Best Practices and Challenges in Supply Chain of Chemical Industry

The Chemicals industry is one of the oldest and biggest industries. It generates an annual-sales of approximately USD 5 trillion and provides direct and indirect employment to approximately 20 million people[1]. Companies operating in this industry compete in terms of product/service innovation or asset intensity. Based on these two parameters, companies in this industry can be segmented into the following segments[2]:

1. Scale Operators — Petrochemicals, fertilizers, and industrial-acids companies fall under this segment. The characteristics of the companies in this segment include high asset and low service/innovation intensity, raw material intensive, strong price completion and large volume client base.

2. Commodity Balanced — Plastics, Rubber and Bulk intermediaries fall under this segment. The characteristics of the companies in this segment include diversified customer base (small/med/large), strong price competition and presence of large-scale intermediaries,

3. Specialty Balanced — Additives, Catalysts and Personal Care chemical companies fall in this segment. The characteristics of the companies in this segment include diversified customer base (small/med/large), large product/portfolios, close customer collaboration, moderate asset intensity and presence of customization.

4. Service Providers — Pesticides, paints, and coating chemical companies fall under this segment. The characteristics of these companies include low asset intensity, high customer interaction, branded products, highly customized services, and product offerings, and involvement in customer processes.

When a diversified company falls in more than two segments it becomes a portfolio player.

Challenges

Supply chain management in these companies is challenging due to the reasons such as lack of flexibility to changes and disruptions, dependability on weather conditions, the influence of macroeconomic trends and politics, lack of transparency, ineffective collaboration with cross-border partners, and complex customer segmentation. Traditionally, companies in this industry utilized strategies such as product/service innovation, spin-offs, mergers and acquisitions to survive and handle the challenges.

Figure Showing industry maturity in digitalization, Source: https://www.accenture.com/_acnmedia/pdf-10/accenture-digital-supply-chain-planning-in-chemicals.pdf, Note: Company Performance on the x-axis is calculated based on average year-over-year revenue growth and profitability between 2008 and 2012. Values range from a low of zero to a high of 100. Digital Index on the y-axis is based on major digital areas, such as strategy, offerings and processes. Values are as follows: 1= mostly, 2 = partially, 3 = somewhat, and 4 = rudimentary digitalized. All values are not weighted averages.

But the current market environment is more volatile with stringent regulatory policies, trade wars, demand shifts to huge markets such as China, weak European union and digitalization affecting the industry. Additionally, while digitalization and customer focus in other industries is high, the chemicals industry is still far behind the other industries[2].

Best Practice Initiatives

Leaders in chemical industry have used various measures to tackle the challenges and set an example. These initiatives and best practices are as follows:

Supply chain planning capabilities framework in a digital supply network, Source: Digital Supply Chain Planning in Chemicals

1. Digitalization — Digitalization in areas where rapid payoffs in cost control and productivity can be seen.

2. Automated Demand Sensing — Advance analysis of the data to identify relevant patterns in demand and develop the demand.

3. Supply chain collaboration using cloud — Interlock with value chain’s critical elements such as customer, suppliers and other partners and leverage technology to exchange information.

4. Dynamic inventory management — Continuous inventory management across the value chain and adjustments to optimize safety and buffer stocks.

5. Profit, Sales & Operations planning — Proactively balancing the demand and supply constraints by considering the expected business scenarios and their impact on profitability.

6. Supply Chain Resilience — Monitoring and managing the supply chain risks to improve the ability to handle disruptive events.

7. Supply Chain Control Platform — Integrated platform for the data visibility, analytics and execution across all supply chain function for improving the responsiveness and flexibility.

Key Take-Away

The key to success is to access market position in the industry. Knowledge about the market position helps companies in the chemical industry to determine the areas to focus that is whether to use digitalization to increase the “product/service responsiveness & innovation” or “focus on better management of assets to increase the cost competitiveness”. Once, this clarity is achieved, the companies should apply the right mix of digital supply chain capabilities in the focus area.

Sources

[1] Source: Deloitte’s report on supply chain management in the chemical industry (2017), Issue 10, Available at: https://www2.deloitte.com/content/dam/Deloitte/fi/Documents/manufacturing/Deloitte_Supply-Chain-Management_chemicals.pdf

[2] New businesses, New Competitors, Accenture (2014)