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©2016 by the Kellogg School of Management at Northwestern University. This case was prepared by Markus Schulze (Kellogg-WHU ’16) under the supervision of Professor Karl Schmedders. It is based on Markus Schulze’s EMBA master’s thesis. The authors are very grateful to Katharine Kruse for editorial support. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.

KARL SCHMEDDERS AND MARKUS SCHULZE KEL942

Solid as Steel: Production Planning at thyssenkrupp

On Monday, March 31, 2014, production manager Markus Schulze received a call from Reinhard Täger, senior vice president of thyssenkrupp Steel Europe’s production operations in Bochum, Germany. Täger was preparing to meet with the company’s chief operating officer and was eager to learn the reasons why the current figures of one of Bochum’s main production lines were far behind schedule. Schulze explained that the line had had three major breakdowns in early March and therefore would miss the planned utilization rate for that month. Consequently, the scheduled production volume could not be carried out. Schulze knew that a lack of production capacity utilization would lead to unfulfilled orders at the end of the planning period. In a rough steel market with fierce competition, however, delivery performance was an important differentiation factor for thyssenkrupp.

Täger wanted a chance to review the historic data, so he and Schulze agreed to meet later that week to continue their discussion.

After looking over the production figures from the past ten years, Täger was shocked. When he met with Schulze later that week, he expressed his frustration. “Look at the historic data!” Täger said. “All but one of the annual deviations from planned production are negative. We never achieved the production volumes we promised in the planning meetings. We need to change that!”

“I agree,” Schulze replied. “Our capacity planning is based on forecast figures that are not met in reality, which means we can’t fulfill all customers’ orders in time. And the product cost calculations are affected, too.”

“You’re right,” Täger said. “We need appropriate planning figures to meet the agreed delivery time in the contracts with our customers. What do you think would be necessary for that?”

“Hm, I guess we need a broad analysis of data to identify the root causes.” Schulze answered. “It’ll take some time to build queries for the databases and aggregate data. And—”

“Stop!” Täger interrupted him. “We need data for the next planning period. The planning meeting for May is in two weeks.”

For the exclusive use of C. Zhang, 2019.

This document is authorized for use only by Cathy Zhang in MGT 508 Winter taught by Steven Henry, DePaul University from Nov 2018 to May 2019.

PRODUCTION PLANNING AT THYSSENKRUPP KEL942

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thyssenkrupp Steel Europe

A major European steel company, thyssenkrupp Steel Europe was formed in a 1999 merger between historic German steel makers Thyssen and Krupp, both of which had been founded in the nineteenth century. thyssenkrupp Steel Europe annually produced up to 12 million metric tons of steel with its 27,600 employees. In fiscal year 2014–2015, the company accounted for €8.7 billion of sales, roughly a quarter of the group sales of its parent company, thyssenkrupp AG, which traded on the DAX 30 (an index of the top thirty blue-chip German companies). Its main drivers of success were customer orientation and reliability in terms of product quality and delivery time.

Bochum Production Lines

The production lines at thyssenkrupp Steel’s Bochum site were supplied with interim products delivered from the steel mills in Duisburg, 40 kilometers west of Bochum. Usually, slabs1 were brought to Bochum by train and then processed in the hot rolling mill (see Figure 1). The outcome of this production step was coiled hot strip2 (see Figure 2) with mill scale3 on its surface. Whether the steel would undergo further processing in the cold rolling mill or would be sold directly as “pickled hot strip,” the mill scale needed to be removed from the surface.

The production line in which Täger and Schulze were interested, a so-called push pickling line (PPL), was designed to remove mill scale from the upstream hot rolling process. To remove the scale, the hot strip was uncoiled in the line and the head of the strip was pushed through the line. The processing part of the line held pickling containers filled with hot hydrochloric acid, which removed the scale from the surface. Following this pickling, the strip was pushed through a rinsing section to remove any residual acid from the surface. After oiling for corrosion protection, the strip was coiled again. The product of this step, pickled hot strip, could be sold to B2B customers, mainly in the automotive industry.

