Leveraging on Maritime Logistics - ArcelorMittal - Case Study Example

Report Navigator Executive Summary Contextual fitness About the group Products and services The business process Keys to success Contextual significance 2. ArcelorMittal’s supply chain network Analysis of Supply-chain Key issues 3. Overview of maritime logistics The maritime logistic process 4. Leveraging on maritime logistics Benefitting maritime logistic activities Contents Report Navigator 4 Executive Summary 7 1. Contextual Fitness 9 1.1 About the Group 9 1.2 Products and Services 9 1.3 The Business Process 9 1.4 Keys to Success and Contextual Significance 9 2. Analysing ArcelorMittal’s supply chain 11 2.1 Forces Affecting ArcelorMittal’s Operations 11 2.2 ArcelorMittal’s Key Supply Chain Characteristics 11 2.2.1 ArcelorMittal’s Supply Chain Network 11 2.2.2 Key Driver of ArcelorMittal’s supply chain 12 3. Overview of Maritime Logistics 17 Defining Maritime Logistics 17 3.1 The Need of the Hour 17 3.2 The realm of maritime logistics 17 3.3 Port/terminal operations management 18 3.4 Ocean Freight Management 19 3.5 Fleet Management 20 4. Leveraging on Maritime Logistics 22 4.1 Providing Flexibility in Cargo and Price Hedging 22 4.2 Increased Flexibility in Managing Global Cargo Movements 22 4.3 Minimising Bullwhip Effect 23 4.4 Consequences 23 4.5 Curbing the Bullwhip Effect 23 5. Conclusion 24 Appendices 25 Appendix A 25 ArcelorMittal Steel Product Catalogue 25 Appendix B 26 Bullwhip Effect Explained 26 26 Appendix C 26 Causes of Bullwhip Effect 27 Bibliography 28 Website References 28 Notes 29 Executive Summary ArcelorMittal Group, world’s number one steel maker, operating in more than 60 countries with a workforce of 350000. At the heart of its business process lays a gigantic logistics and supply chain network. This document delineates an appreciation of its logistics and supply chain management system in the light of the need to maintain its competitiveness by leveraging on maritime logistics. Divided into four chapters, first it deals with the contextual fitness by providing a reasonable understanding of the group’s business process, products and services, keys to success and contextual significance. The second chapter deals exclusively on the group’s supply chain by analysing the process and practices with key supply chain issues that affect the top and bottom line of the company. It also discusses about the drivers that maintain the group’s competitiveness in three key dimensions such as – quality, cost and time. The subsequent chapter explains about the realm of maritime logistics delving deep into how the maritime process can be seamlessly integrated into the logistic and supply chain system of a business. At the end it discusses how the group can leverage on maritime logistics and minimise certain endemic supply-chain issues such as the bullwhip effect. 1. Contextual Fitness 1.1 About the Group The ArcelorMittal, the world’s number one steel company with over 32000 employeesi and presence in over 60 countries and is a truly global steel maker. It is a market leader in all the global steel markets such as automotive, construction, household appliances and packaging. The group holds sizable captive supplies of raw materials and operates a huge distribution network throughout the globeii. With revenue of $124.9 billion and crude steel production of 103.3 million tonnes, it represents almost 10 percent of the global steel outputiii. 1.2 Products and Services ArcelorMittal’s chief operations include providing ‘steel solutions and services’. The group operates in more than 500 centres and 32 countries, providing to approximately 200,000 customers a full portfolio of flat and long products, tubes and stainless steel; adding value through further processing and providing technical, engineering and consultancy supportiv. A detailed list of products is placed at the appendix to this reportv. 1.3 The Business Process The group through its integrated business model operates in the entire hierarchy of the business from mining and sourcing of raw materials to managing a mammoth mobilisation network that transports the raw materials to the factory location, followed by designing and manufacturing and finally managing an equally gigantic sales and distribution network. Figure 1: Busieness process of ArcelorMittal 1.4 Keys to Success and Contextual Significance From the point of view of the group’s global leadership in the steel business, a key element of its success lies in managing its supply chain network seamlessly from vendors’ vendors to buyers’ buyers. Sourcing of high quality, low cost raw materials and then mobilising finished products to the customers is highly significant for the business in view of the stiff competition being faced by this industry. Therefore, transportation is a key driver for the bottom-line of the group and contributes hugely to the success of the company. Maritime logistics is a driver to this driver. These are discussed in detail in the following chapters. 