If a customer wants to get hold of the latest bestselling book at the cheapest price, most would head online. But what if you want to buy a piece of sheet metal? Not so easy.
Therein lies the difficulty for sellers of industrial steel, aluminum and plastic parts. Demand from the automotive and engineering industry is huge, but customers can rarely find what they need online. There is no Amazon equivalent, and, with margins low and prompt delivery vital, that’s a huge problem.
It’s one that has been bugging the Materials Services division of steel and tech giant ThyssenKrupp, one of the largest distributors in the world. Last year, the Essen-based firm had revenues of nearly €12 billion ($13.7 billion) in this area but adjusted profits of only €128 million. The margin was a meager 1.2 percent. Management isn’t happy and wants to reach at least 3 percent. The announcement on Tuesday that the firm is cutting 2,500 admin jobs over the next three years in a bid to save €400 million shows it is serious.
Hopes are focused on digitalization. Amazon has already showed how algorithms can be used to make decent profits in retail even with complex transactions and processes. “We have to digitalize the entire value-creation chain,” says Hans-Josef Hoss, a board member of Materials Services. “We want to network everyone from customers to suppliers.”
“Customer demands are rising and influenced by Amazon. This basic logic will affect the industrial world more and more.”
Rival steel trader Klöckner is leading the way. It already earns 14 percent of its revenues from digital channels and intends to open an industrial platform for competitors by the end of the year.
Materials Services set up customer portals in several countries nearly two years ago to enable large and small customers to order sheet metal, molding and pipes, including made-to-order cuts and coatings. It already has more than more than 700,000 visitors each year and €1 billion in digital sales. But these are almost exclusively to large industrial customers. The online shops aimed at craftsmen are still in their infancy.
Materials Services is now initiating the second phase of its digitalization strategy. It has developed an online platform called toii to link its production machines. This is a daunting task. Metal and plastic parts are delivered to 44 countries from 480 locations. The goal is to make more efficient use of the machines, optimize work orders and provide customers with order updates. “It will make our processes significantly more effective,” Mr. Hoss says.
The hope is that in three to five years, toii will use order, location and machine data to decide from which plant products should be sent to customers. Punctual deliveries are extremely important to customers, Mr. Hoss says.
Experts predict that complete digitalization of all processes can increase efficiency by as much as 30 percent. This is no surprise considering many orders at Materials Services are still handled by paper and fax machine.
Mr. Hoss is convinced this will change quickly. “Customer demands are rising and influenced by Amazon,” he says. “This basic logic will affect the industrial world more and more.” Material Services has invested a seven-digit sum in toii. Mr. Hoss says costs are high because the system is far more complex than the relatively standard digital order platforms of Siemens, SAP or GE.
Some IT experts doubt such a specialized system will pay off. Klöckner, for example, collaborates with the IT platform Axoom, developed by engineering firm Trumpf, to digitally connect its facilities rather than producing its own.
But tailor-made systems such as Materials Services’ do have a place, Patrick Vollmer from the consulting firm Accenture says. “Fully concentrating on a specific industrial sector can definitely make sense.” He points out there are already 450 platform providers globally, and the number is growing. “One size fits all doesn’t exist,” he says.
Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. To contact the author: email@example.com