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The evolution towards an integrated steel supply chain: A case study from the UK
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Int. J. Production Economics 89 (2004) 207–216
The evolution towards an integrated steel supply chain: A case study from the UK Andrew Pottera,*, Robert Masonb, Mohamed Naima, Chandra Lalwania a
Logistics Systems Dynamics Group, Logistics and Operations Management Section, Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK b Lean Enterprise Research Centre, Logistics and Operations Management Section, Cardiff Business School, Cardiff University, UK Received 11 April 2002; accepted 18 November 2002
Abstract Many academics have studied the steel industry with the aim of implementing improvements in the sector. Although these provide snapshots of the structure of the supply chain, the evolution that has occurred is less well understood. This paper studies, primarily using process mapping techniques, the evolution of a case study steel supply chain within the UK over the past decade, drawing both on previous work and current research. The changes that have occurred are identified and categorised and their impact on inventory, lead times and asset utilisation will be assessed. It has been proposed that supply chains evolve from a traditional (uncoordinated, disparate, sub-optimal) to an integrated supply chain structure. The paper concludes that although the steel supply chain has evolved between 1990 and 2001 towards an integrated structure, there are currently constraints imposed by organisational boundaries. r 2003 Elsevier Science B.V. All rights reserved. Keywords: Supply chain evolution; Integration; Steel industry
1. Introduction Studies of the steel sector have been carried out by many academics often with the aim of implementing improvements in the sector to enhance the performance of the supply chain (for example, see Taylor, 1999). While this has enabled a good knowledge of the supply chain structure at particular times, the evolution that has occurred over recent years is less well understood. The aim of this paper is to describe the changes that have *Corresponding author. Tel.: +44-29-2087-6915; fax: +4429-2087-4301. E-mail address: [email protected] (A. Potter).
taken place during the past decade for a supply chain from the steel industry. This provides an understanding of the evolution of the supply chain to its current structure to guide future change management developments. Process mapping techniques are used to outline the structures both in 1990 and 2001. The changes are classified according to whether they are strategic, tactical or operational in nature. Finally, the impact these have had on lead times, inventory levels and behaviour and asset utilisation is discussed. The steel industry is a traditional heavy industry. Being a commodity product the price is elastic. This makes the various players in the supply chain ‘‘price takers’’ where the price is set
0925-5273/03/$ - see front matter r 2003 Elsevier Science B.V. All rights reserved. doi:10.1016/S0925-5273(02)00449-8
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at a level that the market will bear. Furthermore, the basic nature of the products means that differentiation is difficult to achieve. With the price of steel declining over the past 5 years margins are tight making profitability on the basic products low. Therefore, companies in the supply chain are increasingly looking to provide extra value to their customers by improving customer service or providing additional services such as painting and grinding. This paper draws on a broad depth of knowledge built up during a long-term relationship between the authors and a cooperating steel company, embracing action-based, developmental and fundamental research. Action-based research aims to use scientific knowledge to undertake an action in response to a specific problem, while also creating theory about the particular action (Coughlan and Coghlan, 2002). There is very much a two-way relationship between the academic and industrial partners in the research. The implementation of generic rules into specific companies constitutes developmental research. With fundamental research, there is a greater onus upon the academic side where the definition of the problem and the diagnosis is the responsibility of the research team. The industrial partner takes a more passive role and provides the necessary access and information (Gill and Johnson, 1997). Initial research with the company was undertaken in 1989 by a graduate student who carried out a feasibility study (Griffiths, 1989). This led to an action-based research project supported by the UK government and involving other industry sectors. From the project, generic dynamic models and rules of thumb for supply chain re-engineering were developed (Hafeez et al., 1996). Subsequently, a development programme was introduced at the company to implement the generic research outputs for the specific case. This led to an overall average lead time reduction of 15%. In 1996, the Engineering and Physical Sciences Research Council (EPSRC) funded a doctoral student to undertake fundamental research with the company. This led to a market-focused operations management strategy (Naylor, 2000). Currently, the authors are undertaking a 3-year
EPSRC funded project researching the integration of transport and e-commerce in the supply chain. The on-going relationship has led to considerable insight and understanding of the company’s physical and informational processes. This paper utilises a range of research data sources available to undertake a longitudinal analysis of a specific supply chain. There is often a misconception that case studies do not provide generalisable results (Ellram, 1996). This case study of the steel supply chain considers whether the process of evolution described in the literature is occurring. By providing this illustration over time and generalising it to previously published theory, a greater understanding of supply chain evolution can be gained.
2. A steel supply chain The supply chain investigated in this paper is that for the supply of steel bars to a variety of sectors such as structural and general engineering. A schematic of the supply chain can be found in Fig. 1. The end user sources their material from a steel stockholder who performs a break bulk role within the supply chain. They order in large quantities from the main producers (on long lead times) and then sell the material in small quantities on short lead times, according to the customer’s requirements (McAdam and Brown, 2001). The stockholder in this paper has an annual throughput of approximately 25,000 tonnes, making them one of the smaller players in the UK sector. They source products from almost 30 different suppliers, although 75% comes from the case study steel company. The steel supplier can be classified as a general steel producer who converts steel scrap into billets, which are then rolled into a variety of steel products. One product type is termed ‘merchant bar’ and includes flat and angled beams with a small cross-section. These represent approximately 120 stock keeping units. Scrap Steel
Rail
Steel Producer
Truck
Steel Stockholder
Truck
Fig. 1. A schematic of the steel supply chain.
End User
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The supply chain structure described above can be found throughout the steel industry in the UK. Taylor (1999) describes a similar structure found in the manufacture of automotive components. Such differences that exist tend to relate to whether the crude steel is produced from iron ore or is recycled from scrap.
