When it comes to managing complex global supply chains, visibility and collaboration are the name of the game. To drive it, companies are embracing digital strategies
The global chemical process industries (CPI) are undergoing a major transformation brought about by mergers, divestitures and shifting market dynamics, and these changes are leading to the creation of nonlinear supply chains. To keep pace, many industry leaders are harmonizing their supplier-management, sourcing and supply-chain processes using a digital strategy that enables them to extend business processes beyond the four walls of the enterprise. Along the way, these efforts are creating new efficiencies and cost savings that are helping them to compete in today’s complex marketplace.
Industry trends prompt change
Shifting market dynamics.Across the CPI, competition is emerging from growth in the number of low-cost suppliers competing for business. These companies range from spinoffs of established providers, to firms in developing countries. Regardless of the source of the competition, an increasingly crowded field is leading to growing price and margin pressures. In addition, globalization and environmental trends are changing demand patterns. Customers require niche products to satisfy diverse local regulations and end users, while environmental concerns are changing how products are packaged.
For instance, consumers in many regions and many different industry segments prefer products with “green” packaging, often shifting demand away from plastics, shrink-wrap and other non-biodegradable packaging. This leads to further pressure on margins in these categories. And underlying commodity prices are unpredictable, making it difficult for operating companies to forecast and manage costs and profitability. Similarly, volatility in petroleum prices alone creates tremendous instability in an industry where petroleum and petroleum-derived raw materials and intermediates can represent more than one-tenth of the total spend.
Acquisitions, mergers and divestitures. As in many industries, chemical manufacturers are accelerating innovation in ways that create competitive advantage and grow corporate product portfolios. Market leaders are investing in innovation through internal R&D initiatives and their own venture capital arms. They are also adopting disruptive technologies and expanding their product portfolios by acquiring product lines from peers and competitors. These investments and acquisitions increase the urgency for — and the challenges of — harmonizing business processes and supply bases across disparate lines of business.
Business model and portfolio innovation and growth that depend on complex, global, nonlinear supply chains. To support these new business models and product portfolios, many CPI producers are taking advantage of trends such as toll manufacturing (when a third party performs a service related to a product for a volume-based fee, or toll, quickly and efficiently). Tolling can make costs more predictable because the toll manufacturer buys its own equipment and uses its own floor space — taking on huge costs (and risks) that the chemical manufacturer no longer needs to bear. In addition, toll manufacturing often helps companies become more agile at innovating, by allowing them to focus their resources and efforts on innovative opportunities, rather than on manufacturing.
Typically, companies see a 10% increase in new product revenue from accelerated innovation resulting from an extended ecosystem. But many also see a rise in risk, as dependency on global, nonlinear networks of toll manufacturers and other companies grows.
To manage this, CPI companies need deeper supply-chain visibility and improved collaboration with vendors. Visibility into the product quality of batches or lots produced by toll manufacturers, for instance, is critically important to ensure both customer satisfaction and regulatory compliance. Improved visibility into the availability of the supply also helps a company to ensure its ability to meet market demand.
Case example: BASF’s digital transformation
BASF provides an example of the benefits that digitization can deliver. The global chemical company has essentially transformed its sourcing and supplier management across direct and indirect spend, ensuring that all goods and services that are both directly and indirectly incorporated into the products they are manufacturing are covered. In addition, BASF is packaging through the use of digital technologies such as business networks and cloud-based applications. The company started by deploying a new operating model that was structured around strategic category teams, shared-services procurement, and local procurement, to take advantage of local and commodity expertise and efficiencies. BASF then implemented digitized solutions to manage sourcing direct inputs into its products, such as raw materials. Efforts to qualify and segment suppliers by region, commodity and even at the local plant level, and to enforce qualification in its direct materials-sourcing processes, have yielded demonstrable returns.
The case for going digital
While the marketplace changes for chemical companies, advanced digital technologies such as connected devices, the Cloud, Big Data and the Internet of Things (IoT) are driving new opportunities to improve traditional value changes. In fact, IBM and IDC predict that total expected benefits from digital transformation is expected to amount to $14.4 trillion dollars by 2022.
