As a pioneer in our industry, we have been systematically driving forward our digital transformation under the “Klöckner & Co 2022” strategy for several years now, and we accelerated this to a new level in the reporting year. As a result, we already achieved some 45% of sales via digital channels in the fourth quarter of 2020, as against 32% in the prior year. After the initial focus on customer interfaces, we are now digitalizing the end-toend process, from ordering all the way through to shipment. As we do so, we are transforming Klöckner & Co more and more into a platform company, with much lower variable costs.
The core applications here are our Kloeckner Assistant and XOM eProcurement, with which we are automating our key procurement and sales processes. Alongside the transformation of Klöckner & Co, we have continued to upscale the XOM Materials platform for materials and services, which is open to competitors.
Steel and metal distribution continues to be characterized by volatile prices and intense competition. Linear supply chains and a lack of transparency also make the industry highly inefficient. Digital platforms break up such linear structures by fully integrating all market players into a single digital network. They cut out prevailing inefficiencies to optimize stockholding while reducing transaction and selling costs.
With our proprietary marketplaces and the XOM Materials open industry platform, we are the sole competitor in the industry to meet all of today’s B2B customer needs by fully interconnecting market participants.
Since last year, the AI-based Kloeckner Assistant has turned all Klöckner & Co customers into digital customers without the need to change their procurement processes in any way. They can still send requests for quotes or orders to Klöckner & Co by email or PDF and promptly receive a quote or an order confirmation. Going forward, processing will be largely automated. This will not only significantly reduce manual effort, but also considerably accelerate what has always been a complex and time-consuming ordering process for both sides – from quote request and offer preparation right through to order input. During the reporting period, Kloeckner Assistant was rolled out across almost the entire organization and processed some €320 million in sales with 4,300 customers. This means that it already exceeded its operational targets in the first year it was implemented. In the process, the digital application – which is under continuous development – was able to learn from and improve its accuracy against over 90,000 documents. We already expect to process sales of over €1 billion via Kloeckner Assistant this year.
Alongside the digital transformation of Klöckner & Co, in XOM Materials we have created a purely virtual platform company that also allows competitors to sell their products and services. Since last year, in addition to the Marketplace and eShops, the platform has also included the new XOM eProcurement solution. This helps buyers by greatly simplifying procurement and material requirements planning. It automatically matches buy and sell quantities, enabling direct contract negotiations, call-offs and access to current information on availabilities and orders. Using the application, XOM Materials customers – including in the US and Brazilian markets since the start of the year – can fully digitalize their procurement processes. This enables customers to gain valuable and previously concealed data-driven insights to further improve their procurement processes. Over the course of 2020, XOM Materials grew by over 1,300% on the prior year and exceeded a gross merchandise volume (GMV) of €140 million. A GMV of around €1 billion is planned for 2021.
We responded decisively to the COVID-19 crisis during the reporting period by launching the Surtsey project immediately after the outbreak of the pandemic. This takes advantage of the opportunities presented by the crisis while substantially accelerating our transformation into a platform company. As part of the project, we will close 19 smaller branches by the end of the fiscal year and reduce our workforce by a total of more than 1,200 employees (FTEs). Implementation of the measures is proceeding according to plan, with 16 sites already closed and the workforce reduced by around 1,000 as of January 2021.
The restructuring expenses incurred for Surtsey in the past fiscal year will pay off in the long term through a considerably improved earnings situation and lower working capital. This optimized cost structure was already noticeable in the second half of 2020 and substantially reduced the negative earnings impact of the COVID-19 pandemic. We expect that the measures under the Surtsey project will contribute over €100 million to operating income. By the end of the current fiscal year, we will already be generating over 55% of Group sales via digital channels. This places us well on track to exceed our original target of 60% digitally generated sales in 2022. With higher profitability as a result of Surtsey and the increased digitalization level, we are paving the way for unlocking additional growth potential.
We were among the first traditional companies to establish 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 traditional companies fail due to a less than ideally calibrated relationship with their parent company. Some are too far away to successfully transfer 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 between proximity to and distance from the core business. With its office located 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.
In addition to 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 and to the improvement of our operating processes. Investing in this way secures Klöckner & Co access to highly promising start-ups and ideas. We connect up with external start-ups via our venture capital entity, kloeckner.v. In the reporting period, we expanded our start-up network with additional investments totaling some €3 million in venture capital funds and a €2 million investment in tech start-up Keelvar Systems. Keelvar develops software solutions to automate and optimize procurement processes with AI-driven bots. The COVID-19 crisis in particular has shown that stable and efficient procurement processes are a key competitive advantage to which technological innovations can contribute significantly.
The digital transformation of our business is inseparably tied to fundamental cultural change within Klöckner & Co. Our employees understand our digitalization strategy and are adapting to the momentum it brings. We are working systematically to establish innovative working methods from the start-up scene in other parts of the Company, as well as fostering in-depth exchange between kloeckner.i and units in the various country organizations.
We are not leaving our employees to tackle this major change alone: both the Management Board and the management teams at our operating organizations communicate openly and across hierarchical lines on our transformation. In addition, online training is provided by the in-house Digital Academy to get our workforce in shape for the digital age and continuously build the organization’s digital IQ. The courses are highly popular, with course registrations doubling to total over 9,000 in the reporting year.
New ideas, bold experimentation and the use of innovative communication channels are actively encouraged – for example, discussion in our internal social network, Yammer, and straightforward collaboration between subject-matter experts using Microsoft Teams. This promotes open, hierarchy-free dialog across country and divisional borders, which in turn generates motivation and inspires trust.