How the steel industry can contribute to productivity ... · While many sectors of the global ......

How the steel industry can contribute to

productivity improvements in construction

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2McKinsey & Company

Contents

Productivity growth in the construction sector has been low

Approaches for productivity growth in the construction sector

How the steel industry can contribute

3McKinsey & Company

While many sectors of the global economy have experienced quantum leaps in productivity,

construction methods remain largely unchanged

1 Cumulative real growth in the United States, %, 1947-2010

SOURCE: US BLS: World KLEMS

Circa 1940s Circa 2016

Productivity

Growth1, %

From To

1,512Leveraged scale through land assembly and

automation; deployed advanced bioengineering

to increase yields

760Implemented entirely new concepts of flow,

modularized and standardized designs, and

aggressively automated to increase production

699Utilized scale advantages and cutting edge

logistics to reduce costs and provide affordable

goods to the masses

6Limited improvements in technological

capabilities, production methods, and scale

Key advances

Agriculture

Manufacturing

Retail

Construction

Mining &

quarrying

42Relied on technological, environmental, and

safety advances to achieve modest productivity

improvements

4McKinsey & Company

Productivity challenge cuts across all geographies and economies, with the construction sector’s

productivity growth lagging average productivity by 1.8%

-3.1-3.0-2.8

-2.6

-2.6-2.4

-2.3-2.1

-2.0-2.0

-2.0-1.9

-1.7-1.7

-1.3

-1.2-1.2

-1.1-1.1

-0.9-0.9

-0.8-0.8

-0.8-0.7

-0.6-0.5

-0.5

-0.5

-0.4-0.3

-0.1

0.10.30.50.5

1.11.2

-3.5

Nig

eria

Chin

a

India

Czech R

epublic

United S

tate

s

Slo

venia

Chile

0

Egyp

t

Arg

entina

Denm

ark

Mala

ysia

Saudi A

rabia

Austr

ia

Thaila

nd

Fra

nce

Bra

zil

Indonesia

Mexic

o

Isra

el

Japan

Italy

Spain

Turk

ey

Sw

eden

Austr

alia

Belg

ium

South

Afr

ica

Gre

ece

-1.8%

aggregate

productivity

differential

Eth

iopia

-9.1

Kore

a

Neth

erlands

Lithuania

Slo

vak R

epublic

Sin

gapore

Hungary

Germ

any

Colo

mbia

United K

ingdom

Port

ugal

Canada

Russia

SOURCE: OECD Stat; EU KLEMS; Asia KLEMS; World KLEMS; KSA CDSI; KSA MoL, GGDC-10, Oanda,

1 Countries with a shorter times series due to data availability: France, Israel, Czech Republic, Malaysia, Russia (1995-2014), Australia, Japan, Argentina, Brazil, Chile, Mexico, South Africa, Nigeria, Ethiopia (1995-2011), Belgium (1995-2014), Turkey

(2005-2015), Colombia (1995-2010), Egypt (1995-2012), China (1999-2014), Thailand (2001-2015), Singapore (2001-2014), Saudi Arabia (1999-2015), Indonesia (2000-2014)

Only persons employed data available – assumed each person worked 35 hours per week, 48 weeks per year

Differential in construction sector labor productivity 20-year CAGR (%) to overall economy growth

Real gross value added per hour worked by persons engaged, 1995-2015 or longest time series available1

5McKinsey & Company

SOURCE: BEA; BLS; US Census; IDC; Gartner; McKinsey social technology survey; McKinsey Payments Map; LiveChat customer satisfaction report; Appbrain; US contact center decision-makers guide; eMarketer; Bluewolf;

Computer Economics; expert interviews; MGI analysis

MGI industry digitization index, 2015 or latest available data

1 Based on a set of metrics to assess digitization of assets (8 metrics), usage (11 metncs), and labor (8 metrics); see technical appendix for full list of metrics and explanation of methodology

2 Compound annual growth rate

Relatively low

digitization

Relatively high

digitization

Sector

ICT

Media

Professional services

Finance and insurance

Wholesale trade

Advanced manufacturing

Oil and gas

Utilities

Chemicals and pharmaceuticals

Basic goods (incl. steel)