Given these trends, it is more important than ever that chemical manufacturers transform from being essentially disconnected, manual organizations to becoming connected, digital enterprises
1. Align digitization efforts with business imperatives. It is first important to define your digital vision, mapping out where you are and where you want to go. Decide what’s most important for your company and ensure your digital strategy aligns with these goals. This includes determining the strategic relevance of different supply-chain planning functions, and identifying the value these elements may contribute to your competitive advantage.
2. Standardize and harmonize the process. To reduce complexity and streamline procurement processes across different lines of business and acquisitions, leading chemical manufacturers are transforming strategic procurement. Focusing on supplier qualification and selection processes, and harmonizing disparate supplier bases across different regions, can help you achieve purchasing scale in new ways that were previously not possible.
3. Collaborate with suppliers across plan-to-deliver processes.To harness global, nonlinear supply chains and achieve operational excellence, industry leaders are working to provide “a single face” to suppliers by eliminating fragmented communications. They are also collaborating with key direct trading partners, including toll manufacturers and suppliers in low-cost countries. These strategies can help to foster proactive supply chain visibility, increase flexibility and effectively manage volatility.
4. Ensure that your plans are agile and flexible.It may be beneficial to incrementally initiate these digital strategies across your enterprise. Benefits of agile deployment can include shorter time-to-market, early delivery of customer value, transparency and visibility, as well as early risk identification. This approach is not always easy to adopt, as it requires a flexible and ready-to-learn culture across the company. It may make sense to pick a specific area to start with and then scale up from there. If this is the strategy you choose to deploy, ensure that your strategy is flexible enough to move as you do.
Reaping the rewards
The benefits of digitization have been clearly and profoundly demonstrated in leading companies. McKinsey & Co. [ 1] has reported that business-to-business (B2B) companies that are digital leaders generate 8% higher shareholder returns, and a revenue compound annual growth rate (CAGR) that is five times greater, than their competitors. In addition, successful digitization can lead to:
- Improved compliance through reduced risk in supplier selection and management. By employing more sophisticated and granular supplier-qualification and management strategies, companies can enhance compliance on an ongoing basis, which helps to reduce financial, brand and other risks
- Reduced costs by harmonizing processes. Global companies that grow through acquisition and organic investment can gain the best of both worlds — benefiting from local and commodity expertise, and from the efficiencies that harmonized, shared-services organizations offer
- Greater process efficiency. Processes from sourcing and orders through invoice and payment run faster and smarter, because integration with enterprise resource planning (ERP) and supply-chain-optimization systems means connecting the people, partners, processes and information to effectively manage all source-to-settle activities
- Increased inventory turns. Supplier collaboration enables companies to reduce inventory levels, increase fill rates, and minimize supply chain risks through better supply chain visibility — all with minimal manual data entry and re-keying
Changing with the times
Digital transformation of value chains offers a massive opportunity for chemical companies to create new sustainable business and operational advantages. But success requires a change in mindset, and in many cases, will mean investment in new talent and technologies. The process will not be easy and success will not be realized overnight. But companies that commit to making the change will be rewarded in the end with more resilient and competitive supply chains that give them advantage, today and in the future.
1.Tanguy, Catlin, Harrison, Liz, Lun Plotkin, Candace, and Stanley, Jennifer, McKinsey & Co., www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-b2b-digital-leaders-drive-five-times-more-revenue-growth-than-their-peers
Keith Baranowski is global vice president and general manager of Ariba’s Direct Spend Solutions, a unit of SAP (3410 Hillview Avenue, Palo Alto, CA 94304; Email: firstname.lastname@example.org; Phone: 1-650-849-4000). His responsibilities include building Ariba’s innovation growth strategy and helping clients digitize processes for product development, sourcing and supply-chain collaboration. He has been with SAP for 12 years and held a number of leadership roles that focused on SAP’s Supply Chain, Product Lifecycle Management, Manufacturing and Operations solutions. He previously worked at software companies Oracle, PeopleSoft and i2 Technologies, where he held management positions in sales, marketing and product development. Prior to transitioning into software, Keith worked as a sales engineer at Intel. Baranowski graduated cum laude with an electrical engineering degree from California Polytechnic State University in San Luis Obispo and earned an MBA from the University of California, Berkeley.
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