Dr Dieter Bölzing of J&M Management Consulting looks at what the chemicals industry can learn from supplychain champions in other sectors
Supply chains in the chemicals industry are characterised by some very specific challenges, which make them different to those ofother industries: they are affected by governmental control on product substances, dangerous goods transport regulations, high volume commodity transportation, specific filling requirements where explosion and contamination are concerns and temperature and safety requirements in the storage facilities, to name just a few.
However, there are also similarities with other industries, such as constant cost pressure, the increased need for on-time-reliability, an increasing number of short-term customer order changes, more efficient design of transport networks and increased attention to carbon footprint-related environmental issues. In this article, we want to focus on some specific aspects of these similarities, in order to understand current priorities and to highlight opportunities for further performance enhancement in the chemicals industry.
In this context of these increasing challenges, companies in the chemicals industry have developed their supply chains to a significantly higher performance level than before. In the past discussions about ‘supply chain champions’ referred to businesses in the electronics, food, consumer goods and automotive industries, but never to chemicals.
That said, chemicals companies’ customers operate these high performance supply chains and are still improving their performance constantly in order to keep up with market standards and competitive pressure.
It is likely, in this context, that the improvements were required by demanding customers, who could no longer afford sub-standard suppliers. Consequently, good supply chain performance is nowadays a necessity for chemicals companies to stay in business and sometimes in order to provide the competitive edge needed to win the contract.
The integrated supply chain
Recently, BASF won a supply chain management (SCM) award for having redesigned and rebuilt its supply chain in all industry sectors, setting new and higher standards than the industry ever has experienced. Looking at BASF alone is not enough, however. Every company has its own situation, its own set of challenges.
What really helps is looking out into other industries to learn what can actually make a difference in supply chain performance and to stimulate thinking on how the principles behind these practices can be applied in one’s own company. J&M’s latest research on the subject (SCM Study 2012/13) has provided evidence on current leadership practices: internal and external integration of the supply chain, using cutting-edge IT, as well as specific execution techniques which make possible short-term responsiveness and high efficiency.
Internal supply chain integration means that all of the functional processes within the company intertwine. Sales and marketing, service and spare parts management gear into supply chain operations, such as production, warehousing, logistics and distribution, and also into the sourcing and purchasing processes. The finance and controlling function offers integrated support and, with the help of an integrated product life-cycle management system, innovations find their way into the supply chain quickly and efficiently . Supply chain champions have optimal internal interfaces. Chemicals companies already outperform the average participant of the recent SCM study in this aspect. However, internal integration alone is not enough.
According to the survey findings, the processes of supply chain champions are also better integrated with external supply chain partners, for instance with those of their customers for delivery processes. The same goes for integration with suppliers: the processes of supply chain champions are 23% better integrated with their suppliers for production material than those of the average participant.
Another important aspect is the synchronisation of IT systems. In this day and age, nothing works without high-performance IT systems. The better the systems of suppliers and customers are integrated, the smoother the processes run. These themes are not really new – the concepts have been available already for decades – but now they are empowered by the customer’s pressure for higher performance.
Therefore, we concluded that it is no longer sufficient to apply the best practices available. It is also necessary to look for companies which are different in the way they design, operate, and improve their supply chain.
Supply chain champions are companies which apply a lot of good practices, but even among the champions there are a handful of ‘first class champions’. Those companies design their whole business system around their supply chain.
Amazon is one of our prime examples, showing the close link between superb marketing and reachability, linked with excellence in supply chain performance and in the leveraged design of their supply chain based on integration of suppliers. Apple is another, although having a reputation for advanced design and technology and a specific customer experience in using their products, their real revenue machine is in the execution of a fast moving, high performing supply chain which can ramp up new products rapidly, efficiently and effectively.
These ‘first class champions’ tend to integrate future developments such as mega-trends (globalisation, urbanisation, climate change, etc.) into their strategic decisions early on and consider them for their supply chain design and structure.
To sum up, for a chemicals company to really improve its supply chain, it is not enough to look at what competition is doing. Company leaders have to look across all industries to identify what the best among the supply chain champions are doing.
Compared to other industries, supply chain risk management is significantly more developed in the chemicals industry. This is probably related to the dangerous goods and required mitigations but also to the large volume stream which flows through all the assets. Therefore, the terms ‘resilience’ and building ‘resilient supply chains’ have become major focus topics in this industry.
Risks and their effects occur at all stages of the value chain, above all at the interfaces and transfer points between suppliers, companies and customers. Potential risks are the failure or loss of suppliers, customer insolvency or unforeseen machine failures within one’s own company.
The whole transport chain is a major risk area – inbound, internal and outbound. Delays due to congestions can be one source, as can major disruptions if there are no alternatives, e.g. due to blocked rivers for large volume barge transports. Accidents can destroy the transporter and the transported goods, leading to a gap in the volume stream. Additionally, risks can be carried into the company through external influences, such as environmental disasters, financial crisis or legal requirements and laws.