3. The integration of supply chains Within supply chain management, the importance of integration among the various organisations has been recognised as a means of delivering enhanced supply chain performance (Daugherty et al., 1996). The seminal work in this area is that by Stevens (1989), in which an evolutionary model for supply chain integration is proposed. The traditional baseline structure (Stage I) is characterised by limited integration between echelons, with multiple stockholding, incompatible information control systems and little communication. The disjointed flow of information up the supply chain results in ever increasing variations in demand, an effect often known as bullwhip (Lee et al., 1997). There are two intermediate stages between this traditional structure and complete integration. The first (Stage II) involves the functional integration of inward flows, often embracing the principles of lean thinking such as the reduction and removal of waste (Womack and Jones, 1996). However, the lack of integration downstream means that manufacturing still tends to be unresponsive to changes in customer demand. Stage III involves the extension of this integration to outbound flows. Information control is now completely integrated within the echelon which enables manufacturing to become more coordinated with incoming customer demand. The integrated supply chain is the final stage in supply chain evolution and has recently been termed the ‘‘seamless supply chain’’ (Towill, 1997). Integration is no longer constrained by organisational boundaries, and extends to both suppliers and customers. Consequently, their behaviour is coordinated with the ultimate goal of achieving high customer service.
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Some of the characteristics of these four stages are summarised in Table 1. However, because the process of integration is a continuum, it is possible for a supply chain to display characteristics from more than one column with some areas being more advanced than others. While it is desirable to progress towards an integrated supply chain, any reduction in the efficacy of the system diminishes and may even eliminate the operational benefits accrued. Therefore, it is necessary for the supply chain to become aligned with the demands of the end user market place. From this, it is possible to synchronise the supply chain so that supply matches demand. A synchronised supply chain represents the next stage beyond an integrated supply chain (Beech, 1998). The characteristics of the supply chain are similar to those for Stage IV in Stevens’ model, except that production is more closely coupled with demand and there is greater efficacy in the system. Childerhouse et al. (2000) have codified the evolutionary integration model and applied it to 20 value streams from the automotive sector. Although none portray the characteristics of the traditional structure, three are shown as undergoing functional integration. However, 65% of the value streams are in the process of internal integration, namely Stage III of Stevens’ model. Only four have progressed beyond this stage and towards external integration. This work particularly highlights the continuum of evolution, showing that it is unusual for supply chains to display all the characteristics of a particular stage. Stevens (1989) also presents a hierarchical approach to achieving an integrated supply chain by suggesting change at strategic, tactical and operational levels. Strategic level developments should look at the supply chain objectives, structure and spatial dimension as well as the marketing approach and organisational structure. In achieving these, the necessary infrastructure, in terms of equipment, processes and systems, has to be provided. These form the basis of tactical changes in supply chain evolution, which additionally encompasses target setting for each function. Finally, there are operational developments, which are driven by tactical decisions, and relate to
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Table 1 Characteristics of the four stages in Stevens’ model (Adapted from Stevens (1989) and Towill (1997)) Characteristics
Stage I
Physical flow
Functional; uncoordinated
Inventory
Information flow
Lead times
High levels; multiple stock holding between echelons Long
Decision points
Multiple decision points
Data transfer
Manual – facsimile or telephone
Stage II Inbound coordination within boundary Each function buffered Reduction in process time Single decision point for each process PC based information system
Stage III Outbound coordination within boundary No intermediate inventory except at organisational boundaries Reduction in storage and distribution time Single decision point within company boundary E-commerce
No visibility
Visibility of inbound logistics
Complete visibility within company
IT systems
Separate; incompatible
MRP/MRPII
Asset focussed
Inbound cost focussed
ERP/DRP with MRPII Outbound cost focussed
Relationship Management
Parochial management; ad hoc contractual arrangements
Broader management partnership
Management and operational partnership
Key Performance Indicators
None
Functional
Organisational
the actual operation of the supply chain. By adopting a vertical approach to integration, the effectiveness of developing and implementing an integrated supply chain is improved.
4. The steel supply chain: 1990 Turning to the specific case discussed in this paper, Fig. 2a shows the process map for the supply chain in 1990. The end user placed an order upon the stockholder either by telephone or facsimile. This order was shipped by road transport. Every week, the stockholder manually placed a replenishment order with the steel company. This was influenced by delivery time, steel price, interest rates, incoming demand and stock levels (Ha( kansson, 1992). Shipments generally occurred by truck once the products had been rolled at the mill. Occasionally, shipments would be from stock, as the mill had a minimum production batch size.
Minimal, strategic inventory Minimised Coordinated control from single point E-business
Visibility
Focus
Stage IV Integrated across boundaries
Full pipeline visibility in supply chain Integrated along the supply chain Customer focussed Multi-level, full relationship management; open book Supply Chain
On a weekly basis, a production plan for the Medium Section Mill was generated. From this, a billet contract was sent to the steelworks detailing the requirements for the week ahead. Although the same company owned both the steelworks and the mill, they functioned as independent units with separate financial targets. From the weekly programme a daily schedule was produced for the mill, but allowed amendments to be made depending upon events during the week. This generated a daily ‘‘call off’’ for billets from the steelworks. Once produced, the bars proceeded into the finished product warehouse, where they were stored for up to 6 weeks. The steelworks generated a weekly programme for billet production with the aim of maximising asset use, as the billets were always sold eventually. Typically, 18,000 tonnes of billets were produced per week to satisfy the demand from three different sources, not just the Medium Section Mill. The billets were held in stock at the steelworks before being transported to the mill
ARTICLE IN PRESS A. Potter et al. / Int. J. Production Economics 89 (2004) 207–216 Steelworks
Scrap Company
Medium Section Mill
Scrap stock 10kT
End user
Billet stock 5kT
16.25 days
4 days
Bundles 20kt
Merchant Bar Production 6kT/wk 0.25 days
42 days
Steelworks and Medium Section Mill
Scrap Company
Stock controller Order
Daily schedule
Billet stock 2kT
Billet production
Order Sales Department
Order
Daily call off
Order
Stockholder
Bars
72 days
End user
MTS
Stock levels
Scrap stock 10kT
4 days
Billet stock 7kT
Billet production
8.75 days
Merchant Bar Production 6kT/wk 0.25 days
Bundles 14kt
28 days
Order
Total = 134.5 days
Key
Bars
72 days
Manual data transfer Electronic data transfer Operation
Stock level
Make-to-Stock Forecast Requirements
Stock controller Order
Production Weekly Programme
Order
Order
Order
Sales Department
Bars
Echelon boundary
8 week forward plan MTO
Order
Stock level
Bar and Section Mill Weekly Programme (orders + percentage)
Billet contract
Steelworks Weekly Programme
Daily schedule
b) 2001
Stockholder 13 week forward plan
Order
a) 1990
211
Transport Storage
Bars
Total = 113 days
Fig. 2. Process maps of the case study steel supply chain.
by rail transport where they were stored again. The two stock holding points were on the same site, but the transit time was 1 day as the railway wagons had to be moved via adjacent sidings. They were often left for a period of time in the sidings, depending upon the availability of shunting locomotives. From the weekly programme, scrap steel was ordered from suppliers, and this was delivered by both road and rail. On average 4 days worth of scrap stock was held at the steelworks.
