Steel Industry and Cost Control
Steel Industry and Cost Control
The production cost represents the fundamental indicator of the organizational performance. It determines efficient working of the organization. It has a very high impact on the organizational profitability and its bottom line.
Control is an activity of verifying whether the set objectives are being achieved as planned. Control activity is carried out through monitoring and analysis of the data related to the activity. The monitoring and analysis of the data indicates whether the facts or events are taking place as laid down in advance by those responsible. The activity of monitoring and analysis also determines the deviations which appear between what has been proposed to achieve and what has been achieved, identifying the causes of deviations, so that the people responsible for the activity can take appropriate decisions for the corrective measures to eliminate the deviations. This helps in preventing bigger future deviations taking place, in case there are no corrective measures in time. In other words, through control, the negative elements are identified so that they can be gradually eliminated for ensuring a healthy continuity of the activity.
The cost control in the organization is done by carrying out the cost analysis which identifies the opportunities to improve the production process parameters, and the product (design, and quality). The process of cost control in the organization (Fig 1) represents all the decisions taken periodically by providing the analyzed data to the managers and other responsible for the cost. The data regarding deviations is identified through comparison between actual costs (realized) with the planned (standard) costs and has a purpose of taking some corrective measures through appropriate decisions by the management for controlling the cost of producing the products. Cost control is a part of the administrative controls which the organizational management exercises for the management of the organization.
Fig 1 Process of cost control
The process of the cost control is carried out by preparation of the cost sheets. Detailed cost sheets along with cost variance analysis are prepared for each operational step in the production of the saleable product. Cost sheets are prepared based on the scientific principles and hence they reflect accurately the areas where corrective actions are needed for effective cost control. Cost sheets are normally prepared periodically for example every monthly based on previous month data. The annual cost sheets are prepared based on the yearly data. Standard cost parameters are normally those parameters on the basis of which monthly / annual budgets are made. Fig 2 shows the cost variance analysis model.
Fig 2 Cost variance analysis model
The two components of the production cost are (i) variable cost, and (ii) fixed cost. Variable costs are those costs which vary depending on the production volume. These costs rise as production increases and fall as production decreases. Variable costs differ from fixed costs which tend to remain the same regardless of production output.
The major components of the variable cost are (i) cost of raw materials (main and auxiliary), (ii) cost of energy (fuel and power), (iii) cost of utilities (industrial gases, water, and compressed air etc,), (iv) cost of maintenance (spares, consumables like lubricating oil, grease etc.), (v) cost of refractories, (vi) cost of operational changeables (rolls, guides, shear blades etc.), (vii) cost of manpower (regular, and contractual), and (viii) cost of operational overheads. The components of fixed costs are (i) depreciation, (ii) interest on fixed capital, (iii) interest on working capital, and (iv) cost of organizational overheads.
The specific variable cost (variable cost / unit of product) is dependent on the efficiency of the operational performance and practically do not depend on the volume of production. On the other hand specific fixed cost (fixed cost / unit of product) is heavily dependent on the production volume. That is, higher the production volume, lower is the fixed cost component in the product cost.
The cost control process in a steel plant is a multivariate system which is subjected to a large number of inter- influencing variables affecting the cost performance of the steel plant. It is necessary to isolate the inter influence of the variables to understand the role played by the each variable on the cost performance of the steel plant. Major variables affecting the cost performance of a steel plant are discussed below.
Productivity – It is the specific rate of production. It is normally given as per unit volume or per unit area of the furnace or per unit time. Higher is the productivity of the units of a steel plant, lower is the cost of production. Higher productivity results in better utilization of plant and equipment.
Production – Production is the physical output from a unit. For good cost control, it is necessary that each unit of the steel plant is run to its maximum capacity. When production from a unit is lower than its capacity then there is an increase in the specific consumption levels. Also, when a unit is under-utilized then there is a higher fixed cost (over heads, depreciation, interest etc.) component which gets loaded on per unit of product output. Further, it is needed that the capacity of each succeeding unit is to match with the preceding unit so that there is no under-utilization of any unit.
Raw materials – In the present day scenario, raw materials contribute to major cost of production. Hence, the specific consumption of the raw materials is to be not more than what is needed by the technological requirement of the process. Any wastage of raw materials and their deterioration during storage is to be totally avoided. Further, the quality of the raw materials plays very important role in cost control. Lower quality raw materials though cheaper per ton results into higher consumption of not only of its own but also of other raw materials. It also increases the heat requirement in the furnaces and results in higher consumption of fuel and energy. This has a big effect on the specific cost of the product.
Fuel – All metallurgical processes in a steel plant takes place at high temperatures and hence they are fuel intensive. Further, the cost of fuel is always on the increase. Hence, specific consumption of the fuel is required to be controlled within the limits as needed by the employed technology. It is necessary for the management to give priority for the technology up-gradation in this area so that the specific consumption of the fuel can be reduced. Pay back periods of such up-gradations are normally short which justify the capital expenditure for such modifications. Hence, these are to be carried out without any hesitation.
