Annual report and accounts 2012

Business System of Severstal

The Business System of Severstal (BSS) is the logical development of more than ten years of ongoing efforts to optimise production and standardise internal processes, through many projects striving to achieve maximum efficiency of labour, equipment and energy. In 2010 we integrated and formalised these into a uniform improvement system across the company, which also includes a set of projects for cultural change – The Business System of Severstal.
We believe this gives us a key competitive advantage, and is crucial for success in the steel and mining industry. Among industry players, the system is unrivalled in the extent of its integration and EBITDA contribution potential. Its aim is to achieve operational and organisational excellence throughout the value chain, improve customer service, and foster a culture of health and safety across the company. Ultimately, its intention is to make Severstal a global leader in the steel industry. We are expecting approximately US$1.3 billion contribution to EBITDA from 2010 to 2015 via the Business System initiatives.

There are five main lines of development in the Business System:
• Continuous improvement
• Safety
• Customer care
• People of Severstal
• Business standard

Continuous Improvement

We wish to become an industry leader by efficiency, and intend to achieve this through sustained improvements in operational facilities and lean production. This means eliminating production losses and waste, optimising procurement and delivery processes, and making improvements in technology and our production line.

For example, in our Severstal Russian Steel division, BSS continuous improvement projects have created efficiencies as follows in 2012:

  • Purchasing and logistics efficiency, a US$63.2 million gain – more efficient purchase practices include:
    • optimising sinter and coal charges by closer monitoring of process requirements and storage
    • improved transport logistics including delivery times, mode of delivery, and reduction of rail car turnover time
    • commercial work, such as a category-based approach to purchase, and promoting competition among suppliers to obtain better terms
  • Administrative cost optimisation, a US$11.7 million gain – examples include organisational restructuring, with restricted hiring after natural attrition in personnel numbers, and shared services within Severstal Group.
  • Continuous improvement, a US$117 million gain – projects in 2012 have included:
    • selecting the optimal composition of charges
    • reducing external coke and pellet consumption
    • substituting expensive types of scrap with cheaper ones
    • actions to save on ferroalloys
    • actions to save on metallic materials in the charge
    • efficiencies from increasing production volumes

People of Severstal

We aim to foster a collaborative, respectful and highly-professional working environment, with fair and clear HR practices that reflect our values and guarantee professional development opportunities for all employees. The Severstal People project is designed to improve employee well-being, motivation and performance in four key areas: development, engagement, working environment and motivation.

In 2012, 43% of employees passed through training courses, and 100% for the top three management levels. Average training time was about 54 hours per employee across the three divisions.

We continued our management development programme Achieve More Together. By the end of the year the programme had around 900 graduates, and more than 450 new participants had started the programme. It aims to support change at Severstal, by building a team of associates capable of initiating change and achieving outstanding results.

On the communications front we trained shop supervisors and managers in internal communications standards and launched a hotline for handling employee enquiries. Improvements to the working environment in Cherepovets include 350 new parking spaces, extensive improvements to showers, and also a renovated cafeteria.

Safety

We want to achieve one of the lowest injury rates in the industry and reduce the number of fatalities at our facilities to zero. Involving employees in safety policies is crucial to this, and each employee must be aware of health and safety standards, and take responsibility for adhering to them. Therefore we run our Efficient Occupational Safety Management System, to provide the necessary training, establish clear responsibilities and ensure two-way communication. Under the system, we continuously monitor, measure and report process and behavioural safety. We identify and mitigate hazardous situations, conduct incident investigations, assess and control overall risk levels, and create a goal management programme.

Within Severstal Russian Steel, we have identified and introduced 65 new health and safety best practices. In addition, 1,700 managers from 61 business units were briefed on workplace safety methods. We have also made corrections to the Workplace Safety manual based on feedback from employees, which will increase its effectiveness. We commissioned a software application in 2012 so the registering of hazardous incidents is now automated rather than in hard copy, as is the analysis safety effectiveness. The application is now being used by more than 3,000 employees. All in all, Severstal Russian Steel business units and companies reduced occupational injuries from 71 cases in 2011 to 49 in 2012.

Customer Care

Building a customer-oriented organisation is important for achieving our growth and high margin goals. We conduct customer surveys to improve product quality and delivery, and customer service. These surveys can identify specific customer requirements and opportunities to improve product quality, as well as ways to improve overall customer satisfaction.

In the Severstal Russian Steel division, we have been developing a Service Level Agreement (SLA) tool and are in the process of introducing it, which will help focus on meeting the shipment time terms. In addition to improving the quality of products and gaining higher control over the quality of what we ship, special working groups have been looking into this.

A working group established with OAO Kamaz, has introduced ‘pull’ production aimed at increasing delivery discipline – and delivery volume increased from 14,685 tonnes in 2011 to 61,727 tonnes in 2012. Another working group has assessed reducing production volatility and prompt order delivery support, and identified concrete measures for monthly monitoring.

Internal communication programmes also help to increase employee awareness of a customer-focused culture, and we have used display stands, brochures and information sheets to this purpose. Overall, in the Russian Steel division, we estimate the EBITDA contribution of customer care projects to have been US$41million in 2012.

Business Standard

We continued to develop IT projects across all our divisions, of which the most important is the implementation of SAP. We launched SAP at Severstal Resources in 2009 and across almost all the Severstal Russian Steel division. The implementation will be complete in 2013. The project allows us to increase the efficiency of our business processes, the processing of administrative information and general management.