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Chapter 15: Waste of transportation  

2012-06-24 12:14:58|  分类: Buffer Mentality |  标签: |举报 |字号 订阅

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In 1994, during one of NatSteel Ltd’s Board of Directors meetings, members of the board of directors agreed to take preventive action against the possible threat by Perwaja Steel, a state-owned steel mill in Malaysia that was growing its market share aggressively in Malaysia.

Fueled by its aggressive expansion plan, the board of directors felt the imminence that Perwaja would export rebars into the Singapore market. Naturally, fierce competitions would result in severe price erosion which would adversely affect profit margins.

I thought to myself, “The main question for Perwaja Steel is how long it can last without calling in the receivers. Nobody knows how much money it is losing. The reported financial statements were certainly not reflecting the truth.

Corruption is so rife and out of control in Malaysia. It is even more rampant in a state-owned company. It is not difficult to imagine the reason behind installing Mr. Eric Chia[1] who has only 4 years of primary education, the CEO of Perwaja Steel. I was born and raised in Malaysia and I have seen many such cases.”

In the production of steel rebars, scrap metal is melted into molten steel, cast into billets and lastly rolled into rebars. Perwaja Steel started building its steel mill in the state of Terengganu on the east coast of the Malaysian Peninsula.

Building the steel mill in Terengganu was a right decision. The cost of heating up the scrap metal to 1,550 degrees Celsius constitutes the highest variable cost in steel making. Off the shore of Terengganu, are Malaysia’s richest gas fields. Petroleum gas was piped in directly from these gas fields to the steel mill.

Perwaja Steel uses petroleum gas as a cheap source of heating fuel to melt scrap metals and to cast the molten steel into square billets of one-and-a-half tons each. These billets were sold to the other rolling mills in Malaysia replacing the import of steel billets from Brazil and Turkey.

All other older steel mills in Malaysia, which use electricity from the national electricity grid, feared Perwaja Steel for its ability to produce steel billets at a much lower cost. It was their most formidable competitor.

A few years later, Perwaja Steel decided to build its own rolling mill to fully utilize its richly accumulated earnings. They wanted to invest by building one of its own downstream rolling mills.

That decision caused tremors among the local rolling mills. Even if the influence of the state were to be removed, they know they can’t compete with Perwaja Steel on a cost per ton basis. Its energy cost is too low compared to the other rolling mills.

Soon, the Prime Minister of Malaysia announced that the rolling mill was going to be built in Kedah, a state on the northern west coast of Malaysia. The distance separating the rolling mill in Kedah and the steel mill in Terengganu is at least 800 kilometers apart. The reason given was the Prime Minister wanted to provide employment to his fellow citizens in his own election constituency.

It was a great relief deep in the hearts of the managers of the existing rolling mills in Malaysia. They knew it would cost Perwaja Steel a lot of money to move billets from Terengganu to Kedah over such great distance.

In addition, the hot billets would have cooled down to room temperature over the 800-kilometer journey. To reheat the billets from room temperature back up to 600 degrees Celsius would consume a lot of energy. That costs money. Perwaja Steel would not be competitive anymore. That was a certainty.

The rolling mill was built in Kedah. A transport company was formed to transport billets from Terengganu to Kedah. The rates given to the transport company was so good that trucks from this company on the return trip from Kedah back to Terengganu would travel empty. It was totally zero revenue on this leg of the journey.

I coined a name for this journey in which the billet traveled: “the world’s longest conveyor on wheels”. Essentially, this conveyor was made up of a fleet of heavy duty trucks each towing a forty-footer trailer of laden weight capacity of twenty-four tons.

 

Figure 15-1: The distance between the two mills is 800 kilometers apart


     Each trailer would be loaded with just sixteen pieces of the hot billets from the steel mill in Terengganu and first traverses across the entire breadth of the Malaysian Peninsula and then winds all its way up north to the rolling mill in Kedah over a total journey of 800 kilometers. By the time the trucks reach Kedah, the hot billets had become cold billets.

On its way back to Terengganu the trailers traveled empty without any load at all. The rate for a single one-way trip had already factored in the cost of the return journey. The one-way journey takes a day and the return trip takes another day. Can you imagine how large the fleet size is and the number of truck drivers involved? And how much it incurred in transportation cost?

A few years later, Perwaja Steel announced it lost more than five billion Ringgits (US$ 1 = 4.8 Ringgit).  

 

Illustration #1: A cost-conscious steel mill  

 

Back in Singapore, the general manager in NatSteel Ltd ordered the fabrication of a mechanized roller conveyor to link up the billet casting machines to two of the adjacent rolling mills. The total length of the conveyor is about twenty meters.

Hot billets of temperatures of about 800 degrees Celsius are transported directly into the reheating furnaces in a matter of two minutes. There is not much drop in billet temperature over the two-minute journey. In fact the billets hardly need to be heated up at all. Minimum amount of fuel is needed to maintain the billet reheating furnace at a constant temperature.

The cost for NatSteel Ltd to move the billets from the billet casting machine to the reheating furnaces of the rolling mills is negligible.

Before the introduction of the roller conveyor system, billets from the casting machines were stored in the billet yard next to the casting machine. As and when billets were scheduled to be rolled into rebars, the billets were hoisted onto internal transport trucks. The trucks travel across the billet yard to move billets over to the billet yard of the rolling mill. The billets were stacked up to ten meters in height.

As and when the billets were scheduled to be charged into the reheating furnace, the over-head crane hoisted them from the billet yard to the reheating furnace. At the charging door of the reheating furnace, these billets were at room temperature. Although the difference in NatSteel’s transport cost compared to Perwaja Steel’s was negligible, yet the management of NatSteel Ltd went ahead to install the roller conveyor to save transport costs.

 

Figure 15-2: Eliminate waste of transportation by installing a roller conveyor system

     To move billets over a journey of 800 kilometers is beyond the wildest imagination of anyone who has a little knowledge about economics. It is a complete waste of transportation. Though transportation is a necessity to move products between the various processing stations or machines, such transportation costs could and must be minimized. Perwaja Steel did the opposite.


[1] Mr. Eric Chia was on the run for several years before finally returning to Malaysia to answer corruption charges. This was after Perwaja Steel announced multi-billion Ringgit losses accumulated over several years under his stewardship.

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