Energy – Besides fuel, there are other forms of energy which are being used in a steel plant. Out of these, electrical energy has a substantial contribution to the cost of production. The quality of electrical power (power factor) is very important since it has a big contribution on the energy consumption and hence to the cost. To reduce electrical consumption there need to have the correct motor ratings. The idle running of the motors is also to be controlled. Further modifications are needed to be carried out wherever feasible to switch over to hydraulic drives and variable frequency drive motors for reduction in specific power consumptions. Another area, where large potential of power saving is normally available is in the area of shop lighting.
Utilities – Under the category of utilities comes industrial gases (such as oxygen gas, nitrogen gas, argon gas etc.), acetylene gas, compressed air, steam, and water etc. This is the area where cost control steps can be very effective. Pipeline leakages of the utility gases in the air which are normally ignored, need to be controlled by regular inspection and maintenance since these leakages have considerable contribution to the cost of production.
Manpower – In several developing countries, there is still an impression among people that the manpower cost is low and hence there is normally a tendency to go for labour intensive technologies since these technologies are normally low in capital costs. Plants constructed with such philosophies falls into trap of higher production costs after a lapse of time. Further, higher dependence on human workforce means more probability of human related errors and hence lesser reliability of the processes and equipment. Also, in the case of the labour intensive technologies, motivation of the workforce is very important for the output. Any drop in motivation means lower production and hence higher cost. Investments in automation level of the plant contribute a lot towards the cost reduction. Investment in automation also normally has a low payback period.
Maintenance – Planned preventive maintenance of the plant and equipment ensures high availability of the plant and equipment for production. When the timely and proper maintenance of plant and equipment is neglected then there are normally higher levels of equipment breakdowns. This results into unplanned disturbances of the processes. Process disturbance can cause either lower output or fluctuations in the product quality or both. This has big cost implications. Hence, saving on maintenance is always counter-productive and is not to be practiced if the aim is to reduce overall costs.
Inventory – Inventory is a double edged sword as far as cost is concerned. Large inventories means blocked working capital and interest on this capital increases the cost. On the other hand if a process is to stop due to non availability of a raw material, intermediate product, utilities, consumable, or a spare part then there is a process disturbance besides fall in production. This has an impact on the cost which normally increases. Hence, the inventory is to be kept at the optimum level based on the actual consumption in the previous years so as to reduce the cost implication either way.
Technology – Technology is another area, where maximum attention is needed if the cost of production is to be kept low. All those technologies which reduces consumption of raw materials, fuel, energy and utilities and improve the quality of products are to be selected for adoption even if they are having higher capital cost. The increase in the capital cost normally get paid off in a short time but the advantages gained by lower consumption and improved product quality normally remain for the life time of the plant.
Recycling of waste – Most of the processes in a steel plant generates a large amount of solid (dust, sludge, scale, scrap and slag etc.) or liquid wastes. These wastes if recycled back reduce the consumption of raw materials, fuel, and water. Investments needed for recycling these waste materials has very short pay back periods. Hence for the sake of effective cost control, these investments are to be made with priority.
Recovery of waste energy – Recovery of waste energy has a major contribution in the cost reduction. Waste gases from the processes are normally at very high temperatures and contain a lot of heat energy in them. This energy can also be in the form of chemical energy. Letting out of these waste gases in the air is similar to the throwing of valuables in a river. Recovery of these waste energies results into lower consumption of fuel and hence results not only into lower specific energy consumption but also results into lower emissions of carbon dioxide which is a green house gas.
Product mix – Steel plant is required to have a product mix which maximizes the margins. The tendency to sell higher intermediate products so has to have higher sale volumes is to be resisted. The production and the sale of the finished products are to be maximized since it covers the larger area of the fixed costs. Here comes the importance of forward integration. Further production of value added products need to be optimized since in integrated steel plants these products can be produced only with a marginal additional cost.
Process control and quality control – Effective process control and quality control are very essential for the cost management in a steel plant. These controls improve product yields and reduce production of rejects, seconds, and diverted materials to lower grades and hence aids in cost management.
Pollution control measures – some steel plant managements think that pollution control equipments are a burden on cost since they need not only investments but also power and consumables to operate. However, this thinking is not based on the hard facts. Pollution control equipment recovers a large amount of dust, sludge and scale etc. which when recycled back save a large amount of raw materials. Without the pollution control measures not only these materials get lost permanently but also heavy pollution of the environment takes place.
Safety – Safe working of the processes and equipments aids to the cost management. The unsafe working can cause process disturbances, equipment breakdowns and injuries to the operators. This in turn means loss of production and increase in the costs. Further any injuries to the working persons bring down the morale and efficiency of the workforce which again results into production loss.
Besides the above, there are three basic rules regarding costs namely (i) cost of quality (ii) tip of the iceberg and (iii) 1-10-100 rule, which are to be followed while taking important decisions with respect to the costs. These rules help the steel plants in cutting the costs without affecting its capabilities in the long run. These rules are described in article https://www.ispatguru.com/basic-rules-regarding-costs/.