Following the development of the Mission, Vision and Values of Severstal in 2009, in 2010, we made another step forward towards internal efficiency. We worked out a set of principles and tools named the Business System of Severstal implanting desired behavior models among the employees and, as a consequence, enable cultural transformation of Severstal, as well as achievement of the company’s strategic goals.

The Business System is a logical follow-up to the previous development phases. Severstal has always focused on production efficiency and implemented several projects in this segment: “Total Optimization of Production” (1998), “Production Consulting” (2000), “Continuous Improvement” (2009).

The Business System is a Logical Development of Previous Improvement Efforts

In 2010, Severstal identified five key lines of development within the Business System:

1. “Labour Safety”
2. “Building a Customer-Oriented Organization”
3. “Continuous Improvement”
4. “Severstal People”
5. “Business Standard”

Pillars of the Severstal Business System

In 2011, we will implement the five Business System projects simultaneously in production, making it possible to achieve specific goals for each of the projects and ensuring common changes in employee behaviour and cultural transformation.

We established a Unified Business System development centre to integrate these projects and develop harmonised methods for doing so. These methods look at seven areas: skills tracking, motivation, target-setting, standardisation, communications, skill development, and audits. Our approach to implementation prevents project teams competing for personnel, enables even distribution of assignments among line managers and reduces the number of reports and amount of paperwork. At the same time, the uniform project implementation makes it possible to keep all the unique features.

Project details:

The Continuous Improvement project focuses on developing structural competitive advantages for Severstal in the global market. Its foremost objectives include establishing self-sustained continuous improvement systems on site, increased labour and equipment efficiency, reduced production losses, improved product quality, implementing best practices and changing employees’ mentality and behaviour in the workplace.

Lean production tools are particularly important as they help employees eliminate seven classic types of waste, those resulting from overproduction; products transported between processing stages; unnecessary product movements within the same production stage; delays in spare parts and materials arriving; over-processing; excessive inventory; making defective products and re-processing them. Managers and employees are both trained in lean production tools.

The confirmed financial benefits of the project for the Russian Steel division in 2010 were US$52 million. The project's success is proven by changes in the Cherepovets Steel Mill Flat Rolled Shop No 2. In 2011, production volume at the mill 2000 is expected to increase by 363.1 million tonnes due to reduced downtime as a result of decreased roll changing time and introduction of standard rolling speed and pauses between product units.

The Labour Safety project aims to eliminate death at the workplace by 2015 and achieve a leading position by major injury rate indicators (LTIFT, LTIFR) in Russia, and in the longer term at a global level. The project focuses on deploying an efficient occupational safety management system that should help employees development in safe behaviour skills.

Work on this project includes three units: creating safe labour conditions, involving employees in labour safety work, and engraining safe behaviour skills. We have developed eleven methods to train line management and employees in various lines of activities. For example, safe behaviour audits help to assess risks correctly and avoid unsafe employee actions in the future.

The main goal of the Building a Customer-Oriented Organisation project is to involve all employees in systemic customer orientation events to increase our customer orientation.

This project improves absolute and relative customer satisfaction levels, helps to assess and increase corporate process efficiency, improves understanding of internal clients by employees, and leads to economic benefits by increasing the sale price compared to benchmark pricing trends.

We used annual customer questionnaires to develop about 200 organisational and investment activities to improve product quality, delivery flexibility and performance, achieve speedier resolving of customer requests and awareness of order progress.

Under the project, the motivation and target-setting systems were modified in several business units (production and technical directorate, sales directorate). New targets focus on improving customer satisfaction levels. We reorganised marketing service and assigned a new function to manage customer expectations.

By consolidating the project methods and implementing them together within production, we managed to get the system online enabling communication of customer requests to production units. Our subsidiary marketing companies started implementing the customer orientation principles.

The Severstal People project looks to create a single-minded business team focused on solving common corporate tasks and sharing its values. We implement this project in three ways at once: we create transparent and easy-to-grasp HR management processes, ensure a worthwhile working environment, and promote dialogue (a system of internal communications and feedback) with employees.

Within the first group of objectives, we created processes for recruiting, evaluating and developing employees in accordance with the corporate values model, developed a recruitment and engagement process for managers, and implemented a performance, development and continuity management system.

In 2010, we started a new training programme for managers called 'Achieving More Together'. The Russian Steel Division, in cooperation with McKinsey and Hay Group, started implementing an organisational efficiency and compensation project.

Within the second group of objectives, we established a social and living standard, and approved an action plan to improve working conditions for employees, repaired locker rooms, shower rooms, and premises for shift meetings, improved the quality of employee delivery in their workplaces, provided comfortable working clothes and personal protection equipment, repaired walkways and galleries etc.

To promote dialogue with employees, we adopted a Code of Business Conduct, and are also developing feedback routes, and we perform annual cultural monitoring which we follow up with a corrective action plan.

The Business Standard programme, as one of the crucial elements of the Severstal Business System, focuses on increasing business-process efficiency and improving information transparency when making management decisions, as well as significant cost reduction and cultural transformation. The programme is based on the SAP ERP platform.

In 2010, we implemented several projects designed to improve operational processes, within the scope of the Business Standard Programme:

• We opened a Unified Service Centre (USC) in the Russian city of Yaroslavl to provide accounting and tax accounting services, IFRS transaction accounting, treasury operations, HR accounting, wage and withholdings tracking, and wage calculations for Severstal Resources. This technology enables us to develop business while minimising the costs of supporting geographically dispersed business units.
• Vorkutaugol launched an 'Equipment Maintenance & Repair' programme enabling the management of repair quality, as well as control and analysis of the engineering status of equipment and specific units. For cost-saving, new functionality ensures reliable technical accounting, strategic analysis and planning of M&R expenses. EM&R automated management and control enable tracking mandatory performance of scheduled preventative activities: maintenance and repair of mining equipment. In addition to decreasing the number of forced outage cases and bringing direct economic benefits for the company, the new system will also improve industrial safety levels. Equipment maintenance and repair is a harmonised process for the Mining Division and Russian Steel Division.

Those processes have already provided the impetus for serious organisational and methodological changes:

• Merging service companies
• Simplifying warehousing structure
• Establishing harmonised accounting principles by Russian Accounting Principles, IFRS, Tax Accounting

By July 2011, the Business Standard Programme is scheduled for launch at the Russian Steel Division.

By 2012, we expect over 9,000 of Severstal employees to be working in the programme.