2. Analysing ArcelorMittal’s supply chain The steel industry is characterised by a highly complex production system. Even more complex is its supply chain governed by numerous dynamic factors and objectives. An idea of the complexity can be appreciated by the multitude of design, production and logistics involving a multitude of markets. For instance steel is required for a huge number of applications: mechanics, crane lifting, HVAC, electrical appliance, agricultural, shipping, railways, trucks, lifts, new energy, medical, aeronautics, electronics, textile machinery, metallic furniture the list can just go on. 2.1 Forces Affecting ArcelorMittal’s Operations ArcelorMittal’s is a giant among the steel makers, yet an analysis of its business process reveals, it is susceptible to a complex array of forces. These forces are depicted well in the figure below: 2.2 ArcelorMittal’s Key Supply Chain Characteristics Under the influence of these forces, the group’s continuously evolves towards perfection in its operations, the supply-chain in particular. The key characteristics of ArcelorMittal’s supply chain are depicted in the figure below: Figure 2: Characteristics of ArcelorMittals Supply chain 2.2.1 ArcelorMittal’s Supply Chain Network ArcelorMittal’s supply chain starts from mining and raw material sourcing to producing highly sophisticated technological products and activities, managing over 60,000 suppliers and contractorsvi.The key activities are as depicted in the figure below: Figure 3: Supply Chain key activities (Adopted from: Management of Business Logistics, 7th ed.) 2.2.2 Key Driver of ArcelorMittal’s supply chain A further drilling down was undertaken to establish the clear functionalities of these activities. These are classified to identify the exact role maritime logistics can play and to what extent it can benefit the ArcelorMittal’s system, which forms the chief objective of this paper. Figure 4: ArcelorMittals supply-chain activities (Adopted from management of business logistics, 7th ed. chapter 1) A relook of ArcelorMittal’s transportation needs, reveals the following transporting sequence: Figure 5: ArcelorMittals transporting needs Many of these activities can be undertaken by the company by venturing into maritime logistics management, which at present is managed through service providers. These activities are key elements in its supply chain and would certainly make business sense by integrating it in its system. The objective of this part of the paper is to appraise the management about the domain and nuances of maritime logistics and the broader benefits it can usher in terms of cost, quality and time and how it can bring benefit to its supply chain, say for instance, minimise the bullwhip effect and bring more visibility and so on. The Part B of the report which will be subsequently submitted would delve in detail the quantification of these benefits. In the wider context of its global supply chain and considering the gigantic material movement that needs to be crisscrossed over the globe, to enable production of a whopping 100 million tons of steel, almost 10 percent of world’s combined steel production, maritime logistics can effectively take over the functions of in and out bound transportation typically undertaken by port-to-port operations. An idea of the quantum of ArcelorMittal’s mining and distribution efforts are placed at the text boxes below. In the ensuing chapter we discuss about maritime logistics and by entering into the business what the company stands to gain. 3. Overview of Maritime Logistics The last decade witnessed rising prosperity in some of the highly populous countries such as China and India. Elsewhere, other parts of the world such as Brazil and Russia and the east-European countries too contributed towards world’s prosperity, triggering a gigantic demand momentum contributing to surge in international trade, most of which is being and will be materialised over the ocean. As a direct consequence of this trade surge, there has been drastic limitation in cargo space giving rise to sharp increase in cargo rates. Bottlenecks in maritime logistics have already developed in many parts of the world. Thus the effective performance of maritime logistics hold the key to competitiveness and value added processes more so for a large player like ArcelorMittal. 3.1 The Need of the Hour The need of the hour for the company is to lower freight costs and have more direct control on the supply chain, while condensing the volatility in shipping costs and better management of supply chain value. This can be achieved only by venturing into maritime logistics. 