Canadian Steel: Role of Information Systems (IS) Canadian Steel is the 5th largest integrated steel manufacturer in North America and the largest in Canada. Headquartered in Mitchell, Ontario, it can produce approximately 15 million tons annually. In the last fiscal year, Canadian Steel's total revenue was $7.56 billion, with a net loss of $210 million. Its information technology budget was approximately 1% of the total revenue or $76 million, a very low number for the industry. Ford Motor Company and General Motors form Canadian Steel's top two customers. Both automobile manufacturers viewed Canadian Steel as the worst in performance amongst its leading suppliers and threatened turn elsewhere for its steel supplies if no improvements are noted in Canadian Steel's performance in the coming six quarters "We were in the danger of losing our top two customer's business", explained Ronald Swanson, Canadian Steel's Chief Information Officer. The automakers' biggest complaint was that they were not notified when their steel shipments would arrive, leaving the car manufacturers unable to operate efficiently. For Canadian Steel, this threat was a wakeup call causing it to examine its whole production cycle. Canadian Steel identified several challenges beyond its notification system. It knew it needed to lower production costs, including its cost per ton of steel and the number of hours per person required to produce a ton, as well as the costly size of its steel inventory. It had to return to profitability, and to accomplish that it needed to increase its share of the high-end steel market. Internally it needed to centralize management of its various business divisions and factories as well as their locally controlled information technology infrastructure. Canadian Steel's major problems were reflected in its order-taking process. Orders were often manual, very imprecise, and filled with errors. Moreover, once an order arrived, Canadian Steel was unable to track it during processing. Processing began when one of its four plants transformed the raw materials into steel coils, which were then sent to Canadian Steel's processors to be turned into finished products. Canadian Steel has over 150 processors (65 of which work on Ford Motor Company and General Motors). A single piece of steel might be processed by up to seven different processors as they treat, shape, and finish the products. The reason for the complexities is that these orders require blending and shaping of the materials, including manipulating such characteristics as heat and tensile strength. Canadian Steel was unable to follow each order as it was processed and delivered. One problem was that each processor had its own tracking and order systems, and each assigned its own inventory codes, making tracking impossible for Canadian Steel. In addition, each processor communicated its processing data to Canadian Steel over a dialup system. When the data arrived, they then had to be manually translated into a format that could only be used by Canadian Steel's own system before the information could be sent to the customer. This translation took about 90 minutes per message. It was a very expensive and inefficient system, and it left Canadian Steel's customers without enough information for their own production planning. Canadian Steel did send advanced shipping notices (ASs) to their customers notifying them of the arrival time, but ASs often arrived after the steel, too late to benefit the customers. Late shipments made customers such as Ford Motor Company and General Motors more inefficient. Some of the car manufacturers' plants are within 15 minutes away from the processors. If a truckload of steel arrived without an AS, the automakers' employees would have to record the delivery information manually, a process requiring excess labor while increasing errors. The tracking system's inadequacies also created forecasting and inventory problems, forcing the company to hold too much inventory, which in turn, raised Canadian Steel's costs even higher. It needed to modernize its order taking, tracking, and inventory management systems. Canadian Steel moved rapidly to solve these problems. One objective was to enable customers to enter orders electronically so that they would be accurate. Using the Web, customers can now specify the product, quantity, price, composition, size, thickness, and even the delivery date for their orders. To achieve all of this, the system had to handle information on production limitations such as metallurgical rules and production capabilities. It even had to calculate cost and delivery dates. All of this had to be done rapidly so the customer knew cost and dates promptly after entering the order. Canadian Steel even connected the CRED system from EQUITEL Corporation to speed up credit authorization, enabling Canadian Steel to reduce uncollectible debts while approving most orders. To track orders, Canadian Steel developed an event-driven system that recorded each step in processing an order, automatically triggering the nextstep when the current step was finished, including the steps performed by the external processors. The new system even triggered ASs and the delivery of the order. One benefit was that Canadian Steel was able to handle processor messages in 12 minutes rather than 90. Both Canadian Steel and the customers