As a pioneer in our industry, we have been consistently driving forward our digital transformation for several years as part of the “Klöckner & Co 2022” strategy, with the result that we already generated some 42% of Group sales through digital channels in the third quarter of 2020. After focusing on customer interfaces at the start of this transformation, digitalization of the end-to-end process from ordering to delivery to customers is now moving to center stage. Through the resulting automation of our core processes, Klöckner & Co is evolving into a platform company. This type of company is characterized by much lower variable costs, which is ultimately the key to profitable growth.
We are using our Kloeckner Assistant and XOM eProcurement applications to automate our core functions of sales and procurement. In addition to transforming our core processes, we have created XOM Materials, a procurement and sales platform for all products and services associated with the manufacturing industry that is also open to competitors.
Alongside digitalization and platforms, further pillars of our corporate strategy include expanding 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.
The AI-based Kloeckner Assistant turns all Klöckner & Co customers into digital customers, without them having to change their procurement processes. Our customers can send requests for quotes or orders to Klöckner & Co by email with PDF attachments, by fax or phone as before and immediately receive an offer or order confirmation. Going forward, processing will be fully automated which will not only significantly reduce manual effort, but also considerably accelerate the previously complex and universally time-consuming ordering process from quotation request to offer preparation and order input. During the reporting period, a first version of Kloeckner Assistant was successfully rolled out to almost all country organizations. While the implementation initially focused solely on order processing, a functionality for processing requests for quotes will already be added in the second half of the year. During the first half-year, a sales volume of more than €80 million was placed by around 1,300 customers using Kloeckner Assistant. The digital application was able to learn from over 20,000 documents and improve its accuracy.
The new AI-based XOM eProcurement solution considerably simplifies procurement and resource planning for customers. It automates the reconciliation of materials supply and demand in addition to supporting 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 and previously inaccessible data-driven insights into their procurement transactions. Klöckner & Co is already using the eProcurement solution for a large proportion of its procurement activities in Europe, with its main suppliers now connected to the XOM Materials platform in this way.
Besides the new XOM eProcurement solution XOM Materials as an open platform connects, via the XOM Marketplace, 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 makes it easier for suppliers to enter online selling. The eShop and eProcurement solutions significantly enhance the scalability of XOM Materials. The more market players join a platform, the larger is the benefit it generates and through the solutions buyers and sellers motivate each other to join.
Through project “Surtsey”, we are utilizing the COVID-19 crisis to significantly accelerate our transformation into a platform company. Moreover, we are further optimizing our location network by closing 19 smaller branches and reducing costs throughout the organization. As a result of our advanced digitalization and optimization of our location network and cost structure, the number of employees will be reduced by a total of more than 1,200.
The one-time expenses triggered by the restructuring measures in 2020 will pay off in the form of a significantly improved earnings situation and lower funds tied up. We expect to achieve an improvement in operating income of more than €100 million by the end of 2021. By that time, more than 50 % of our Group sales will already be generated via digital channels.
With the higher profitability achieved through "Surtsey" and the increased level of digitalization, we are creating the conditions to realize further growth potential, also by taking a more active role in further market consolidation.
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.
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.