3.2 The realm of maritime logistics The domain of maritime logistics would constitute the following aspects that ArcelorMittal need to consider developing: Figure 7: Leveraging Maritime logistics would require effective management of port/ terminal operations, ocean freight management and fleet management 3.3 Port/terminal operations management Port and terminal operations efficiency is a crucial aspect for leveraging from maritime logistics and thus forms the core of the services that needs to be managed affectively. It would provide speed to its supply chain. The business process involves the following: Figure 8: Building strong capabilitties in port/terminal operations would require service rationalisation, resource planning, stevedore management, operations process exectuion, monitoring and control Effective management of this segment would require a thorough understanding of the underlying complexity of the process. The following figure depicts it well: Figure 9: Port/terminal operations aspects - a major contributor in maritime logistics Source: http://www.sandia.gov/nisac/images/port_flow_lg.jpg ArcelorMittal’s cargos to be transported involve mostly bulk cargo movement involving raw material such as iron ore, coal and limestone and thereafter shipping of finished products. An idea of the bulk cargo movement process is depicted below: Figure 10: The bulk cargo handling process Source: Martin Stopford, Maritime Economics 2nd Ed. Due to a number of factors it becomes difficult to predict and schedule efficient large bulk export operations, making them one of the most complex maritime operations. For example, loading iron one cargoes would involves careful scheduling of input barges from sources that may lie deep in the hinterland again governed by many factors. Similarly, discharging can be equally complex and hazardous since there are all the problems of ensuring the prompt arrival of a multitude of barges and coasters. Penalties for faulty consignments and demurrage[vii] charges grow more rapidly with large consignments as well. (Stopford-2nd ed.) 3.4 Ocean Freight Management By building ocean freight capability, the group can have substantial saving in terms of charter and also larger address the perpetual uncertainties of ship charter. This part of maritime logistics includes the following aspects: Figure 11: Manging Ocean Freight effectively can save considerable amount for ArcelorMittal 3.5 Fleet Management Managing a robust fleet would enable ArcelorMittal to have the strongest ever hold over its supply-chain. It would make its control absolute and can eventually help the company to surge ahead of its competitors. It makes equally strong business sense to own a fleet. Today, many of the steel makers are shying of developing their own shipping fleet due to the high capital investment and complexity. Yet, it has been seen from the world shipping scenario that the large players those who could maintain their own fleet successfully are able to provide much differentiated services than their competitorsviii. Presently, the charter market wields considerable power in the shipping industry being central to its function. Ships have to be available when cargo is needed to be transported. In the process and in its effort to combine cargo with the ships, it can unduly skew both cost and time. Owning a fleet would provide the group from the perpetual owes of ship chartering. However, managing a fleet would involve the following aspects. Vessels procurement and registration Positioning Crewing Fleet maintenance Commerce 4. Leveraging on Maritime Logistics The benefits that can be ushered if the group ventures into maritime logistics can be many fold. Below some of the key benefits are discussed. 4.1 Providing Flexibility in Cargo and Price Hedging Many a times, it may be difficult for ArcelorMittal to forecast exact quantities of import and the time of the shipment, largely due to the constraints in which its user subsidiaries operate. Under these circumstances, the group can be at the mercy of the spot market, firstly due to freight rate fluctuations and performance of the carriers. By venturing into maritime logistics, this problem can be totally eliminated. Secondly, the elimination of the price risk, because freight rates are no longer linked to the spot market, besides the performance is guaranteed by the group’s own bulk carriersix. This benefit itself can bring in substantial stability and reduce resultant volatility. 4.2 Increased Flexibility in Managing Global Cargo Movements ArcelorMittal has several mills located in many parts of the world, with iron ore, coal and limestone mines located in many other parts of the world. The group need to manage effectively its inflow of raw materials to optimise costs and constantly remain responsive to developments in the world steel market. It also has a huge outflow of finished goods to the customers and distributors. The group’s entering into maritime logistics and active involvement in shipping can enhance its awareness of the differing flows throughout the world; there by contribute to creating cost and logistical value, which can be shared throughout the value chain. Besides, combining these two shipping flows, there can be significant enhancement in service level, getting substantial freight costs savings, significant flexibility and tight logistical control over the entire supply chainx. Figure 12: Benefits that can be acrued by entering into maritime logistics The largest ever benefit, however, would be from reduction in bullwhip effect across the entire supply chain. 