How a damage inspection contract became a trading intelligence system

SGS Vostok · Cherepovets, Russia · 2000–2002 · B2B Case Study

Challenge

We were invited by Severstal, one of the largest integrated steel works in Russia, which suffered perennial damage to its cold-rolled steel. Pristine packaging left the mill, and one mile later it was already damaged — visible during transhipment to a river vessel.

These damages were commercially harmful. Cold-rolled steel is sensitive to elements, especially during a subsequent sea voyage. Any damage quickly depreciated the value of the goods. The plant's P&L suffered as a result.

We proposed the solution: tracking individual packages across the entire supply chain. The idea had been in the air for three years — as a concept, and as an implemented project where our company had tracked wagonloads, not individual packages, in Siberia. The speed with which the client accepted the idea confirmed our judgement was correct.

The plant imposed two harsh conditions. First, the deadline: four months, at the end of which we had to demonstrate a working solution. Second, they introduced competition — another global inspection company.

What we did not know when we accepted: the entire supply chain, from the mill to the trader, belonged to the same corporate group. The way they behaved, one could easily believe they were separate and not always friendly parties.

What we did not have:

• No product. The solution required an IT system that had never been built for this purpose.
• No staff in the town. No office.
• No knowledge of the plant's production process and logistics.
• No knowledge of the client's internal politics.

At least our IT team confirmed the solution was technically feasible. The rest was within our control.

Strategic Decisions

First — the product. We offered a product our competition had never heard of, forcing them to play on our terms. They had no choice but to pursue the traditional approach: inspectors at transhipment points, paper reports.

Second — the production site. Of the two available rolling mills, we chose cold-rolled. It presented the biggest logistical and administrative challenge but promised far greater rewards. The results of our intervention would be most visible there — it was cold-rolled packaging that had caused the entire exercise. Competitors chose hot-rolled: fewer dimensions, fewer damages, fewer rewards.

Third — the software platform. We selected Lotus Notes — old, reliable, cheap, and fast to develop. We had prior experience with a tracking solution built on it. Competitors chose Oracle: powerful, expensive, and requiring substantial time and resources to develop.

Fourth — the team. I relocated to the site for the duration. Two highly capable team members came with me. Competitors worked remotely, subcontracting execution to a two-person local agency. We demonstrated commitment. They did not.

Fifth — the demonstration strategy. We decided we would build the product and demonstrate its advantages to every stakeholder, consistently and persistently. We were confident in our capabilities and bet on them.

Sixth — trust. We needed to win the trust of the production people from day one. Any obstruction from staff who feared we would replace them would have been fatal to the timeline.

Execution

To understand the business process, we brought our own staff from a remote Siberian branch — people experienced in exactly this kind of environment. They spent two days on the shop floor with paper and pencil, recording everything they could. From that data, we calculated the workforce required for full operations.

In three weeks — THREE WEEKS — we built the first version of the software, covering product site to railcar loading. We trained a pilot team of inspectors whose computer literacy had been nil until then. We started work.

The fifth strategic point proved itself quickly. There was an export gangman whose sole job was to walk the mill's vast territory and pick packages selected for export by reading order numbers on labels. Very soon, he started every shift by visiting our office instead. His mission was accomplished in two minutes. Nobody told him to change his routine. The system made his work easier. He changed it himself.

One month into the pilot, the plant asked us to double the volumes we handled. They also mentioned they intended to build something similar themselves one day. Clearly, they valued what we were doing.

After a while, the QA department incorporated our procedures into the plant's Quality Assurance Manual. We became part of the production process.

Two months in, we completed software development and extended operations along the entire supply chain: plant — railroad — river port — cargo handling complex — vessel.

By this time, we had developed a comprehensive damage classification manual, codifying all damage types and severities. Every order received a complete damage report, describing each package, the severity of any damage, and where it occurred.

Unexpected Discovery

When we expanded operations to the port, we discovered something we had not been looking for.

Before our project, every party in the chain measured its own performance in isolation:

• The plant reported it had shipped the goods.
• The warehouse said it had delivered the correct cargo.
• The stevedores confirmed they had loaded the right packages.
• The forwarder signed off on the documents.

Each step passed its own test. Yet at the port, we sometimes saw wrong cargo, mixed shipments, and documents that did not match reality. The system was not perfect, even though every department was doing its job.