knew exactly where the supplies were and how the processing was proceeding. Canadian Steel now found that when customer orders and ASs were correct, its customers were more likely to give the steel company repeat orders. "You need a way to differentiate your business," said Jerome Gergich, Senior Director of IT Strategy at competitor Great White, North Steel, "and I think you can do that with repeatability of customer orders." Lesley Knopp, Canadian Steel Director of Fulfillment, agreed, saying, "Everyone is producing the same steel; how to fulfill orders would be different." All of this required very complex software, much of it home-grown. In addition to information about price, quantity, and delivery date, an order must capture information on each steel product's composition, size, and thickness. Canadian Steel used order fulfillment and data management software supplied by the Pawnee Systems Corporation, a product configuration system from Eclipse Technologies, plus its own software for capturing very complex business rules and procedures for handling intricate mix of product specifications and prices for customers. The business rules "required thousands of hours of interviews and logic revisions, because "much of the knowledge was resident in the minds of our metallurgical engineers," explained Ron Swanson. When the system was completed, Canadian Steel's need to revise orders dropped by two-thirds while greatly reducing order-taking staff time. Canadian Steel replaced its order fulfillment system with ENT720 Technologies' Planning and Forecasting software, which the programmers connected to their order system. They also connected Canadian Steel's homegrown systems, including Track, which tracks orders as they go to processors or customers and an automatic order generation system for repeat customers call Track. mTrack reduces inventory by improving the forecasting of demand for finished goods at the customer's location. When Track was first used, it reduced inventories from 33,500 tons to 24,000 tons. The system has been recently upgraded. While in the previous fiscal year, $987 million inventory was needed to support $6.5 billion in revenue. Canadian Steel now keeps only 21 days of inventory on hand to meet demand, while it required 32 days of inventory on hand in the prior year. Overall, this whole system, known as continuous flow manufacturing, made the company the vanguard of the industry. According to Anastasia Perkins, a consultant to Canadian Steel from the Brantford Consulting Group, the sweep of these order tracking and inventory systems for a continuous flow manufacturing business such as steel is "astonishing". These systems can go from the shop, through Canadian Steel's own production facilities and third-party service centers to the customer, managing the entire supply chain through a single integrated system. Once Canadian Steelstarted deriving benefits from its new supply chain management system, its management concluded that the system could provide a new source of profits. It could be adapted to serve smaller companies who bought Canadian Steel products through service centers and could be sold to other steel and non-steel companies. In the currentyear, Canadian Steel created Frontline Steel, a new division that sells steel products directly to smaller customers bypassing service intermediaries. Frontline was setup like an independent company so that it could compete for the steel service center business (which sold steel to small companies) without alienating the 15% of Canadian Steel's business that already came through other service centers. In essence, the small customers could place their orders directly to Canadian Steel through Frontline Steel, which gave customers the ability to know when their orders would be delivered as soon as they were placed, a source of competitive advantage over service centers. The software manages customer inventories, handles shipping to the customers, and includes order fulfillment and supply chain management. Registered customers can check the status of their order any time. Frontline Steel added other features that would be difficult for conventional service centers to match, such as online credit checking and order aggregation. For order aggregation, Frontline implemented a software call SmartRoute, which combines similar orders and routes them through its processors in chains that minimize waste and scrap. Canadian Steel found that reducing apparently insignificant amounts of waste saves the company millions of dollars each year. Frontline also uses CRED from EQUITEL Corporation for online authorization of credit, helping customers speed up their steel purchases while reducing Canadian Steel's uncollectible debts. The combined power of all of Frontline's information systems makes it possible for the division to take into account everything that will affect the price of an order when pricing a product for a customer. While traditional service centers might take several days to develop price quotes. Frontline can quote competitive prices in seconds. Many service centers are angered that Canadian Steel is competing against them. Canadian Steel also created a subsidiary called Advanced Consulting Technologies (ACT) to generate additional revenue from in-house technologies and services. ACT's principal products are an order-fulfillment system