These risks, of different types and intensity, multiply along the value chain. They weaken the company to a considerable degree or even threaten its very existence in a worst case scenario. Therefore, supply chain champions put a lot of effort into identifying and sustainably mastering risks by establishing better transport-tracking technologies and predictive supplier performance tools and, of course, by proactively developing a set of scenarios for alternative supplies and transport routings.
As with other industries, there is still a significant opportunity for increased collaboration with customers, but even more so with suppliers. For the latter, the chemicals industry is probably restricted by the large pipeline supply situation and in other areas also by the small number of available suppliers.
Pipelines automatically mean a high degree of integration. Interestingly, for non-pipeline supplies, the chemicals industry has a tendency not to think very much about supplier integration. The good news is that those companies that have tried it have seen the high potential for improvement which can be tapped into by doing so.
In terms of reliability versus cost, the priorities and decisions are clear in the chemicals industry. Cost pressure is so high that this is the focus area in order to win the contract. Therefore chemicals companies are among those with the lowest logistical costs.
At the same time, the chemicals industry’s delivery reliability to customers is below average and this is the same on its own supply side. Only 5% of the SCM study participants from the chemicals industry achieve a very high performance, that is a delivery reliability rate to their customers of 96-100%. In fact, 10% even admitted to meeting the confirmed delivery date in 60% of cases or less.
On average, chemicals companies manage to achieve a delivery rate of slightly above 80%, which is among the worst results of all participating industries. Compared to the supply chain champions, who deliver 96% of their goods at the confirmed date, there is still a huge gap to fill
As a consequence, internal operations often need to improvise or reschedule. This leads to higher operational costs, which are often hidden. Increased safety stocks are the standard response, but these require specific storage and tank strategies. The chemicals industry is used to this and one reason why is that, due to the nature of the product, its price position and its production process, evaluated inventory costs are often lower than in other industries.
Here we see a difference between the different business models within the chemicals industry: commodity-type products with ‘lowest bid’ awards put pressure on costs and neglect repeat business in favour of lower cost. Therefore, integration with customers is not considered, although there is a huge potential, especially in more regular delivery relationships.
Speciality-type products, on the other hand, are significantly more linked to application engineers and the individual design of the substances for specific customer situations. This tends to create demand for regular repeat business.
This factor potentially offers opportunities in their supply chain for improved planning and delivery collaboration with their customers – but is often not tapped into, as it is not seen as welcome by the customers. In both cases, overcoming traditional thinking offers major sources of sustainable cost reductions as well as performance improvements.
Currently, we see that the three biggest challenges of the chemical supply chain are cost pressure, volatility and complexity. So it comes as no surprise that 95% of chemicals companies have already started working on the improvement of their cost efficiency. Within the next three years, they plan to enhance their supply chain integration and to further improve their risk management.
Flexible supply chain
Challenging the current cost position is very common in all industries. This is still the dominant topic in a world which is used to electronics products getting cheaper every day.
The chemicals industry is hit more than most by volatility of demand, especially in uncertain market conditions. Yet the biggest challenge comes from increasing product portfolio complexity, which hits the inflexible or even specialised production equipment in a dormant stage when it does not really match with future responsiveness requirements.
This is probably the biggest challenge in the chemicals industry: to distinguish even better the fit of product to production facility and to build not only large-scale, low-cost production units, but to invest into more flexible, medium-scale production equipment for products which can bear the higher average cost.
Compared to industry in general, our study shows that chemicals companies intend to invest significantly more into even better cost-efficiency, still pursuing the traditional paradigm. These companies need to open their perspective towards a polarised, dual market situation and distinguish between product and customer scenarios which require an efficient supply chain to be built and those that require a more responsive one.
The study also reveals a strong focus on improving secured supply and working on internal collaboration and process integration to enable an even better flow. Chemicals companies tend to focus more and more on better understanding their market’s needs. But a more detailed look into the results reveals that these companies still struggle to draw the appropriate conclusions because they contradict traditional paradigms.
Being realistic in what can be further achieved, chemicals companies rate their cost reduction potential lower than other industries. That is probably the result of saturated markets with big players, leaving little room for winning from the other market participants. Still the impact of improved SCM on winning market share, increasing revenue and decreasing cost is significant in the next three years (Figure 3).
Now, contrasting the chemicals industry with the current supply chain champions, we see the real space of opportunity from the application of best practices. Supply chain decision makers can learn a lot from industry comparison to see where their own status is, which topics to emphasise in the future and where current potentials are already tapped. As the industry propels itself to new heights of supply chain performance, the real inspiration is in finding out what the supply chain champions and particularly the best among those champions do and what the chemical industry can learn from them.