4.3 Minimising Bullwhip Effect In a supply chain, only when all the links coordinate with each other well, then only the profit is maximised. Similarly, when the different links start focusing on optimising on their own local objectives or if the information is distorted as it moves across the supply chainxi. This fluctuation in orders increases as one moves up the supply chain from the customers to the retailers to wholesalers to manufacturers and finally to the vendors’ vendors. This phenomena as it is called as the bullwhip effect, is much more pronounced in a highly complex and huge organisation such as ArcelorMittal. A graphical representation of the bullwhip effect is placed at Appendix B to this report. 4.4 Consequences The bullwhip effect results in an increase in all costs in the supply chain and decrease in customer service levels. The bullwhip effect moves all parties in the supply chain away from the efficient frontier and results in a decrease of both customer satisfaction and profitability within the supply chain. The consequences can be summarised as in the figure below: The obstacles to coordination in a supply chain that eventually results in the bullwhip effect can either be caused by behavioural or operational conditions. These are placed at Appendix B to this report. 4.5 Curbing the Bullwhip Effect Minimising the bullwhip effect would mean bringing about a reduction in uncertainty, variability and lead time. All of these can be effectively brought under control by venturing into maritime logistics, which greatly help in two areas, such as smoothening of the flow of products and information sharing. 5. Conclusion Prima facie it appears that ArcelorMittal stands to gain immensely by venturing into maritime logistics in term of reduced costs, reduction in lead-time and tremendous reduction in uncertainty leading to improved efficiency and quality products and enhanced prosperity in the value chain. Finally, a global leader such as ArcelorMittal dealing with such a primary object as steel starts distributing prosperity in its value chain, the impact will be echoed throughout the world. Appendices Appendix A ArcelorMittal Steel Product Catalogue Source: http://www.constructalia.com/en_EN/products/productos.jsp Appendix B Bullwhip Effect Explained Figure 15: The Bullwhip effect Explained - the best benefit arcelorMittal can acrue by venturing into maritime logistics Source diagram: Accenture Appendix C Causes of Bullwhip Effect Bibliography Chopra Sunil & Meindl Peter, 2001, “Supply Chain Management: Strategy, Planning, and Operation”, Pearson Education Asia, p.383. Simchi-Levi David, Kaminsky Philip & Simchi-Levi Edith 2000, “Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies”, Irwin McGraw-Hill, Singapore, p 82-94. Christopher, M. 1998 “Logistics and Supply Chain Management: strategies for reducing cost and improving service”, London, FT / Prentice Hall. CLM 1993 “What’s It All About”, Oak Brook, Council of Logistics Management, in Lambert et al., 1998, “Fundamentals of Logistics Management”, New York, Irwin McGraw-Hill, p.3. De Geus, A., & Bonney, J. 1997 “The Living Company”, London, Nicholas Brealey; Donovan, A. 2006 “The Box That Changed The World : 50 years of container shipping”, East Windsor, NJ, Commonwealth Publishing. Russell, R. & Taylor, B., 2006 “Operations Management: quality and competitiveness in a global environment”, 5th Ed., Chichester, Wiley. Slack, N.et al. 2001 “Operations Management”, 3rd Edition. London, FT / Prentice Hall. Stopford, M. 1997 “Maritime Economics”, 2nd Ed., London, Routledge. Waters, D. 2003 “Logistics: an introduction to supply chain management”, Basingstoke, Palgrave Macmillan. Christopher, M. 1998 “Logistics and Supply Chain Management: strategies for reducing cost and improving service”, London, FT / Prentice Hall. CLM 1993 “What’s It All About”, Oak Brook, Council of Logistics Management, in Lambert et al., 1998, “Fundamentals of Logistics Management”, New York, Irwin McGraw-Hill, p.3. Johnson, G. & Scholes, K 2008 “Exploring Corporate Strategy: text & cases”, 8th Ed., Harlow, FT / Prentice Hall. Porter, M.E. 1980 “Competitive Strategy: techniques for analysing industries and firms””, New York, Free Press. Senge. P. 1992 “The Fifth Discipline”, London, Century Business. Slack, N. et al. 2001 “Operations Management”, 3rd Ed., London, FT / Prentice Hall. Stopford, M. 1997 “Maritime Economics”, 2nd Ed., London, Routledge. Waters, D. 2003 “Logistics: an introduction to supply chain management”, Basingstoke, Palgrave Macmillan. Website References ArcelorMittal. About . 2010. 16 January 2010 . Export 911. “International Commercial Terms (INCOTERMS) .” www.EXPORT911.com. Export 911. 05 January 2010 . Har, Dr. K.V. “Logistics, Physical Distribution and Supply Chain Management.” Har, Dr. K.V. Logistics and Shipping Management in Maritime Trade. Bhandarkar Publications, n.d. 1-26. UB Libraries. “Internatioal Trade.” UB Libraries. University at Buffalo, The State University of New York. 05 January 2010 . World Business Council for Sustainable Development. “Building sustainable supply chains in Brazil ArcelorMittal.” 2009. www.wbcsd.org. 16 January 2010 Read More