The metals industry faces a number of unique challenges that put significant pressure on its supply chain planning operations. This is particularly relevant as the industry emerges from the recent economic downturn.

The main characteristics of the metals industry are summarized in the left column of the  following diagram; some of them have been relevant for a long time (marked in green) whereas some only became important more recently (marked in cyan). The right column contains the main challenges that the industry faces as a direct consequence of its characteristics.



challenges of the metals industry


Despite the consolidation efforts of the last 20 years, the metals industry remains highly fragmented. This is evident across several layers of the business, including raw material suppliers, processing facilities and key customers like automotive and construction entities. This fragmentation leads to a high operational cost for serving the global market. Likewise, a better utilization of production assets is possible. The combined R&D resources can also be better leveraged.  Facing these challenges the industry keeps looking for attractive consolidation deals in order to increase price leverage and economies of scale.

Extreme market cyclicality is a long time characteristic of the industry. Cycles of boom or bust are normal and can be tremendously severe. Demand fluctuations can be enormous. Note that the strength and duration of downturns is changing significantly in recent years with the trend being for shorter but deeper disruption cycles. To cope with such industry market conditions, metals companies try to expand downstream in a vertical way adding products with higher value and more stable demand. Manufacturing elevators or ship building is a way to diversify the product portfolio.

The rapid expansion of manufacturing in emerging countries has increased the commoditization of standard product offerings and has led to price erosion. This is despite the fact that many metals products are still engineered to order, something that puts significant pressure on the operational costs. Therefore, many metals companies move towards offering differentiated services. They adopt strategies to reduce lead time, improve delivery performance and managing inventories for their customers. Clever inventory positioning on semi-finished products (e.g. slabs of standard characteristics) is also in the agenda.

The cost of  buying and procuring raw materials has been increasing significantly until recently due to the high demand for metals products. Companies have adjusted by negotiating longer supplier contracts, meaning that their flexibility in market downturns has been reduced. Given high transportation costs, they are making strategic decisions about repositioning basic manufacturing facilities closer to the raw material source in order to gain from cost efficient production and at the same time improve the efficiency of transportation. However, the increased distance between manufacturing and traditionally strong markets needs to be carefully aligned so that it doesn’t have negative effects like poor delivery performance or high inventory levels of semi-finished goods.   

Finally the combined pressure of high energy costs and carbon emission limits creates a novel constraint, in an industry typically driven by a need for high utilization of expensive facilities. This increases the necessity for operational cost reductions while at the same time asset utilization and delivery performance need to be kept at acceptable levels.

The characteristics and challenges that we analyzed in this article have a direct impact on supply chain operations. The underlying root causes and opportunities are analyzed in a different article.