Other types of pickling lines were operated as continuous lines, in which the head of a new strip was welded to the tail of the one that preceded it. The differentiating factor of a PPL was its batching process, which involved pushing in each strip individually. Production downtimes due to push-in problems did not occur at continuous lines, but with PPLs this remained a concern. Nevertheless, thyssenkrupp chose to build a PPL in 2000 because increasing demand for high- strength steel made it profitable to invest in such a production line. At that time, high-strength steel

1 Slabs are solid blocks of steel formed in a continuous casting process and then cut into lengths of about 20 meters. 2 A coiled hot strip is an intermediate product in steel production. Slabs are rolled at temperatures above 1,000°C. As they thin out they become longer; the result is a flat strip that needs to be coiled. 3 Mill scale is an iron oxide layer on the hot strip’s surface that is created just after hot rolling, when the steel is exposed to air (which contains oxygen). Mill scale protects the steel to a certain extent, but it is unwanted in further processes such as stamping or cold rolling.

Figure 1. Source: thyssenkrupp AG, http://www.thyssenkrupp.com/en/presse /bilder.html&photo_id=898.

Figure 2. Source: thyssenkrupp AG, http://www.thyssenkrupp.com/en/presse /bilder.html&photo_id=891.

For the exclusive use of C. Zhang, 2019.

This document is authorized for use only by Cathy Zhang in MGT 508 Winter taught by Steven Henry, DePaul University from Nov 2018 to May 2019.

KEL942 PRODUCTION PLANNING AT THYSSENKRUPP

KELLOGG SCHOOL OF MANAGEMENT 3

grades could not be welded to one another with existing machines, and the dimensions (at a thickness of more than 7.0 millimeters) could not be processed in continuous lines.

The material produced on the PPL was not simply a commodity called steel. Rather, it was a portfolio of different steel grades—that is, different metallurgical compositions with specific mechanical properties. (For purposes of this case, the top five steel grades in terms of annual production volume have been randomly assigned numbers from 1 to 5.) Within these top five grades were two high-strength steel grades. These high-strength grades were rapidly cooled after the hot rolling process—from around 1,000°C down to below 100°C. Removing the mill scale generated during this rapid cooling process required a different process speed in the pickling line. Only one of the five grades could be processed without limitations in speed and without expected downtimes.

Performance Indicators

At thyssenkrupp, managers responsible for production lines needed to report regularly on the performance of the lines and the fulfillment of individual objectives. The output, or throughput, of the production lines had always been an important metric. Even today, coping with overcapacities and customers’ increasing demands concerning product quality, the line throughput was part of the set of key performance indicators. These indicators were taken into account for internal benchmarking against comparable production lines at other sites. The line-specific variable production cost was calculated as cost over throughput and was expressed in euros per metric ton. Capacity planning was based on these figures, eventually resulting in delivery time performance. In the steel industry, production reports contained performance indicators at different levels of aggregation. A very important metric was throughput (tons4 produced) per time unit5; the performance indicator run time ratio6 (RTR) was the portion of time used for production (run time) compared to the operating time of a production line.

Operating time = Calendar time – (legal holidays, shortages,7 all scheduled maintenance) Run Time = Operating time – (breakdowns, exceeding downtime for maintenance, set-up time)

Both figures were reported not only on a daily basis (i.e., a 24-hour production period) but also monthly and per fiscal year. Deviations from planned figures were typically noted in automated reports containing database queries. Thus, every plant manager received an overview of past periods. Comparable production lines of different sites were benchmarked internally.

Deviation from Planned Throughput

Steel production lines had typical characteristics and an average performance calculated based on an average production portfolio, mostly determined empirically using historic figures. For planning purposes, a fixed number was usually used to place order volumes on the production lines

4 Throughout this case, the term “ton” refers to a metric ton. 5 Tons produced are usually reported by shift (eight hours), by month, and eventually by fiscal year. 6 The metric run time ratio is calculated as run time over operating time (e.g., 8 hours of operating time, or 480 minutes, with 48 minutes of downtime yields a RTR of 90%). 7 Shortages can refer to material shortages, lack of orders, labor disputes, or energy/fuel shortages (external).

For the exclusive use of C. Zhang, 2019.

This document is authorized for use only by Cathy Zhang in MGT 508 Winter taught by Steven Henry, DePaul University from Nov 2018 to May 2019.

PRODUCTION PLANNING AT THYSSENKRUPP KEL942

4 KELLOGG SCHOOL OF MANAGEMENT

and in this way “fill capacities.” On a monthly basis, real orders then were placed to a certain amount, which was capped by the line capacity. Each month’s production figures had three possible outcomes.

The first possibility was that the planned throughput would be reached and at the end of the month there would be extra capacity. In this case, the extra capacity would be filled with orders from the next month if the intermediate product already were available for processing. Otherwise, the line would stand still without fulfilling orders. This mode was very expensive because idle capacity would be wasted, and fixed costs occurred anyway.