The role of procurement and supply chain management has changed tremendously, since companies are increasingly engaging in outsourcing. In recent years this trend has especially concerned services. Most common activities outsourced are related to logistics or transportation, which often aims for increasing the flexibility and efficiency of these functions. In the steel industry, transportation and handling of materials performed internally is considered highly significant due to the notable volume. Hence, the effectiveness of material handling and internal transportation has a direct influence on the profitability and competitiveness of steel production companies.

This thesis aimed to develop the procurement of production services in a steel production company. The main objective was to improve the cost effectiveness of the services by optimizing contract portfolio. The research was conducted in two parts: theoretical and empirical. The theoretical section focused on previous literature concerning the general features of service procurement and the management of company’s external resources. This section provided basis for the empirical part.

In the empirical section the current state of production service procurement in the factory of Raahe was first analyzed in terms of main characteristics and possible areas of development. Additionally, a small-scale comparative analysis of another case company factory in Luleå was conducted. Second, the current service contracts were analyzed in terms of resource utilization for finding possible synergies. These findings were studied further qualitatively by exploiting interviews.

The results indicated that synergies between different services occurred. This thesis suggests the combining of three different service contracts. The first consists of two services related to handling and transportation activities in the iron production and harbor area. The second combination includes the contracts of internal product transportation, and the handling and transportation of slab materials. The third combination comprises of three truck machinery services situated in various locations. By implementing these recommendations the challenges found in the current state can be reduced. As a result, the cost effectiveness of production services is increased by optimizing the structure of contract portfolio. Hence, significant savings can be achieved.