Mining

Real estate

Transportation and ware housing

Education

Retail trade

Entertainment and recreation

Personal and local services

Government

Healthcare

Hospitality

Construction

Agriculture and hunting

Overall

digitization1

Digital

spending

Digital asset

stock Interactions

Business

processesTrans-actions

Market

making

Digital capital

deepening

Digital

spending on

workers

Digitization of

work

Assets Usage Labor

One of the root causes is a low level of digitization in construction compared to other industries

6McKinsey & Company

Companies in the construction sector identified inefficient designs and misaligned contracts as leading

causes of low productivity

SOURCE: MGI Construction Productivity Insights Survey (n=159) , McKinsey Global Institute Analysis

47

42

39

38

36

33

28

23

14

8

38

48

41

40

49

44

43

34

47

17

15

9

20

23

16

23

29

44

39

75

Project management

Low-skilled labor force

Project complexities

Underinvestment in innovation

Owners’ requirements

Misaligned contractual structures

Medium

High level of fragmentation

High Low

Informality and corruption

Extensive regulation

Inefficient design processes

Relative importance of root causes of low productivity

% of responses with root caused ranked as high, medium, or low

7McKinsey & Company

Contents




8McKinsey & Company

Standardize progress monitoring, information

sharing, and incentives across value chain

There are six major approaches which can drive productivity gains in the sector

Firm-level

operational

factors

External

forces

Shape the regulatory environment for

productivity

Industry-level

factors

Cultivate collaborative stakeholder

partnerships

Overhaul training and workforce

development efforts

Invest in innovation and infuse new

technologies

Master on-site execution

1

2

3

4

5

6Move towards standardization of

designs that allow for scale and value

Opportunity for suppliers to the construction

industry?

Collaborate with contractors to create scope for

simplified, repeatable pre-fabricated solutions

Increase R&D, apply real-time digital collaboration

and IoT to improve flow of materials

Examples on next pages

Limited

Limited

9McKinsey & Company

Measured impact on project KPIs1 Measured ROI3

Non BIM

BIM

Cost of materials Project life span

Project analysis time Change orders2

Building Information Modeling (BIM): integrates design, cost and schedule

in a 3D output, and has demonstrated significant impact in projects

1 Stanford University / Dr Martin Fischer

2 Excluding scope changes, including rework

3 Based on survey of 2228 construction industry professional in North America (McGrawHill Construction)

14%

9%

Less than 10% 15%

13%

Breakeven

Negative

50-100%

25%

10%

14%

Over 100%

25-50%

10-25%

-80%

20%

100% 100%

20%

-80%

100%80%

-20%

80%100% -20%

SOURCE: Based on survey of 2228 construction industry professional in North America (McGrawHill Construction)

A

10McKinsey & Company

Internet of things (IoT): offers multiple value creation opportunities for the construction siteWhat an IoT-enabled construction site can look like

Wearables monitor safety

conditions and help

supervisors track overall

site productivity Vehicle tracking

allows for material

location, workflow

tracking and safety

Monitoring equipment allows for

predictive maintenance of

critical equipment, preventing

unexpected breakdowns and

lost production time

Smart pressure,

temperature and vibration

sensors detect structural

issues

Active RFID tags for

key materials allows

better logistics

1

2

3

4

5

B


Off-site construction: could lead to demand for new product specifications and

a changed value chain

SOURCE: Lit search, Press search, Expert interviews, Team analysis

▪ Off-site construction takes place

in different forms

– Pre-cast: Casting and curing

concrete forms at factories

before transporting to site

for final assembly.

