We have been rigorously driving forward Klöckner & Co’s digital transformation for more than five years, with the result that we already generated some 32% of Group sales through digital channels by the fourth quarter of 2019. After initially focusing on customer interfaces, digitalization of the end-to-end process from ordering to delivery to customers is now moving to center stage. We expect that this will contribute more than an additional €100 million to operating income by 2022.
Further pillars of the “Klöckner & Co 2022” strategy include expansion of the higher value-added business and efficiency improvement. All three strategic pillars are supported by our transformation to a digital corporate culture marked by greater openness, agility and customer centricity.
Steel and metal distribution continues to be characterized by volatile prices and tough competition. Rigidly linear supply chains and lack of transparency also make the business highly inefficient.
Linear supply and value chain:
Steel distribution still has the classic linear supply and value chain, from producer to distributor to processor. Orders are mostly placed by phone, fax or email, with manual intervention needed at many points along the way. This results in long delivery times, incorrect deliveries and unnecessarily high inventory levels. The quotation process is also highly time-consuming and effort-intensive. On top of that, only a fraction of quotations lead to an order.
Insufficient information and data interchange:
The steel industry lacks effective information and data interchange, such as on available inventory and lead times. There are frequent breaks in the information flow, resulting in a severe lack of transparency along the entire supply chain. Suppliers, distributors and processors consequently have to buy in large quantities to make up for the lack of information about demand, supply and prices.
Overcapacity, volatile steel prices and narrow margins:
The steel industry suffers overcapacity at all levels. This causes frequent large price swings, which make it hard to plan ahead and hit profitability. Especially with commodity steel products, strong competition also drives margins down to very low levels among both producers and suppliers.
Digital platforms break up linear supply and value chains by connecting market players. They cut out the inefficiencies due to lack of transparency and supply chain linearity to optimize stockholding as well as reduce transaction and sales costs.
Klöckner & Co is very well positioned with its digital platforms. As a basic distinction, platforms can be horizontal or vertical.
Vertical platforms like XOM Materials primarily feature industry specific products and services. XOM Materials aggregates the ranges of numerous market players and thus offers a broad product portfolio with a high level of transparency on price and availability.
Horizontal platforms, by contrast, mainly offer standard products for different industries. The range does not include any customer specific or extended services. Unlike vertical platforms, they therefore contribute little to addressing the challenges in the materials business.
Marketplaces offer products and services beyond the Company’s own portfolio. The Klöckner & Co Marketplaces allow our customers to purchase specialized products and services from our own portfolio as well as products from complementary third-party vendors.
In the Onlineshops, customers are offered a strictly proprietary product range. Years ago, this is how Klöckner & Co took its first step into this arena. The benefits for customers are very limited, however.
With our XOM Materials open industry platform and our proprietary marketplaces, we are the sole competitor in the industry to meet fundamentally all contemporary customer needs and thus to have paved the way for marketplace and platform scalability.
Kloeckner Assistant and the XOM eProcurement solution are key to our ability to scale up our platforms. The Kloeckner Assistant turns all customers into digital customers without them having to change their procurement processes. They can send requests for quotes or orders to Klöckner & Co by email with PDF attachments, by fax or phone as before and receive an offer or order confirmation in real time. Going forward, processing will be fully automated. This will not only significantly reduce manual effort, but also considerably accelerate the entire ordering process from quotation request to offer preparation and order placement.
In contrast to the Klöckner & Co marketplaces, XOM Materials is a procurement and sales platform for all products and services associated with the manufacturing industry that is also open to competitors. The platform optimizes the materials management with intuitive and efficient digital processes and flexible IT solutions.
Via the XOM Marketplace, XOM Materials can ultimately connect any number of suppliers and customers at every level of the value chain. One focus is on steel and metal products, for which extended processing services are offered. In principle, however, other materials such as plastics can also be traded on XOM Materials. The platform can additionally be used as an eShop solution with proprietary branding, which frequently makes it easier for suppliers to enter online selling.
New to XOM Materials is an eProcurement solution, which considerably simplifies procurement and requirements planning for customers by reducing the workload to just a few mouse clicks. The solution not only automates the reconciliation of materials supply and demand, but also supports contract negotiations, data retrieval and access to current information on availability and orders. Using this application, XOM Materials customers can almost fully automate their procurement processes while gaining valuable data-driven insights into their procurement transactions.
The eShop and eProcurement solutions will significantly enhance scalability for XOM Materials. The more market players join a platform, the greater the benefits it generates. The solutions prompt buyers and sellers to motivate each other to join. As of December 31, 2019, more than 50 employees worked for XOM Materials at the Berlin, Duisburg and Atlanta locations.
Over 60 suppliers with some 22,000 products and around 700 customers were already registered with XOM Materials by the end of January this year. The volume of sales transacted on XOM Materials also rose steeply last year, by 81% to above €10 million.
Overall, we expect the efficiency gains achieved through the Kloeckner Assistant, XOM eProcurement and other digital applications to contribute more than an additional €100 million to EBITDA by 2022, by which time we aim to generate over 60% of Group sales through digital channels.
