"Servi-Manufacturers"

I had never heard the term "servi-manufacturers" before reading this article, but have been lobbying for this concept for many years with my auto supplier clients. Some automakers and many good dealerships have recognized the value of this as well. Good advice for most industries, I suspect. Some times one can get premium price for this approach, but more often customer loyalty is the real payoff. Thus, caring about the long-term is an essential element of a "servi-manufacturer" strategy.

Dawn of steel's flexible future

By Peter Marsh

Published: November 24 2006 02:00 | Last updated: November 24 2006 02:00 Financial Times

When Chiang Yao-Chung says "we have to become better at service", he is talking not only about China Steel, theTaiwanese steelmaker he chairs, but about all its competitors, too.

According to Mr Chiang, steelmakers can no longer simply produce steel; they need to back up their production with services such as design, distribution and "tailoring" of products to meet their customers' more demanding requirements.

Mr Chiang ought to know. Until about a year ago, he was the chairman of China Airlines, Taiwan's largest carrier and an archetypal service business. His comments resonate clearly in the steel industry, where many companies are recognising the need to compete by adding a service element to their production skills.

The new thinking reflects broader changes in manufacturing. In the past 20 years, it has become far more common to find "hybrid" businesses or "servi-manufacturers" that offer customers a more profitable combination of products and services.

Large manufacturers such as Germany's Siemens increasingly provide "service offerings" such as equipment maintenance, but the practice is also being adopted by smaller concerns. Munters, a Swedish maker of dehumidifying equipment, offers to run its machines on a customer's premises where, for example, the business has suffered a flood.

In the steel industry, moves towards adding service most often involve refinements to ordering and production processes, sometimes with a design element.

Even companies widely regarded as makers of "commodity" steel sold at standard prices can see the benefits of adding service operations. At the Polish arm of Mittal Steel, the world's largest steel business, managers are trying to alter the way they sell steel to customers to emphasise smaller production runs and pay closer attention to specifying particular steel grades.

"In the past, we tended to sell steel in lot sizes of hundreds of tonnes at a time," says Sanjay Samadder, sales director of Mittal's Polish subsidiary. "Now the emphasis is on accepting a more complex mix of orders so we can supply steel to customers in a wider range of product grades and in batches of as little as 50 tonnes."

A similar approach is apparent at a large plant in Scunthorpe, northern England, run by Corus - the Anglo-Dutch steelmaker subject to an agreed £5.1bn takeover deal by India's Tata Steel (though a rival, CSN of Brazil, may yet put in a higher offer). One reason Tata wants to buy Corus is to gain expertise in making steel in small batches geared to customers' needs.

Engineers at the Scunthorpe plant are adept at changing the shapes, sizes and chemical formulations of products such as rods and sections through sophisticated procedures to control the dozens of separate steps in steelmaking. In this way they can add tens of thousands of variants to basic steel to meet the requirements of customers.

Another group of steel companies concentrates on making specialist steel grades - a sector where competition is quite limited. In these plants very little "basic" steel, such as commodity coils and bars, is produced. An example is Böhler Uddeholm, the world's largest maker of high-grade steel used in production tooling.

The Vienna-based company says it makes hundreds of different grades of steel for toolmaking. It delivers these in quantities that, by the normal standards of the steel industry, are extremely small - an average of 70kg at a time.

"We sell to 100,000 customers and in many ways are more like a pharmacist than a steelmaker: we have toget our material to customers at the right time andin the right formulation," says Claus Raidl, chiefexecutive.

Furthest down the road of "servi-manufacturers" are businesses that behave more like engineering manufacturers than steel producers. The distinctive feature they offer is expertise in design.

Take Voestalpine. The Austrian steelmaker is a leader in the coated steel sheet used by vehicle companies for the exteriors of car bodies, but the company has gone further, by making "laser-welded blanks".

Voestalpine makes these by welding together two or more pieces of steel into a new sheet, which is then stamped into a part, as specified by a customer, and using its own design and development skills - sometimes in collaboration with the customer.

One of its customers for laser-welded blanks - which sell for $800-$1,000 a tonne, twice as much as conventional steel sheet - is BMW. The German carmaker uses the blanks in some of its car doors, where different grades of steel are needed to help withstand corrosion from rain water.

Two other steelmakers - Rautaruukki of Finland and Bluescope of Australia - have also hit on the idea of turning parts of their businesses into producers of specialised panels and other components.

Both make roofs and gutters used in construction. Rather than sell steel to construction businesses that fabricate the items themselves, Rautaruukki and Bluescope not only turn out the parts in different shapes and sizes but also take on the project management of the building contract.

"In some instances of work we do for customers in construction steel, only 20 per cent [of the contract price] is accounted for by the material cost. The rest comes from what we are providing through design, intellectual property and management expertise," says Sakari Tamminen, chief executive of Rautaruukki.

If "servi-manufacturing" turns out to be an important part of global industry during the next 20 years, then the steel business will have played a big part in showing others how to do it.

Copyright The Financial Times Limited 2006