototype development stage is termed “design thinking” and the developed tool that initially meets only the minimum requirements is called the “minimum viable product”. In the past, we developed such tools and systems far more elaborately, aiming to include each and every conceivable function and transaction type from the outset in our quest for perfection. The result was far too much time spent on product development, high cost and dissatisfaction on all sides. Going forward, we will be using the lean start-up approach also in a variety of in-house projects. We aim to become more agile by focusing solely on the most important requirements first. Improvements and enhancements can always be added later.
While kloeckner.i is geared to securing short-term efficiency gains in business processes using innovations that can be quickly adopted, more radical and disruptive changes to the business model are to be effected over the medium to long term through selective investment in start-ups. Another option is for us to launch start-ups with the appropriate focus ourselves. Given their disruptive nature, we firmly believe that innovations of this kind must be developed from outside the box. With this in mind, we are currently establishing kloeckner.v to fund such ventures.
We have set ourselves ambitious goals for the ongoing implementation of our digitalization strategy: The rollout of our new web shops should be complete by the end of the year at all country organizations. In five years, we aim to generate more than half of Group sales online.