5. The steel supply chain: 2001 Before analysing in more detail the changes that have occurred in the steel supply chain, a brief
description of the current process will be given, with reference to Fig. 2b. The interactions between the end user and the stockholder are unchanged. The stockholder now uses spreadsheets to monitor and control stock levels. Replenishment orders are still placed weekly by the stockholder with additional variables such as work in progress considered. Telephone and facsimile are the main methods of transmission to the steel company. Depending on the product, it is either treated as a make-to-stock (MTS) or make-to-order (MTO) product. With this strategy, orders for the most popular lines can almost always be shipped from stock. The production batch size is based upon current demand with the steel going into stock. Lower volume products are, as before, manufactured on a MTO basis. The production rules are
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changed so that an additional percentage of overage is no longer produced. Information on incoming orders is fed into the production control system, and a weekly plan is generated for both the steelworks and Medium Section Mill. Both product types are held as inventory after production— the MTS products pending the placement of an order and the MTO products until the shipment date agreed with the stockholder is reached. Scrap material is still received by both road and rail transport. Once made into billets, it is loaded directly onto railway wagons for transit to the Medium Section Mill. They are placed into inventory until required whereupon they are moved by crane to the production line. Once the manufacturing process is complete, the bars pass into the warehouse until shipment. Typically, there are 12 stock turns per year.
6. Development in the steel supply chain Within the steel supply chain, there have been financial drivers behind all of the developments. One pressure has been the reduction of costs. As well as taking direct action, this has also been achieved through investment in technology that delivers benefits in the medium to long term. It is significant that the output level per employee over the period considered has increased by almost 100%. Another pressure has been the need to reduce the capital tied up in inventory, particularly for finished goods. While these cost pressures are generated from within the company there are also external cost forces imposed by the market. These result from the fluctuating price for scrap steel and the declining price of finished products in the UK. Developments in information technology have been driven by the ability of the sector to provide the appropriate products for the steel sector at an affordable price. Only within the past few years has customer service started to influence the developments in the supply chain. As discussed earlier, Stevens (1989) suggests a hierarchical framework to achieve an integrated supply chain. Strategic developments in the chain drive tactical changes that in turn affect operational aspects. The developments that have
occurred within the steel supply chain over the past decade can be mapped onto this framework. At a strategic level, the steel company has undertaken functional integration whereby the steelworks and Medium Section Mill are no longer separate units. This occurred during 1999 and has brought about a number of benefits, including cost reduction through the elimination of duplication in personnel and systems. Both facilities now have common targets rather than being focussed on their own production centre. As part of the reorganisation, a logistics department was created, providing a focus upon supply chain issues. This strategic change has enabled two tactical changes to be introduced—an integrated information system and split production order processing, namely MTO and MTS. The integrated information system introduced during early 2002 has reduced much of the duplication in production control as well as allowing increased information visibility within the company. The increased information visibility has further enhanced the benefits of eliminating the billet inventory at the steelworks. This realises a cost benefit because the double handling of the billets at the steelworks no longer occurs. There has also been a reduction in decision-making within the supply chain, with a single point of control for both the steelworks and Medium Section Mill. As outlined earlier, products are either classified as MTS or MTO according to their sales volumes with the production of the former being forecast driven and the latter being sales driven. Operationally, this splitting of production has introduced pipeline control into the MTS decisionmaking process and ensures that stock availability is not compromised. Further, there has been a reduction in the production cycle time (the time between production batches), in many cases by one half. The effectiveness of the MTS/MTO strategy has been increased with the introduction of the improved information system. The MTS/ MTO system was implemented during September 2001. The impact of these changes on the supply chain will now be considered with respect to inventory, lead times and asset utilisation.
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6.1. Impact on inventory Production
There are three main inventory staging points within the company, namely scrap material, billets and finished bars. Over the past decade there has been no change in the inventory level of scrap steel. This reflects the relatively low cost of storing this raw material and the economies available from having bulk rail deliveries. Billet stock levels are the same when compared to 1990 although the inventory is now concentrated in one location. There has been a reduction in the volume of goods in transit between the steelworks and Medium Section Mill due to a reduction in the transit time between the two locations. There has been a significant reduction in the volume of finished bars stored at the steelworks. The steel company has reduced inventory levels steadily over the decade by 2,000 tonnes. The move to MTS/MTO and the associated operational changes are beginning to have a significant impact on inventory levels. Cycle times for many of the popular product lines have been halved, reducing the level of safety stock required. Overall, this newly implemented strategy has reduced stocks by an additional 4,000 tonnes or 20%, with further gains anticipated in the future. While it is important to look at overall stock levels within the system, it is beneficial to look at the behaviour of the inventory found after the decoupling point in response to demand and manufacturing processes. Fig. 3 shows these relationships for the steel supply chain both in 1990 and currently, with the effect of the MTS/MTO strategy being detailed. In 1990, production by the mill was level due to the policy of manufacturing what was ordered plus an overage allowance. Therefore, variability in inventory levels existed. The two components of the current manufacturing strategy have different impacts on production and inventory levels. With MTO, production is directly proportional to incoming demand and is therefore variable while inventory levels remain constant. For MTS products, production is constant with inventory varying according to customer demand. Combined, these strategies cause variability in both production and inventory
Inventory
Demand pattern
1990
MTO
2001
MTS
Combined
Fig. 3. The relationship between production, inventory and demand.
