Migrating to a connected plant with a digital platform helps industries maintain a competitive edge. This article offers insight on how to get started
We are often asked how chemical companies pursue digital adoption. As you can surmise, this is a complex journey that factors in the individual firm’s current maturity in information technology (IT), its business model and value drivers. However, the fact is that most companies in the chemical process industries (CPI) are facing the limitation and challenges of their legacy systems that are siloed, expensive to maintain and not supportive of innovation. Although they have heavily invested in operational technologies like sensors and process control systems to automate their plants for safety and efficiency, there is typically no integration with their business systems. In the past, companies have attempted to combine both their system of record and systems of business differentiation into a single architecture. Unfortunately, this resulted in heavily customized systems that were expensive to implement and difficult to maintain.
In the future, companies will need to shift to an architecture that will clearly separate the system of record and the system of innovation or differentiation. The system of record should be as standard as possible to enable all business transactions, such as order management, finance, procurement and so on. Business differentiators will need to be in the system of innovation that is tightly integrated with the system of record.
Industry 4.0 framework
Often described as the age of cyber-physical systems, Industry 4.0 is more than just connecting machines to the internet. That approach could create point solutions that solve smaller business problems in an isolated way. Our point of view is that the basis for successful implementation is the horizontal integration of business processes, starting in research and development (R&D) all the way through delivering product to customers. One of the prerequisites for this horizontal integration is a platform with a common data model and digital-physical representation. This platform must be smart in the sense that it allows fast and simple correlation, analysis and visualization of data. Therefore, it makes sense for this common data platform to be on a cloud infrastructure to allow access for constituents in the extended ecosystem. The platform could also enable vertical integration from the business process down to the machine level, which could fundamentally change the way companies are operating today.
A recent survey of over 150 executives from chemical companies revealed that most have already budgeted or begun to prototype applications of digital technologies. However, most seem to be struggling with the following challenges:
- Where to start? – Do we need to build analytics capabilities before we invest in machine learning or do we invest in the internet of things (IoT) before we build “big data” capabilities? Which infrastructure should we use? Which use cases should we start with?
- Do we need to make a large upfront investment? – Do we need to hire teams of experts to build and leverage these digital technologies? Do we need to make investments in infrastructure?
- How can we integrate digitalization with everything we already do? – How can we integrate intelligence and innovation capabilities with our systems of record? Do we need to upgrade or replace our existing applications?
- How soon can we expect to see real outcomes? – Do we have to wait multiple years to realize value in our digital investments? How can we speed up our time to value?
- How can we scale our innovations across our businesses? – How can we make our innovations repeatable? How can we effectively leverage digital capabilities across business areas?
Although there is no “one size fits all” approach, at the most fundamental level, the industry is universally pursuing a three-pillar approach designed to apply digital technologies in use cases that drive early value creation (the first pillar), leveraging work that accretes the migration to the core digital platform (the second pillar), while insuring that the vision of business model transformation (the third pillar) and the capabilities that will require remain the ultimate target. Currently, CPI executives are seeking to invest around four strategic priorities: gaining organizational agility, simplifying and optimizing operations, competing as a network, and selling business value instead of products.
To the point of accelerating downstream change, we have witnessed disruption in many consumer-focused industries. One has only to look at companies like Netflix, Uber, Airbnb, and Under Armour to see relevant examples. You might think that because chemical companies make consumable products that require further processing to be useful, the risk of disruption would be minimal — not exactly. In their July 2015 article, Chemicals and capital markets: still going strong, McKinsey highlights the turnover that the industry faced after the global recession where nearly 40% of the top quintile performers in terms of shareholder returns dropped out – 14% to the bottom quartile. At the same time, 50% of the bottom quartile performers moved up with 7%, making it to the top quartile. The clear message of this analysis is “use it or lose it” with regards to allocating capital. Industry leaders must perpetually invest in innovation to address change or risk losing their standing in the market.
Central to achieving organizational agility is the need to enable quick decision making at all levels of the company through insight into the impacts of the assorted options at a given employee’s disposal. This requires the removal of silos through shared data across the business and operational platforms, including those of partners, along with user-consumable analytics that illuminate the tradeoffs between choices. This is mostly an analytics and big-data play with application for many high-value use cases. At the strategic level, use cases would include enhancing market strategy, enabling portfolio optimization and the mergers-and-acquisition (M&A) lifecycle (from target selection through integration), and eventually business model transformation. At the tactical end, it is primarily centered on the ability to not only detect, but to anticipate changing market conditions and trends along with emerging customer requirements.