– Pre-fab: Assembling complete

sub-modules or building

envelopes at factory before final

assembly at construction site

(e.g. Pruksa, building complete

apartments off-site, assembling

them as "lego blocks")

▪ This delivery model will lead

to changes in the supply chain

and new opportunities

– Clients could consolidate and

become more sophisticated

with more specific skills

– Instead of delivering to a high

number of construction site,

construction materials

companies will be delivering

to fewer off-site plants,

changing logistics and

distributions requirements

– Cross selling gains in

importance as products could

be integrated into raw materials

sales (e.g. electricity systems

sold with pre-fabricated walls)

▪ This could drive innovations

in both materials and products

(e.g. lighter products)

▪ Success is dependent on local

market conditions such as their

historic preferences and openness

to innovation

▪ Singapore is a pioneering market

with Pre-Fab, Pre-Finished

Volumetric Construction

C

Implications of off-site for

construction materials

▪ If widely adopted, supply chains

could change

– Contractors or materials

suppliers becoming

manufacturers

– Fewer, more consolidated and

sophisticated clients will lead to

increased importance of

relationship management and

excellent service

▪ Products that can be easily

integrated into offsite construction

and offer weight benefits could end

up being a key differentiator

▪ Packaged sales through complete

offerings for all external and

internal building products could

become increasingly important

12McKinsey & CompanySOURCE: Company website, Press search, Team analysis

▪ KEF Infra project : Meitra

Hospital, Kerala India

– Pre-cast: 70% of the

facility

manufactured offsite

– 21 months to

complete compared

to 4 years (industry

average)

– Est. 30% cost saving

compared to

traditional building

▪ Cost savings of around

30% mainly driven by

time and material saving

▪ Time saving of 50%,

driven by an assembly

line

▪ Material saving of 10%

(2% material waste

compared to Indian

average construction

waste of 12%)

▪ Reduces dependence on

imports and labour

Savings of pre-fab

compared to traditional

methods

▪ KEF Infra fully integrated

consctrution solutions:

Design to engineering and

manufacturing of every

element of the building

using advanced

manufacturing technology

▪ KEF Infra project : Infosys

Electronic city, Bangalore

India

– Pre-cast: Fully

manufactured offsite

– 15 months to

complete compared

to 24 months using

the traditional method

– Est. 30% cost saving

compared to

traditional building

Case Study: Pre-fab construction can save up to 30% of cost and 50% of construction time

KEF Infra

C

Example projects


Contents





Steelmakers should reduce costs by eliminating waste along the value chain

SOURCE: McKinsey analysis

▪ Shorter and more streamlined value

chain: Steel producer sells directly

to contractor

▪ Only one fabricator/distributor for

value-added production steps

involved

▪ Simplified product range

Advantages

▪ Capture value of intermediaries

▪ Increase value potential of

introducing new concepts/steel

products

▪ Get immediate feedback from end

users to improve concept and

adjust R&D efforts for new materials

▪ Develop joint concepts with

contractors to increase productivity

on site

▪ Large number of

transactions/interfaces

▪ Product order by customer reaches steel producer

via cascade of intermediaries

▪ Complex sequence of

production steps

▪ Steel products undergo many fabrication steps

carried out by different players before reaching the

final customer

▪ Many transportation

steps

▪ Steel products are transported across network of

intermediaries, sometimes even without extra

activities

▪ High stock levels ▪ Stocks level disconnected from real demand due to

poor forecasting (insufficient knowledge)

▪ Significant re-work ▪ Lack of knowledge about end use may lead to

wrong design, difficult information flow in chain

increases number of production mistakes

▪ Complexity of products ▪ Too many different products lead to long lead times

and huge stock levels

Sources of waste Current situation Vision for future situation


Steelmakers should innovate and develop more solutions, through cross value chain cooperation

SOURCE: McKinsey analysis

1 Ready mix concrete

Steel

Concrete

Raw materials

suppliersSteel producers

Distributors

(various steps)

Fabricators

(various steps)Contractors

Several intermediary production and transportation steps

Large number of steps in distribution and fabrication process

(involving processing/handling/shipping of steel product) before reaching the

end customer

High stock levels throughout chain

Lack of knowledge about end customer demand information and high number of

intermediaries involved lead to long lead times and build-up of inventory of some products