levels. Changes in the level of output are small and occur because MTO products, which are low volume lines, influence production. The inventory level is more variable, being determined by the MTS products. This potentially has consequences for storage requirements with the warehouse effectively needing elastic walls. 6.2. Impact on lead times The lead time for merchant bar production has decreased from 19 to 16 weeks, a reduction of 16%. Reasons for this include the concentration of billet stocks in one location, process improvement within the Medium Section Mill and the reduced cycle times. The information lead time has also been reduced. The rolling schedules issued are now for the following 8 weeks rather than the next 13. 6.3. Impact on asset utilisation Asset utilisation is important in the steel sector given the cost structure of the industry. In 1990, production was based around an economic batch size that effectively smoothed incoming demand and maximised the use of the assets at the steelworks and Medium Section Mill. Having implemented MTO/MTS, however, there is the
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potential for this utilisation to decrease, as economic batch sizes may not be achieved. With the MTO products, production is directly linked to orders with no overage allowance to achieve a full batch size. In planning MTS production, existing stock levels feedback into the production decisions. This introduces variability in production with the potential for the bullwhip effect to propagate within the supply chain. The changes implemented by the company have brought about benefits to the supply chain as it progresses towards full integration. In particular, there has been a net reduction in costs within the company. Those costs associated with implementing new systems and procedures are far outweighed by the benefits of reduced inventory, shorter lead times and potentially improved customer service levels.
mill to become a fully continuous production line. Information systems were also upgraded, although incompatibility remained. This gradual change continued over the next 4 years, with most of the characteristics being brought up to those expected of a Stage II company. In 2001, some characteristics have achieved Stage III. Of those that have reached this advanced stage, the changes in the physical flow of the products reflects the integration of the business units while the reduction in the number of decision points and visibility have been facilitated by the integrated information control system. Lead time reductions have been influenced by the adoption of the MTS/MTO system. The change in focus to encompass both manufacturing and distribution costs has been influenced by external forces such as the decreasing price of steel and the consequent tightening of margins.
7. Analysis of the evolution 8. Conclusion In order to assess the degree of integration within the steel supply chain, the characteristics of the previous and current structure have been overlaid on Table 1. In addition, intermediate stages showing the characteristics in 1995 and 1999 have been added. The positioning within these years has been determined with reference to Naylor (2000) and company reports from throughout the 1990s. The choice of 1995 has no major significance, merely representing the mid-point in the period considered. With the major changes that are described above having started during 1999, this intermediate stage enables their effect to be highlighted. As can be seen from Table 2, the supply chain was very functional in 1990, with the characteristics being reflective of a company at Stage I of the Stevens model. By 1995, there had been improvements in a number of areas in the supply chain. Particular focus was on process improvements and has been supported by some investment to improve the equipment used. In 1994, d10 million was spent improving the Medium Section Mill. New rolling stands were installed and the automatic bundling of finished products introduced. This enabled the
Over the past decade, the steel supply chain studied has undergone changes at a strategic, tactical and operational level. These changes can be fitted within the hierarchical framework proposed by Stevens (1989) and shown in Fig. 4. The major strategic change has been functional integration within the steel company, with the production units now having combined goals and targets. This has facilitated the implementation of several tactical improvements including an integrated information control system and distinctive production processes for different product types. To achieve this, there have been a number of operational changes. The main driver behind these changes has been cost reduction with the need to keep abreast of developments in information technology another influence. Customer service has only recently emerged as a driver of change. The overall impact has been to reduce inventory levels by 16% and lead times also by 16%. Asset utilisation may have decreased through the use of variable input signals into the production quantity decisions. The integration that occurred has embraced both inbound and outbound material flows with
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Table 2 Position of the steel supply chain within Stevens’ model
Stage IV
Stage III
Stage II
Stage I
2001 Stage IV
Stage III
Stage I
Stage II
1999 Stage IV
Stage III
Stage II
Stage I
Stage IV
1995
Stage III
Stage II
Stage I
1990
Characteristics Physical flow Inventory
Information flow
Lead times Decision points Data transfer Visibility IT systems Focus Relationship management Key Performance Indicators
Integration of business units
Integrated information control
Fewer decision points
Inventory
STRATEGIC
Make-to-stock & Make-to-order manufacture
Concentration of billets
Reduced manufacturing cycles
Lead times
TACTICAL
Pipeline control
Asset utilisation
OPERATIONAL
IMPACT
Fig. 4. Development of an integrated steel supply chain.
the resultant characteristics being representative of a supply chain that has progressed beyond Stage II of the Stevens model. Using the table of characteristics, management can reflect upon where potential improvements can be made in order to improve the supply chain. By comparing their
position with other companies within or outside the sector, opportunities for benchmarking better practice can be identified. For progression beyond Stage III, integration must cross the organisational boundaries that currently exist to include both raw material suppliers and stockholders. The approach taken in this paper shows that the changes that have occurred within the steel supply chain can be applied to previously described theory on supply chain evolution. This enables the generalisation of the work and advances the understanding of integration by illustrating the dynamic process that is occurring. Further work will look to compare the steel supply chain with others drawn from both the steel industry and other sectors. They will be mapped onto the table of characteristics to provide a direct comparison with the steel supply chain studied. An attempt will also be made to codify the results allowing a comparative assessment as to the degree of integration to be made. Consideration will also
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be made as to the potential future structure of the supply chain.
Acknowledgements The authors would like to acknowledge the help they have received from employees at the case study steel company, in particular Stuart Meldrum and Steve Severs. We would also like to thank the referees for their constructive comments.
