How to Improve Labour Productivity in Iron and Steelmaking Operations

Introduction

Whilst the biggest variable costs for most iron and steel plants include raw materials and energy, the biggest components of fixed cost generally include labour cost. This is especially so in the developed world where a typical blue-collar salary can come to $25,000 per year or more. In this article, the author discusses a number of different approaches to reducing labour costs through emphasis on productivity improvement.

Productivity Differences in the Industry

Whilst some differences in productivity are always evident in different steelmaking processes, very large differences are also often apparent when looking at nearly identical plants. This is especially so if comparisons are made between state-owned and privately owned steel businesses. A typical modern European integrated flat rolled steel plant producing 2.5 millions tonnes of flat products can today be expected to employ around 3000 people. A plant of the same size in some parts of Eastern Europe can at the same time employ ten or even twelve thousand people. It should be stressed that some of this productivity difference is not real, because the comparison is not strictly fair. Quite commonly,

the high productivity plant may be outsourcing many services (e.g. transport services, IT, canteen operations)

the low productivity plant may be providing social or welfare-related activities (e.g. offering hospital or recreational facilities).

However, much of the productivity difference discussed above often is very real and arises because of differences in organizational structure, so that – even on a like for like basis – a three-fold difference in productivity can still be apparent. Low hourly labour costs in many countries do of course mean that poor productivity is not always as problematic as it might at first seem. Nonetheless, as business profitability falls or other performance pressures come about (e.g. changes of ownership, as for example through privatization) so the question arises as to how productivity might significantly be improved.

Lessons from the Past

Lessons from restructuring of state-owned companies such as British Steel are instructive. In the case of the UK steel maker, productivity improvement (beyond that relating to modernization and the introduction of new technology) was achieved in two ways:

First, organizational structure was streamlined by the removal of organizational layers. Why have seven or eight organizational layers when four or five will do? Reduction in the size of the employment pyramid is the key technique here. Firms such as Nucor in the USA (which has just four organizational layers from CEO level down to shop floor level) have applied this very successfully

Second, job flexibility was introduced. The point here is not to have separate teams of utility workers specialised in maintenance of gas, electricity and water services – when a single (better trained) team might be sufficient. Such job flexibility applies not just to utilities; but also to engineering (civil, mechanical, etc), maintenance (iron making, steel making, rolling), transport etc – and can similarly lead to a major reduction in total employment.

Plans for the Future

The common measure of plant productivity in the iron and steel industry is referred to as man hours per tonne (MHPT). Thus, assuming a 40 hour week and a 48 week year, a 2.5 million tonne steel plant with three thousand employees would have a productivity of 2.3 MHPT. Thirty or forty years ago, this plant might have had a productivity of only 7.5 or perhaps even 10 MHPT. The management challenge for many steel plants today is to:

establish their current productivity

assess competing plants to understand potential productivity

to set targets for achievement of better productivity performance – with removal of unnecessary management layers and introduction of greater job flexibility [“multi-skilling”] being at the heart of any substantial productivity improvement initiative.

Without measurement there cannot of course be control. External expert support can considerably assist however in facilitating the productivity improvement programme.