A lot of rework

Lack of information or misinterpretation on specific end customer requirements leads to many fabrication

steps to reshape the original steel product

Complexity of products

Many different products lead to long lead times and

high stock levels

Raw materials

suppliersCement RMC1 Prefab Contractors

Streamlined supply chain

▪ All players are adding value

▪ Shipments are made when needed

▪ More transparent given more integration

and cooperation along value chain

Poor delivery performance of

steel producers as a main

cause of waste


Steelmakers should embrace digital opportunities throughout the full value chain

SOURCE: McKinsey

1 Yield, energy, throughput, and quality

Organization: Well-performing digital

organization based on digital talent/leadership,

governance/ KPIs, and clear digital roles/

responsibilities

Th

e d

igit

al

ste

el

co

mp

an

yD

igit

al

en

ab

lers

Strategy: Long-term oriented digital strategy,

aligned with corporate goals and centered

around customer needs

Culture: Digital-embracing culture with highly

agile digital organization, “test and learn”

environment, and strong digital risk appetite

Capabilities: Digital capabilities such as

technology infrastructure and advanced

analytics skills

Big data/

advanced

analytics in

OpEx/ CapEx:

Big data-driven

raw material

analytics to

optimize

feedstock costs

Digital

procurement:

Digital tools

enabling more

efficient pro-

curement

processes

End to end

supply chain

integration:

Production

data sharing

with suppli-

ers/real-time

supply tracking

YETQ:

Sensor-based

production

control and

real-time

optimization of

YETQ1 , e.g.,

for pig iron in

blast furnace

Predictive

mainte-nance:

Advanced

analytics-

based

predictive and

risk-based

mainte-nance

across all

aggregates

Digital

integrated

lean system:

IT-based

integrated lean

system to

drive ma-

nufacturing

excellence

Risk manage-

ment:

Advanced

analytics-

based risk

manage-

ment/cyber

security

New roads to

market:

Using online/

marketplace

sales channels

to sell coils

Digitization of

customer

experience:

Customer self-

service

platform

Commercial

engines:

Use advanced

analytics for

lead

generation,

etc.

G&A 4.0:

Back office

automation

Digital manu-

facturing:

Production

automation by

applica-tion of

autonomous

logistics, e.g.,

autonomous

cranes for coil

handling

Quality:

Online

tracking of

coil quality

reduces

inspection

time


BACK-UP


Advanced Materials: There are emerging breakthroughs in advanced materials that will allow more

freedom for tomorrow’s architects and engineers Cost Green Durable Efficient Aesthetics

Aerogel

98% air, super transparent, super

insulator. Aerogel panels now available

Topmix Permeable

Can absorb 600 liters of water/m2/minute.

Early adoption

Graphene

An atom thick layer of carbon - thin, strong,

conducive, flexible. Research phase

Nanomaterials

Possibility of super strong, ultra-lightweight

materials. Research phase

Concrete Canvas

8mm layer of concrete cloth, only add

water to set. Commercial

Ea

rly a

do

pti

on

Un

de

r d

eve

lop

me

nt

Bacteria base (self-healing concrete)

Using bacteria as a healing agent to close

cracks in concrete. Proof of concept

B


Advanced analytics provides a new opportunity to extract value from increasing amounts of data

that could become a key differentiator for construction materials companies

SOURCE: Gartner

Advanced analytics

analyses all kinds of

data using

sophisticated

quantitative methods

to produce insights

that traditional

approaches to

business intelligence

are unlikely to

discover

▪ Increasing speed of computation, rising amounts of captured data and decreasing

cost of technology are providing new opportunities to extract value from data

▪ Advanced analytics has already created value

– In a wide variety of industries

▫ Google used 600+ variables from internal and external sources to predict

business propensity to spend, increasing spend 5.7x

▫ Vestas used advanced analytics to select best wind turbine location to reduce

the cost per kilowatt hour of energy produced

– As well as in construction materials

▫ An American integrated Steel client saw a 19% production volume increase

from analyzing stability and throughput levers

▫ A mining company could predict 88% of machine failures, enabling predictive

maintenance and fewer machine downtime

▪ For construction materials in particular, new technologies such as BIM, internet of

things, 3D modelling, e-commerce are generating data on client preferences,

product properties, manufacturing performance, etc. These can be used for a wide

variety of applications ranging from increased manufacturing performance (e.g.

real-time machine performance measurement) to better tailored products (e.g.

identify client preferences from use in BIM and clicks on e-commerce websites)

▪ New actors with advanced analytics capabilities are entering the construction

environment (e.g. online giants, BIM platform providers, internet of things

providers, etc.)