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Gill, J., Johnson, P., 1997. Research Methods for Managers, 2nd Edition.. Paul Chapman Publishing, London. Griffiths, M., 1989. The modelling and analysis of a multibusiness production-scheduling system. M.Sc. Thesis, University of Wales, Cardiff. Hafeez, K., Griffiths, M., Griffiths, J., Naim, M.M., 1996. Systems design of a two-echelon steel industry supply chain. International Journal of Production Economics 45, 121–130. H(akansson, F.B., 1992. Dynamic supply chain model of the construction industry. M.Sc. Thesis, University of Wales, Cardiff. Lee, H.L., Padmanabhan, V., Whang, S., 1997. The bullwhip effect in supply chains. Sloan Management Review 38 (Spring), 93–102. McAdam, R., Brown, L., 2001. Strategic alignment and the supply chain for the steel stockholder sector: An exploratory case study analysis. Supply Chain Management: An International Journal 6 (2), 83–94. Naylor, J.B., 2000. A decision support system for the product introduction process in a steel supply chain. Ph.D. Thesis, University of Wales, Cardiff. Stevens, G.C., 1989. Integrating the supply chain. International Journal of Physical Distribution and Materials Management 19 (8), 3–8. Taylor, D.H., 1999. Measurement and analysis of demand amplification across the supply chain. International Journal of Logistics Management 10 (2), 55–70. Towill, D.R., 1997. The seamless supply chain—the predator’s strategic advantage. International Journal of Technology Management 13 (1), 37–56. Womack, J., Jones, D., 1996. Lean Thinking. Simon and Schuster, New York.
Int. J. Production Economics 89 (2004) 207–216
The evolution towards an integrated steel supply chain: A case study from the UK Andrew Pottera,*, Robert Masonb, Mohamed Naima, Chandra Lalwania a
Logistics Systems Dynamics Group, Logistics and Operations Management Section, Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK b Lean Enterprise Research Centre, Logistics and Operations Management Section, Cardiff Business School, Cardiff University, UK Received 11 April 2002; accepted 18 November 2002
Abstract Many academics have studied the steel industry with the aim of implementing improvements in the sector. Although these provide snapshots of the structure of the supply chain, the evolution that has occurred is less well understood. This paper studies, primarily using process mapping techniques, the evolution of a case study steel supply chain within the UK over the past decade, drawing both on previous work and current research. The changes that have occurred are identified and categorised and their impact on inventory, lead times and asset utilisation will be assessed. It has been proposed that supply chains evolve from a traditional (uncoordinated, disparate, sub-optimal) to an integrated supply chain structure. The paper concludes that although the steel supply chain has evolved between 1990 and 2001 towards an integrated structure, there are currently constraints imposed by organisational boundaries. r 2003 Elsevier Science B.V. All rights reserved. Keywords: Supply chain evolution; Integration; Steel industry
1. Introduction Studies of the steel sector have been carried out by many academics often with the aim of implementing improvements in the sector to enhance the performance of the supply chain (for example, see Taylor, 1999). While this has enabled a good knowledge of the supply chain structure at particular times, the evolution that has occurred over recent years is less well understood. The aim of this paper is to describe the changes that have *Corresponding author. Tel.: +44-29-2087-6915; fax: +4429-2087-4301. E-mail address: [email protected] (A. Potter).
taken place during the past decade for a supply chain from the steel industry. This provides an understanding of the evolution of the supply chain to its current structure to guide future change management developments. Process mapping techniques are used to outline the structures both in 1990 and 2001. The changes are classified according to whether they are strategic, tactical or operational in nature. Finally, the impact these have had on lead times, inventory levels and behaviour and asset utilisation is discussed. The steel industry is a traditional heavy industry. Being a commodity product the price is elastic. This makes the various players in the supply chain ‘‘price takers’’ where the price is set
0925-5273/03/$ - see front matter r 2003 Elsevier Science B.V. All rights reserved. doi:10.1016/S0925-5273(02)00449-8
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at a level that the market will bear. Furthermore, the basic nature of the products means that differentiation is difficult to achieve. With the price of steel declining over the past 5 years margins are tight making profitability on the basic products low. Therefore, companies in the supply chain are increasingly looking to provide extra value to their customers by improving customer service or providing additional services such as painting and grinding. This paper draws on a broad depth of knowledge built up during a long-term relationship between the authors and a cooperating steel company, embracing action-based, developmental and fundamental research. Action-based research aims to use scientific knowledge to undertake an action in response to a specific problem, while also creating theory about the particular action (Coughlan and Coghlan, 2002). There is very much a two-way relationship between the academic and industrial partners in the research. The implementation of generic rules into specific companies constitutes developmental research. With fundamental research, there is a greater onus upon the academic side where the definition of the problem and the diagnosis is the responsibility of the research team. The industrial partner takes a more passive role and provides the necessary access and information (Gill and Johnson, 1997). Initial research with the company was undertaken in 1989 by a graduate student who carried out a feasibility study (Griffiths, 1989). This led to an action-based research project supported by the UK government and involving other industry sectors. From the project, generic dynamic models and rules of thumb for supply chain re-engineering were developed (Hafeez et al., 1996). Subsequently, a development programme was introduced at the company to implement the generic research outputs for the specific case. This led to an overall average lead time reduction of 15%. In 1996, the Engineering and Physical Sciences Research Council (EPSRC) funded a doctoral student to undertake fundamental research with the company. This led to a market-focused operations management strategy (Naylor, 2000). Currently, the authors are undertaking a 3-year
EPSRC funded project researching the integration of transport and e-commerce in the supply chain. The on-going relationship has led to considerable insight and understanding of the company’s physical and informational processes. This paper utilises a range of research data sources available to undertake a longitudinal analysis of a specific supply chain. There is often a misconception that case studies do not provide generalisable results (Ellram, 1996). This case study of the steel supply chain considers whether the process of evolution described in the literature is occurring. By providing this illustration over time and generalising it to previously published theory, a greater understanding of supply chain evolution can be gained.
2. A steel supply chain The supply chain investigated in this paper is that for the supply of steel bars to a variety of sectors such as structural and general engineering. A schematic of the supply chain can be found in Fig. 1. The end user sources their material from a steel stockholder who performs a break bulk role within the supply chain. They order in large quantities from the main producers (on long lead times) and then sell the material in small quantities on short lead times, according to the customer’s requirements (McAdam and Brown, 2001). The stockholder in this paper has an annual throughput of approximately 25,000 tonnes, making them one of the smaller players in the UK sector. They source products from almost 30 different suppliers, although 75% comes from the case study steel company. The steel supplier can be classified as a general steel producer who converts steel scrap into billets, which are then rolled into a variety of steel products. One product type is termed ‘merchant bar’ and includes flat and angled beams with a small cross-section. These represent approximately 120 stock keeping units. Scrap Steel
Rail
Steel Producer
Truck
Steel Stockholder
Truck
Fig. 1. A schematic of the steel supply chain.
