BASF Group: Innovation & Integration in Chemicals’ Supply Chain Management
BASF Group (Badische Anilin und Soda Fabrik[1]), the world’s largest and one of the oldest[2] chemicals companies is the only one from chemicals industry that secured a position in Gartner’s supply chain excellence rating of 2019. This case study focuses on the key factors that led to the supply chain excellence for the BASF.
BASF Group is a global manufacturer and supplier of chemicals headquartered in Ludwigshafen, Germany. The company operates in the chemical industry with a focus on serving its customers through six business segments that provide Chemicals, Materials, Industrial Solutions, Surface technologies, Nutrition & Care and Agricultural solutions. At the time when chemical companies are suffering from a decrease in revenue due to global reduction in prices of crude oil and trade conflicts, the company generated a sales revenue of €62,675 million in 2018 with a net income of €4,707 million[3].
Chemical Industry Trends
Recent years have seen a decline in sales in the chemical industry due to slowdown in global automotive production and trade-wars between global powers such as Russia, China, and the USA, but future of the chemical industry is promising good prospects. China is the global production hub and the largest chemical market is expected to become the source of half of the total global demand for chemicals. The other factors that are deriving growth in this industry include demographic changes, population growth, climate change, digitization, and electromobility. The following figure shows the trends[4] that will affect the chemical industry[5].
These trends are promising for the chemical industry that usually works on a “Think-Global, Act-Global” philosophy that is competing in the market using standardized products and service offerings. This means unlike other industries where quality plays an important role in affecting sales, it plays a negligible role in the chemical industry. The four factors that greatly affect sales in this industry include volume, price, portfolio, and currency. Moreover, the demand for chemical products also remains fairly stable. These characteristics led to lower margins and thus organizations operating in this industry often gain competitive advantage by improving the value-chain between the raw material sourcing and delivery of the final product. BASF did realize this and thus invested heavily in innovation and technology to integrate its value chain.
BASF Group Value Chain: The Concept of Verbund
Verbund is a German word that means combine or composite. For BASF, it is an approach to consider a system view of its business and operate it in an integrated manner to obtain operational efficiencies and supply chain effectiveness. As a part of this approach, BASF invested heavily in digital technologies and artificial intelligence to interlink production plants, energy flows, and infrastructure. This is done using intelligent plant networking of six of its global production sites (two in Europe, two in North America and two in Asia) that produce more than 50% of its total global production.
At these six verbund sites production plants, energy, and material flow, logistics and site infrastructure are well integrated. The elements of this integration are unique because unlike other integrated systems employed in other industries focus on product and information flow, this system focuses not only product & information flow but also on by-products, waste, energy and everything that goes in the value chain and comes out. It has several other dimensions, that contribute to the company’s businesses and strengthen its portfolio. This includes creating value through efficient management of raw material and products by monitoring end-to-end supply chains (Own, Partners, Suppliers, etc.)
This is further explained in detail in the following sections:
1. Smart Supply Chain — As a part of the verbund concept, BASF implemented global logistics visibility platform with connection to 600 carriers. This system allows management of maritime and air shipments in a transparent way and thus enhances supply chain service to customers who can now track the shipments in real-time. This tightly integrated and connected system improves the transparency, agility, and speed in the supply chain.
2. Automated Guided Vehicles — BASF implemented system controlled automated guided vehicles (AGV) to replace railway tank cars. These AGVs helped to optimize logistics by reducing the delivery time to loading stations on-site by more than 95% and also reduced the labor requirements.
3. Environmental Sustainability — Adoption and implementation of the concept of verbund creates opportunities to reduce emissions, waste gases and consumption of resources. Verbund concept helps to optimize transportation by minimizing transportation distance thereby generating both economic and environmental benefits. It further helped to avoid around 6 million metric tons of greenhouse emission by eliminating unnecessary activities in the system and using by-products of one process as starting material for another process. In logistics, it helped to reduce 280,000 fewer truckloads per year[6].
4. Digital Verbund — Chemical supply chains create a vast amount of data such as details of the composition of products, customer processes/application, and other related information. Digital verbund means collectively storing and managing this data to provide a knowledge base to all segments of the company. This is used for creating a technological competence in research, product development, and customer applications. This is also utilized to offers customers chemistry-related solutions to solve specific problems. Furthermore, there were cases when different business segments were supplying the same customers but were managing them separately. Integration of business segments helped the management of customer accounts, deliveries and other things in an effective way. This helped in saving time & cost and improving customer experiences. For example, earlier different segments were using separate deliveries and logistics to supply materials to customers but with integration, the deliveries and logistics can be integrated and coordinated if they are going to the same customer. It also used artificial intelligence to connect all six-major segments excluding the oil & gas construction chemicals.
5. Verbund Simulator — Verbund simulator is a tool that helps in optimizing the processes involved in the value chain by simulating the value chain and other systems under changing scenarios of demand and supply. This helps the company to understand the flexibility and adaptability requirements for managing any variation in the demand or supply.
6. Circular Supply Chain — Verbund not only monitors the internal aspects, but it also helps in the integration of the company’s value chain with its customers to create a circular supply chain. These circular supply chains utilize or find ways for use of byproducts of processes at customer sites in other places. For example, Pyrolysis oil derived from plastic waste, produced at one of the customer facilities is now being utilized by BASF.
Conclusion
Systems such as Verbund demand investment of huge resources for its development and usage in integrating various business segments. This huge investment often creates problems for companies with limited resources in the development of these systems. Sometimes, these companies need to drop such initiatives during the execution phase due to the demand for additional resources or scope creep.
Companies that need improvement in the chemical supply chain should follow the strategy of BASF, which is to adopt incremental innovation[7] and integrate the segments by focusing on sources of biggest revenue. Biggest revenue means that they are also the biggest cost centers which further means that even a small improvement in the system will make a big difference in terms of actual costs. This can be observed in the integration of BASF Group’s 6 major production sites using Verbund concept, that delivered over €1 billion in cost-saving. BASF could have adopted it for all of its 371 production-sites[8] but it did it only for the selected few i.e. those that are responsible for more than 50% of its production. This is because the benefits of integrating all sites could never have created enough value to overcome the implementation costs.
[1] German translation of Baden Aniline and Soda Factory
[2] Formed in 1865
[3] Company’s Annual financial report, 2018
[4] UBS foresight report, 2019
[5] United Nations, World Population Aging 2017, and World Population Prospects 2019
[6] Source: Company Annual Report 2018–2019.
[7] Incremental innovation is a philosophy of doing innovation in small steps. Radical innovation is an approach to do innovation abruptly.
[8] Sites as on 31st December 2018
Originally published on LinkedIn: https://www.linkedin.com/pulse/basf-group-innovation-integration-chemicals-supply-chain-dixit/