Implications of

advanced analytics

for construction

materials

D

▪ Excellent data

management and

analysis

capabilities could

become a key

differentiator for

operational

excellence as well

as sales

▪ These skills could

also become a

necessity to

partner and / or

compete with new

digital entrants


3D printing: could increase product innovation speed in the short term, in the long term, impact is

uncertain but potentially strong

First 3D-printed house

in China

First 3D-printed hotel suite

in the Philippines

Factory set-up 3D

visualisation

Roofing material properties

3D modelling

▪ While 3D modelling is already well-

adopted (e.g. in BIM), 3D printing is only

in the first phases of its development

▪ 3D modelling and printing enable rapid

design testing

▪ These tools can be used to define the

best factory design before construction or

to test the specifications of a product and

its interaction with the outside world

before setting up a full production

process

▪ Products can increasingly be tailored to

specific client demands or complex

designs

Implications of 3D modelling and printing for construction materials

▪ While 3D printing's impact is limited in the short term, in the long term, while highly

uncertain, this could potentially be a game changer

– Less legacy machinery and working methods could lead to faster adoption in

emerging markets (e.g. first 3D printed house and hotel suite in China and Philippines)

– 3D printing could offer benefits more quickly to niche customers that need highly

customized products

▪ Product innovation speed could increase due to shortened iteration cycles

▪ Bespoke product specifications could become the norm

▪ Barriers to entry for niche players could decrease as major part of traditional upfront

investment can be done digitally

▪ For materials, 3D printers could require the development of new raw materials or new

material specifications

E


New construction methods: Singapore is pioneering offsite construction, especially PPVC (Pre-

Fab, Pre-Finished Volumetric Construction) and improving productivity by 50%

SOURCE: Building and Construction Authority of Singapore whitepapers, Company websites, Press search

Case example: PPVC – The ‘Lego model’ of Construction

Concept

▪ In Prefabricated Pre-finished Volumetric

Construction (PPVC), complete flats or

modules made of multiple units complete

with internal finishes, fixtures and fittings are

manufactured in factories, and are then

transported to site for erection in a Lego-like

manner

▪ Typically relevant for hotels, hostels, budget

condominiums and other facilities with

standard shapes and designs

Impact

▪ Productivity improvement of up to 50% in

terms of manpower and time savings

▪ Minimal dust and noise pollution

▪ Improved site safety

G


These six approaches have varying implications for the different stakeholdersPrimary opportunity

Secondary opportunity

Policymakers Owners Contractors Suppliers (incl. steel industry)

Streamline land use, building, local

content, and permitting regulations

and incentivize productivity1

Shape the regulatory

environment for

productivity

Ensure effective contract protections

are in place

Optimize risk and incentive allocation in contracting and focus on up-front

involvement of all parties

Standardize progress monitoring, information sharing, and worker incentives

across value chain

2Cultivate collaborative

stakeholder partnerships

Invest in vocational training

programs and revamp to fit current

construction needs

Expand training and for project

leadership roles, including soft team

formation and integration

Structure incentives and training to

bolster productivity on front-lines,

including subcontractors3

Overhaul training and

workforce development

efforts

Apply real-time digital collaboration and internet of things to improve flow of

materials and labor

Digitize tendering, data storage, and

permitting processes and incentivize

advanced techniques like 5D BIM

Encourage new materials, techniques, and equipment and utilize digital

collaboration tools

Increase R&D and expand

marketing

4Invest in innovation and

infuse technology

Deploy integrated scheduling and

ensure critical paths are mapped and

optimized

Implement real lean construction and

incentivize collaborative mindset

across subcontractors5 Master on-site execution

Facilitate land release coordination

across jurisdictions to enable

scaling, replication and

standardization

Adopt a portfolio view and central

budget to effectively pre-invest in

standardized solutions where

appropriate

Focus engineering on replication at

scale and avoid gold plating

Collaborate with contractors to

create scope for simplified,

repeatable pre-fabricated solutions6

Move towards

standardization of designs

that allow for

scale and value

How the steel industry can contribute to productivity ... · While many sectors of the global ......

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