End User
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The supply chain structure described above can be found throughout the steel industry in the UK. Taylor (1999) describes a similar structure found in the manufacture of automotive components. Such differences that exist tend to relate to whether the crude steel is produced from iron ore or is recycled from scrap.
3. The integration of supply chains Within supply chain management, the importance of integration among the various organisations has been recognised as a means of delivering enhanced supply chain performance (Daugherty et al., 1996). The seminal work in this area is that by Stevens (1989), in which an evolutionary model for supply chain integration is proposed. The traditional baseline structure (Stage I) is characterised by limited integration between echelons, with multiple stockholding, incompatible information control systems and little communication. The disjointed flow of information up the supply chain results in ever increasing variations in demand, an effect often known as bullwhip (Lee et al., 1997). There are two intermediate stages between this traditional structure and complete integration. The first (Stage II) involves the functional integration of inward flows, often embracing the principles of lean thinking such as the reduction and removal of waste (Womack and Jones, 1996). However, the lack of integration downstream means that manufacturing still tends to be unresponsive to changes in customer demand. Stage III involves the extension of this integration to outbound flows. Information control is now completely integrated within the echelon which enables manufacturing to become more coordinated with incoming customer demand. The integrated supply chain is the final stage in supply chain evolution and has recently been termed the ‘‘seamless supply chain’’ (Towill, 1997). Integration is no longer constrained by organisational boundaries, and extends to both suppliers and customers. Consequently, their behaviour is coordinated with the ultimate goal of achieving high customer service.
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Some of the characteristics of these four stages are summarised in Table 1. However, because the process of integration is a continuum, it is possible for a supply chain to display characteristics from more than one column with some areas being more advanced than others. While it is desirable to progress towards an integrated supply chain, any reduction in the efficacy of the system diminishes and may even eliminate the operational benefits accrued. Therefore, it is necessary for the supply chain to become aligned with the demands of the end user market place. From this, it is possible to synchronise the supply chain so that supply matches demand. A synchronised supply chain represents the next stage beyond an integrated supply chain (Beech, 1998). The characteristics of the supply chain are similar to those for Stage IV in Stevens’ model, except that production is more closely coupled with demand and there is greater efficacy in the system. Childerhouse et al. (2000) have codified the evolutionary integration model and applied it to 20 value streams from the automotive sector. Although none portray the characteristics of the traditional structure, three are shown as undergoing functional integration. However, 65% of the value streams are in the process of internal integration, namely Stage III of Stevens’ model. Only four have progressed beyond this stage and towards external integration. This work particularly highlights the continuum of evolution, showing that it is unusual for supply chains to display all the characteristics of a particular stage. Stevens (1989) also presents a hierarchical approach to achieving an integrated supply chain by suggesting change at strategic, tactical and operational levels. Strategic level developments should look at the supply chain objectives, structure and spatial dimension as well as the marketing approach and organisational structure. In achieving these, the necessary infrastructure, in terms of equipment, processes and systems, has to be provided. These form the basis of tactical changes in supply chain evolution, which additionally encompasses target setting for each function. Finally, there are operational developments, which are driven by tactical decisions, and relate to
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Table 1 Characteristics of the four stages in Stevens’ model (Adapted from Stevens (1989) and Towill (1997)) Characteristics
Stage I
Physical flow
Functional; uncoordinated
Inventory
Information flow
Lead times
High levels; multiple stock holding between echelons Long
Decision points
Multiple decision points
Data transfer
Manual – facsimile or telephone
Stage II Inbound coordination within boundary Each function buffered Reduction in process time Single decision point for each process PC based information system
Stage III Outbound coordination within boundary No intermediate inventory except at organisational boundaries Reduction in storage and distribution time Single decision point within company boundary E-commerce
No visibility
Visibility of inbound logistics
Complete visibility within company
IT systems
Separate; incompatible
MRP/MRPII
Asset focussed
Inbound cost focussed
ERP/DRP with MRPII Outbound cost focussed
Relationship Management
Parochial management; ad hoc contractual arrangements
Broader management partnership
Management and operational partnership
Key Performance Indicators
None
Functional
Organisational
the actual operation of the supply chain. By adopting a vertical approach to integration, the effectiveness of developing and implementing an integrated supply chain is improved.
4. The steel supply chain: 1990 Turning to the specific case discussed in this paper, Fig. 2a shows the process map for the supply chain in 1990. The end user placed an order upon the stockholder either by telephone or facsimile. This order was shipped by road transport. Every week, the stockholder manually placed a replenishment order with the steel company. This was influenced by delivery time, steel price, interest rates, incoming demand and stock levels (Ha( kansson, 1992). Shipments generally occurred by truck once the products had been rolled at the mill. Occasionally, shipments would be from stock, as the mill had a minimum production batch size.
Minimal, strategic inventory Minimised Coordinated control from single point E-business
Visibility
Focus
Stage IV Integrated across boundaries
Full pipeline visibility in supply chain Integrated along the supply chain Customer focussed Multi-level, full relationship management; open book Supply Chain
On a weekly basis, a production plan for the Medium Section Mill was generated. From this, a billet contract was sent to the steelworks detailing the requirements for the week ahead. Although the same company owned both the steelworks and the mill, they functioned as independent units with separate financial targets. From the weekly programme a daily schedule was produced for the mill, but allowed amendments to be made depending upon events during the week. This generated a daily ‘‘call off’’ for billets from the steelworks. Once produced, the bars proceeded into the finished product warehouse, where they were stored for up to 6 weeks. The steelworks generated a weekly programme for billet production with the aim of maximising asset use, as the billets were always sold eventually. Typically, 18,000 tonnes of billets were produced per week to satisfy the demand from three different sources, not just the Medium Section Mill. The billets were held in stock at the steelworks before being transported to the mill
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Scrap Company
Medium Section Mill
Scrap stock 10kT
End user
Billet stock 5kT
16.25 days
4 days
Bundles 20kt
Merchant Bar Production 6kT/wk 0.25 days
42 days
Steelworks and Medium Section Mill
Scrap Company
Stock controller Order
Daily schedule
Billet stock 2kT
Billet production
Order Sales Department
Order
Daily call off
Order
Stockholder
Bars
72 days
End user
MTS
Stock levels
Scrap stock 10kT
4 days
Billet stock 7kT
Billet production
8.75 days
Merchant Bar Production 6kT/wk 0.25 days
Bundles 14kt
28 days
Order
Total = 134.5 days
Key
Bars
72 days
Manual data transfer Electronic data transfer Operation
Stock level
Make-to-Stock Forecast Requirements
Stock controller Order
Production Weekly Programme
Order
Order
Order
Sales Department
Bars
Echelon boundary
8 week forward plan MTO
Order
Stock level
Bar and Section Mill Weekly Programme (orders + percentage)
Billet contract
Steelworks Weekly Programme
Daily schedule
b) 2001
Stockholder 13 week forward plan
Order
a) 1990
211
Transport Storage
Bars
Total = 113 days
Fig. 2. Process maps of the case study steel supply chain.