The parties handling the cargo and information did not own the cargo and were not motivated by its integrity. The very nature of logistics creates tensions that can only be resolved by a strong culture of discipline. It was absent at the time.

What the Port Revealed

It became clear that many problems were arising in the port. Warehouse staff would sometimes take the easiest packages instead of the correct ones. Stevedores would occasionally mix packages belonging to different orders. Packing lists required hours of manual reconciliation by multiple parties — almost always with errors.

Even the best third-party inspection cannot fully solve such problems without underlying discipline. At best, it imposes external control. At worst, it becomes just another step that can be gamed.

Our system changed that by enforcing accountability at the point of execution.

What Real-Time Visibility Did

Visibility: A project manager at Sales Directory could now see the exact status of every package with no more than 20 minutes' delay.

Discipline: Right cargo could no longer be substituted by the wrong one. Mixing orders on the same vessel became nearly impossible.

Documentation: An 85-page packing list for 10 Bills of Lading on a 35,000-tonne vessel was now generated in 1.5 seconds with zero errors.

Evidence: We prepared a comprehensive report reflecting every damage by type and severity on every package at the moment of loading. The seller entered every claim negotiation with the facts already in hand.

Business Impact

Winning the Tender

We won the tender. Competitors had asked for another six months to finish their system on Oracle. The decision was not difficult.

Contract Negotiations

We were promised inspections of all exports. Very soon it became clear that the Sales team dealing with exports was not particularly interested in anything beyond the plant gates.

When we started, production was the default scapegoat — any damages or claims hit their P&L. We solved their problem. Their troubles ended at the plant gates. What happened afterwards — discrepancies, damage, claims — was someone else's headache.

We had been solving the wrong people's problem. Negotiations stalled.

Two days later, without warning, the phone rang: "Come over and sign."

I never learned exactly what changed. The Sales team that had shown little interest suddenly had no objections. Two contracts were ready — one for exports, one for domestic. I had never asked for the domestic one. Nobody explained why it was on the table. Of course I did not object.

The Real Beneficiary

The obvious beneficiary of our data was not the plant that paid for the service. It was the trader — the selling office in Germany.

For the first time, they had something impossible to obtain by any other means: the reassurance of the exact contents of the consignment — not what had been on paper in the past — and the condition of every package, in real time, before the vessel sailed. That information gave them a genuine trump card in any claim negotiation. Its value far exceeded the cost of the inspection contract.

What made this situation unusual: all parties — plant, forwarder, port, and trader — belonged to the same corporate group, each with its own P&L. The trader was effectively the internal customer of the Sales Directorate. They understood the value of the data earlier than most and confidently pushed for the solution.

Outcomes

• Contract duration: 10+ years
• Team growth: 25 to 120 people across four locations
• Process incorporated into Severstal's Quality Assurance Manual
• Two contracts signed: export tracking and domestic production tracking
• SGS Group kept the project's platform active after an organisation-wide migration to a new system

 

                    A highlight was the signing, by SGS Vostok, of a steel monitoring contract with Severstal,                                            the biggest steel producing mill in Russia. This contract, for the monitoring of steel  from                                          production through to final delivery at various Russian ports, strongly positions SGS in the                                        steel industry within the CIS. — SGS Group Annual Report

Key Lessons

The beneficiary is not always the buyer.

The most valuable user of our system turned out to be the trader in Germany rather than the plant that paid for it. In complex B2B sales, the person who signs the contract is often not the one who receives the greatest value. Sometimes you can identify the real beneficiary in advance. Sometimes — as happened here — they find you. Either way, it is a question worth asking early: who else in the chain benefits most from what we are building? Do they know it yet?

Products often discover their value in use.

We started by tracking packages to reduce damage. We ended up creating an information system used by every party in the supply chain, from the rolling mill to the trading desk in Germany. Like in many other cases, the original invention was not the main product. The real value emerged as we watched how the system behaved in the real world.

In highly uncertain projects, judgment matters more than process.

The system was designed, built, demonstrated and deployed simultaneously. Traditional governance would not have kept pace. The project was not successful because we broke the rules. It was successful because we knew which rules could be broken and which could not. The difficult part is knowing the difference.

This project was also covered in Expert magazine (Russia's equivalent of The Economist) and featured in the SGS Group Annual Report. The article — vetted by Severstal's PR department before publication — was the first time the project received external recognition.