for businesses in the metals, glass, and paper & pulp industries; a set of supply chain software toolsets jointly marketed with ENT720 Technologies that can help other steel companies manage their supplies; and a tool to help companies set up an extranet for customers to place orders, check status, exchange electronic contract documents, and provide shipping information. To maintain Canadian Steel's competitive edge, ACT sells technologies that is one generation behind what Canadian Steel uses. According to ACT President, Andrew Dwyer, the venture has been highly profitable. Has Canadian Steel's use of information technology solved its problems? The company has become very efficient, as shown by the time it takes to produce a ton of steel. Canadian Steel requires about three person hours for one ton while in Germany it is 4 hours, Japan 4.5 hours, and South Korea 4.8 hours. Although countries like India need 34 person hours, their hourly labor rate is much lower. However, "Everybody has access to the same technology [referring to both information technology and advanced equipment], says Benjamin Wyatt, a Conestoga College professor of metallurgy, and 'These can be purchased." And still Canadian Steel's labor costs remain high - $65 per ton higher than South Korea's. In fact, Canadian Steel estimates it lost $54 per ton in the fourth quarter of the current fiscal year. Many observers claim that one reason is that Canadian Steel spends $39 per ton for retiree health care costs and has only about 130,000 employees supporting over 600,000 retirees and their dependents. However, April Ludgate, Canadian Steel's Chairperson, claims its pension liabilities are well-funded. According to Thomas Haverford, the senior trade analyst at the Golden Triangle Institute, a conservation Waterloo-based think tank, "Canadian Steel is quite efficient, but it is simply not large enough to equal its foreign competitors. Canadian Steel's biggest problem is that it doesn't have the same economies of scale that its foreign competitors have In addition, in July 2001, when the Frontline system was completed, the country was in recession, prices had fallen to all-time lows, and Canadian Steel was experiencing its worst losses in ten years. Canadian Steel pushed for an industry bailout, and Prime Minister did grant a 30% tariff on flat-rolled steel in the third quarter despite his strong commitment to free trade. Many analysts believe the tariff solves nothing but only delays the inevitable consolidation. Analysts point out that worldwide the steel industry annually produces 200 million more tons of steel than the world consumes. Another issue for Canadian Steel is that a few innovative competitor steel makers use scrap steel as inexpensive raw material, forcing Canadian Steel to make higher-grade steel from coal and iron, the type of steel used in automobiles and skyscrapers. Canadian Steel has stated that it would like to combine with a few other steel makers in the country, but only if the Canadian government takes over about $10 billion of the involved costs. These "mini-mills" oppose this because they are non-unionized and don't have the medical and pension expenses of the bigger companies. Christopher Trager, Chief Executive Officer of a competitor steel maker said that "Canadian Steel's proposals are nothing more than an attempt to get government to help a couple of larger players at the expense of the rest of the Canadian steel industry and the taxpavers." Comparison with South Korea's steel makers might further help explain Canadian Steel's problems. In the nineteenth and early twentieth centuries, Canadian steel companies located themselves near the sources of iron and coal. However, half the cost of producing a $210 ton of steel today is for purchasing and shipping raw materials, while energy is 6%, labor 6%, and the remaining costs of 38% are for such factors as maintenance, information technology, and administration. Today companies locate themselves on Atlantic, Pacific, and Mediterranean coastlines to reduce their largest single cost. Canadian Steel's struggles in servicing their existing customers, attracting new customers, and optimizing their costs have been a cause for concern for its Board of Directors. Consequently, April Ludgate has been asked by the Board of Directors to provide a brief presentation at the upcoming meeting to identify the root cause of the company's challenges as well as propose a feasible path forward. Specifically, the Board has raised the following key questions for April: 1. Articulate the goal of the organization and the role of information systems in clear and concise manner. 2. Summarize Canadian Steel's current competitive situation using Michael Porter's five forces model. Specifically, analyze the industry and competitive marketplace as well as identify the best competitive strategy to pursue given the company's strengths, weaknesses, opportunities, and threats. 3. How are information systems related to the way Canadian Steel runs its business? What role is played by supply chain management system? How do these systems provide value for Canadian Steel? 4.How helpful were information systems in addressing Canadian Steel's problems? 5. Evaluate the decision by Canadian Steel to sell its software to other companies. Could it helo or hinder Canadian Steel? Explain vour rationale