by rail transport where they were stored again. The two stock holding points were on the same site, but the transit time was 1 day as the railway wagons had to be moved via adjacent sidings. They were often left for a period of time in the sidings, depending upon the availability of shunting locomotives. From the weekly programme, scrap steel was ordered from suppliers, and this was delivered by both road and rail. On average 4 days worth of scrap stock was held at the steelworks.
5. The steel supply chain: 2001 Before analysing in more detail the changes that have occurred in the steel supply chain, a brief
description of the current process will be given, with reference to Fig. 2b. The interactions between the end user and the stockholder are unchanged. The stockholder now uses spreadsheets to monitor and control stock levels. Replenishment orders are still placed weekly by the stockholder with additional variables such as work in progress considered. Telephone and facsimile are the main methods of transmission to the steel company. Depending on the product, it is either treated as a make-to-stock (MTS) or make-to-order (MTO) product. With this strategy, orders for the most popular lines can almost always be shipped from stock. The production batch size is based upon current demand with the steel going into stock. Lower volume products are, as before, manufactured on a MTO basis. The production rules are
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changed so that an additional percentage of overage is no longer produced. Information on incoming orders is fed into the production control system, and a weekly plan is generated for both the steelworks and Medium Section Mill. Both product types are held as inventory after production— the MTS products pending the placement of an order and the MTO products until the shipment date agreed with the stockholder is reached. Scrap material is still received by both road and rail transport. Once made into billets, it is loaded directly onto railway wagons for transit to the Medium Section Mill. They are placed into inventory until required whereupon they are moved by crane to the production line. Once the manufacturing process is complete, the bars pass into the warehouse until shipment. Typically, there are 12 stock turns per year.
6. Development in the steel supply chain Within the steel supply chain, there have been financial drivers behind all of the developments. One pressure has been the reduction of costs. As well as taking direct action, this has also been achieved through investment in technology that delivers benefits in the medium to long term. It is significant that the output level per employee over the period considered has increased by almost 100%. Another pressure has been the need to reduce the capital tied up in inventory, particularly for finished goods. While these cost pressures are generated from within the company there are also external cost forces imposed by the market. These result from the fluctuating price for scrap steel and the declining price of finished products in the UK. Developments in information technology have been driven by the ability of the sector to provide the appropriate products for the steel sector at an affordable price. Only within the past few years has customer service started to influence the developments in the supply chain. As discussed earlier, Stevens (1989) suggests a hierarchical framework to achieve an integrated supply chain. Strategic developments in the chain drive tactical changes that in turn affect operational aspects. The developments that have
occurred within the steel supply chain over the past decade can be mapped onto this framework. At a strategic level, the steel company has undertaken functional integration whereby the steelworks and Medium Section Mill are no longer separate units. This occurred during 1999 and has brought about a number of benefits, including cost reduction through the elimination of duplication in personnel and systems. Both facilities now have common targets rather than being focussed on their own production centre. As part of the reorganisation, a logistics department was created, providing a focus upon supply chain issues. This strategic change has enabled two tactical changes to be introduced—an integrated information system and split production order processing, namely MTO and MTS. The integrated information system introduced during early 2002 has reduced much of the duplication in production control as well as allowing increased information visibility within the company. The increased information visibility has further enhanced the benefits of eliminating the billet inventory at the steelworks. This realises a cost benefit because the double handling of the billets at the steelworks no longer occurs. There has also been a reduction in decision-making within the supply chain, with a single point of control for both the steelworks and Medium Section Mill. As outlined earlier, products are either classified as MTS or MTO according to their sales volumes with the production of the former being forecast driven and the latter being sales driven. Operationally, this splitting of production has introduced pipeline control into the MTS decisionmaking process and ensures that stock availability is not compromised. Further, there has been a reduction in the production cycle time (the time between production batches), in many cases by one half. The effectiveness of the MTS/MTO strategy has been increased with the introduction of the improved information system. The MTS/ MTO system was implemented during September 2001. The impact of these changes on the supply chain will now be considered with respect to inventory, lead times and asset utilisation.
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6.1. Impact on inventory Production
There are three main inventory staging points within the company, namely scrap material, billets and finished bars. Over the past decade there has been no change in the inventory level of scrap steel. This reflects the relatively low cost of storing this raw material and the economies available from having bulk rail deliveries. Billet stock levels are the same when compared to 1990 although the inventory is now concentrated in one location. There has been a reduction in the volume of goods in transit between the steelworks and Medium Section Mill due to a reduction in the transit time between the two locations. There has been a significant reduction in the volume of finished bars stored at the steelworks. The steel company has reduced inventory levels steadily over the decade by 2,000 tonnes. The move to MTS/MTO and the associated operational changes are beginning to have a significant impact on inventory levels. Cycle times for many of the popular product lines have been halved, reducing the level of safety stock required. Overall, this newly implemented strategy has reduced stocks by an additional 4,000 tonnes or 20%, with further gains anticipated in the future. While it is important to look at overall stock levels within the system, it is beneficial to look at the behaviour of the inventory found after the decoupling point in response to demand and manufacturing processes. Fig. 3 shows these relationships for the steel supply chain both in 1990 and currently, with the effect of the MTS/MTO strategy being detailed. In 1990, production by the mill was level due to the policy of manufacturing what was ordered plus an overage allowance. Therefore, variability in inventory levels existed. The two components of the current manufacturing strategy have different impacts on production and inventory levels. With MTO, production is directly proportional to incoming demand and is therefore variable while inventory levels remain constant. For MTS products, production is constant with inventory varying according to customer demand. Combined, these strategies cause variability in both production and inventory
Inventory
Demand pattern
1990
MTO
2001
MTS
Combined
Fig. 3. The relationship between production, inventory and demand.