As well as expanding our own digital services, Klöckner & Co also invests in start-ups capable of adding value to the onward refinement of our platforms and marketplaces. We connect up with external start-ups via our venture capital entity, kloeckner.v. In the reporting period, we invested an additional €1.5 million each in a Visionaries Club seed fund and growth fund. Investing in this way secures Klöckner & Co access to highly promising start-ups and ideas.
For Klöckner & Co’s digital transformation, we chose an innovative path from an early stage. We were among the first tradition-rich companies to have our own digital hub by launching kloeckner.i in Berlin back in 2014. In kloeckner.i, we have combined Klöckner & Co’s more than century-long experience as an international steel and metal distributor with the agile working methods of a start-up. From here, we drive forward all projects and initiatives related to digitalization and digital networking at the Company. Some 90 employees now work there in Product Management, Software Development, Data Science/AI, Business Intelligence/Analytics, Online Marketing and User Experience/Design.
Many such hubs launched by tradition-rich companies fail due to a non-ideal calibrated relationship with the parent company. Some are too far away to successfully transform innovations into the core business, while others are too close to advance ideas independently using new methods. One of kloeckner.i’s key success factors is striking the right balance relative to the core business. With its location in Berlin, kloeckner.i is sufficiently independent to develop digital applications and platforms using agile start-up methods. Conversely, the relationship is close enough for kloeckner.i to benefit from Klöckner & Co’s broad-based expertise as well as its customer and supplier relationships in order to develop solutions and thus drive forward Klöckner & Co’s digital transformation.
Artificial intelligence (AI) is playing an ever more important role – not just in Kloeckner Assistant and XOM eProcurement. Klöckner & Co has for some years been working on other AI projects with Arago, one of the leading providers in this field. A new joint project, for example, targets AI-supported automation of order block processing and other SAP-based processes. The initial findings already show efficiency gains coupled with a significant decline in manual effort within the processes. As a result, the project has been nominated for the SAP Innovation Award. Going forward, access to improved data analytics incorporating a wide variety of factors will make it possible to predict demand for steel and price trends with much greater accuracy and open up additional growth opportunities through a more detailed analysis of customer behavior.
Digitalization goes hand in hand with change – also at Klöckner & Co. The digital transformation is closely tied to a fundamental change in culture. Our employees understand our digitalization strategy and need to adapt to the accompanying momentum. We are going all out to anchor innovative working methods employed in the start-up scene also in other divisions, as well as fostering in-depth dialog between kloeckner.i and the divisions in the various country organizations.
Nor are we leaving our employees to tackle this major change alone: About the transformation is openly communicated by both the Management Board and the management at the operating organizations, and online training is provided by Klöckner & Co Digital Academy to get our workforce in shape for the digital age. New ideas and innovative communication channels are actively encouraged – for example, discussion across country and divisional borders through our internal social network, Yammer. This promotes an open, hierarchy-free dialog, which in turn generates motivation and inspires trust.
Alongside the numerous digitalization measures, we are, as mentioned above, also exploring two other strategic areas.
Improving our customers’ efficiency over the long term is a priority for Klöckner & Co – not only with our digital solutions, but also by analog means. Time and again, we find that many of our customers still carry out tasks using conventional methods. We add value here, for example, through our investment in 3D lasers, which we can use to combine several tasks such as drilling, sawing and slitting at an attractive price and with significant precision gains. In the UK, for instance, we have built what is the country’s second-largest 3D laser center near Dudley. The first machines have also come into operation in other countries. Group-wide, we already have a total of 16 3D lasers in operation, successfully positioning us in this niche.
At the same time, we are expanding our higher-margin business with higher value-added products. In the reporting period, for instance, we significantly increased the volume for aluminum flat products at our service center in Bönen, North Rhine-Westphalia.
Our US country organization, Kloeckner Metals Corporation (KMC), uses a new product line with an innovative coating process of sheets and profiles for both private architectural and industrial applications. Furthermore, KMC has added to its range of other complex finishing processes for alloy and stainless steel sheet as well as fabricated metal products.
Our decentralized approach with regard to the operating business is also mirrored in measures and projects to enhance efficiency. These are increasingly launched and managed by the respective country organizations in order to secure even faster, more efficient implementation of our strategy.
During the reporting period, we reduced the number of employees in the core functions of the Group holding organizations by some 40% and responded to the ongoing difficult market environment in Europe by launching improvement initiatives. In France, for example, this included a significant concentration of our location network and the partial outsourcing of logistics. Activities in Switzerland have been combined under uniform management to streamline structures there. We also attained efficiency gains in the USA during the fiscal year under review. Three product divisions resulting from multiple acquisitions have been pooled in a single unit. A new structure now amplifies the regional focus.
This year, we are going to further improve our business in Germany by concentrating locally on selected services and adjusting our product range. In the USA, projects geared to outsourcing booking and logistics services will help improve efficiency. There are many other initiatives in our country organizations, such as an optimization of logistical processes in the sale of technical products in Switzerland, which is also being managed locally in view of its local impact. Implementing efficiency programs reduces costs while strengthening the focus on our core competencies.