levels. Changes in the level of output are small and occur because MTO products, which are low volume lines, influence production. The inventory level is more variable, being determined by the MTS products. This potentially has consequences for storage requirements with the warehouse effectively needing elastic walls. 6.2. Impact on lead times The lead time for merchant bar production has decreased from 19 to 16 weeks, a reduction of 16%. Reasons for this include the concentration of billet stocks in one location, process improvement within the Medium Section Mill and the reduced cycle times. The information lead time has also been reduced. The rolling schedules issued are now for the following 8 weeks rather than the next 13. 6.3. Impact on asset utilisation Asset utilisation is important in the steel sector given the cost structure of the industry. In 1990, production was based around an economic batch size that effectively smoothed incoming demand and maximised the use of the assets at the steelworks and Medium Section Mill. Having implemented MTO/MTS, however, there is the
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potential for this utilisation to decrease, as economic batch sizes may not be achieved. With the MTO products, production is directly linked to orders with no overage allowance to achieve a full batch size. In planning MTS production, existing stock levels feedback into the production decisions. This introduces variability in production with the potential for the bullwhip effect to propagate within the supply chain. The changes implemented by the company have brought about benefits to the supply chain as it progresses towards full integration. In particular, there has been a net reduction in costs within the company. Those costs associated with implementing new systems and procedures are far outweighed by the benefits of reduced inventory, shorter lead times and potentially improved customer service levels.
mill to become a fully continuous production line. Information systems were also upgraded, although incompatibility remained. This gradual change continued over the next 4 years, with most of the characteristics being brought up to those expected of a Stage II company. In 2001, some characteristics have achieved Stage III. Of those that have reached this advanced stage, the changes in the physical flow of the products reflects the integration of the business units while the reduction in the number of decision points and visibility have been facilitated by the integrated information control system. Lead time reductions have been influenced by the adoption of the MTS/MTO system. The change in focus to encompass both manufacturing and distribution costs has been influenced by external forces such as the decreasing price of steel and the consequent tightening of margins.
7. Analysis of the evolution 8. Conclusion In order to assess the degree of integration within the steel supply chain, the characteristics of the previous and current structure have been overlaid on Table 1. In addition, intermediate stages showing the characteristics in 1995 and 1999 have been added. The positioning within these years has been determined with reference to Naylor (2000) and company reports from throughout the 1990s. The choice of 1995 has no major significance, merely representing the mid-point in the period considered. With the major changes that are described above having started during 1999, this intermediate stage enables their effect to be highlighted. As can be seen from Table 2, the supply chain was very functional in 1990, with the characteristics being reflective of a company at Stage I of the Stevens model. By 1995, there had been improvements in a number of areas in the supply chain. Particular focus was on process improvements and has been supported by some investment to improve the equipment used. In 1994, d10 million was spent improving the Medium Section Mill. New rolling stands were installed and the automatic bundling of finished products introduced. This enabled the
Over the past decade, the steel supply chain studied has undergone changes at a strategic, tactical and operational level. These changes can be fitted within the hierarchical framework proposed by Stevens (1989) and shown in Fig. 4. The major strategic change has been functional integration within the steel company, with the production units now having combined goals and targets. This has facilitated the implementation of several tactical improvements including an integrated information control system and distinctive production processes for different product types. To achieve this, there have been a number of operational changes. The main driver behind these changes has been cost reduction with the need to keep abreast of developments in information technology another influence. Customer service has only recently emerged as a driver of change. The overall impact has been to reduce inventory levels by 16% and lead times also by 16%. Asset utilisation may have decreased through the use of variable input signals into the production quantity decisions. The integration that occurred has embraced both inbound and outbound material flows with
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Table 2 Position of the steel supply chain within Stevens’ model
Stage IV
Stage III
Stage II
Stage I
2001 Stage IV
Stage III
Stage I
Stage II
1999 Stage IV
Stage III
Stage II
Stage I
Stage IV
1995
Stage III
Stage II
Stage I
1990
Characteristics Physical flow Inventory
Information flow
Lead times Decision points Data transfer Visibility IT systems Focus Relationship management Key Performance Indicators
Integration of business units
Integrated information control
Fewer decision points
Inventory
STRATEGIC
Make-to-stock & Make-to-order manufacture
Concentration of billets
Reduced manufacturing cycles
Lead times
TACTICAL
Pipeline control
Asset utilisation
OPERATIONAL
IMPACT
Fig. 4. Development of an integrated steel supply chain.
the resultant characteristics being representative of a supply chain that has progressed beyond Stage II of the Stevens model. Using the table of characteristics, management can reflect upon where potential improvements can be made in order to improve the supply chain. By comparing their
position with other companies within or outside the sector, opportunities for benchmarking better practice can be identified. For progression beyond Stage III, integration must cross the organisational boundaries that currently exist to include both raw material suppliers and stockholders. The approach taken in this paper shows that the changes that have occurred within the steel supply chain can be applied to previously described theory on supply chain evolution. This enables the generalisation of the work and advances the understanding of integration by illustrating the dynamic process that is occurring. Further work will look to compare the steel supply chain with others drawn from both the steel industry and other sectors. They will be mapped onto the table of characteristics to provide a direct comparison with the steel supply chain studied. An attempt will also be made to codify the results allowing a comparative assessment as to the degree of integration to be made. Consideration will also
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be made as to the potential future structure of the supply chain.
Acknowledgements The authors would like to acknowledge the help they have received from employees at the case study steel company, in particular Stuart Meldrum and Steve Severs. We would also like to thank the referees for their constructive comments.
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