Simplify operations and optimize business processes
Overcoming organizational and information silos is another area that complicates business processes for most chemical companies. Information becomes segregated – either through organizational structure, incomplete integration of M&A targets, or layers of point system customizations. The information in the silos is usually aggregated and loosely (often manually) integrated with information in other silos. This not only results in a high degree of human touch through massive reconciliation efforts between systems, it creates multiple single points of failure that dramatically increase operational risk. By standardizing processes on a single integrated enterprise-wide platform with embedded best practices, CPI companies can largely eliminate this risk as employees share a single version of the truth at all times. It also serves to help retain and share proprietary knowledge to help alleviate the potential drag created by the growing skills gap. Further, the platform enables companies to leverage digital technologies to automate and optimize functions in back end, manufacturing and supply chain operations as well as apply IoT, predictive models, machine learning, artificial intelligence (AI), and blockchains to maximize operational performance and proactively mitigate risks.
Compete as an ecosystem
Chemical companies have long recognized the value of collaboration across the value chain, often partnering with both customers and suppliers to drive new product innovation. This collaboration can span across a long chain, since the industry is typically anywhere from three to six steps away from the ultimate consumer. What has been lacking in this information is real-time insight into what is happening along the chain in either direction. An enterprise-wide digital platform with embedded analytics enables CPI companies to explore new collaboration models that go beyond company boundaries to accelerate innovation with partners and deliver higher levels of customer value. It also enables CPI companies to generate new revenue streams by offering new services from comprehensive insight into data shared across ecosystems. An example of this is a new asset information network that connects chemical companies with equipment manufacturers, original equipment manufacturers (OEMs) and engineering, procurement and construction (EPC) firms to enhance everything from handover and commissioning (to ramp up new lines quickly) to prescriptive maintenance practices (to further reduce asset downtime).
CPI companies are also seeking to leverage networks to address skills-gap issues, both within the industry and with academia. First, many are now pursuing more of a blended model of direct and indirect labor to perform key tasks. Many companies are now seeking to optimize major maintenance actions (shutdowns and turnarounds) by orchestrating networks of suppliers, OEMs, and both direct and contingent labor to significantly reduce costs and overruns. Second, although chemical companies always partnered with academia to recruit science, technology, engineering and mathematics (STEM) skills, they can better align their interests and overcome negative perceptions with Millennials (and women) by featuring more desirable digital positions and career paths.
Sell outcomes instead of products
At the heart of the CPI business is the ultimate customer who is seeking outcomes, not products. As CPI companies produce tangible products that require further processing to bring value to the ultimate customer, selling outcomes instead of products is a tall order. However, companies that have invested in a digital platform to simplify and optimize their business processes, have achieved a high degree of organizational agility, and have a high degree of value chain collaboration through business networks are well positioned to deliver outcomes to their customers. Through increased insight into customer needs along with enhanced network collaboration, they can develop new customer-centric and value-oriented business, product, and service models, as well as compress R&D cycle-time to drive product innovation to increase customer loyalty and share of wallet. We see this happening as companies begin to pilot projects leveraging machine learning and AI to compress product development times through better recipe management and driving down off-specification material through predictive quality. Eventually, CPI companies will no longer sell product grades, (which is really a tradeoff of on the continuum of product properties to efficiently meet demand without overburdening the production process) but will sell targeted specifications for an individual application – also known as “the lot size of one.” Attaining such capabilities promises to unlock enormous potential across the value chain and will provide a huge source of competitive advantage for those who reach this milestone.
The Journey Begins Now
U.S. chemical companies are expected to enjoy an unprecedented window of favorable economic fundamentals. They are currently making substantial investments in scale to meet growing demand, while enjoying an enviable cost-advantaged position. However, the industry now is faced with new pressing issues specific to the accelerating pace of change downstream from them along with a growing STEM and trade-skill gap that can only be addressed through better use of data and digital technology applied both inside and outside the organization along with higher levels collaboration across the ecosystem.
The CPI now recognize the potential of digitalization to help them address these challenges. As the threat of disruption rises, executives are realizing that digital investment is increasingly becoming a better use of capital than new capacity, share buybacks and increased dividends. As a result, most of the large enterprises are now beginning their digital journey by pursuing relevant high-value digital use cases, while simultaneously planning their migration to a digital platform that will eventually enable their transformation. These players will have a tremendous edge when the present favorable business cycle ends, because they will not only be realizing the productivity and efficiencies that digital technologies offer, but also will possess the necessary agility and capabilities to compete under any market conditions. Those who do not take advantage of this investment window will be putting themselves at great risk and competitive disadvantage. Once the window closes, capital will be much scarcer and, frankly, the lag may be too large to overcome.
Edited by Dorothy Lozowski
Mike Laprocido serves as the strategic industry advisor, chemicals for SAP (7500 Windrose Ave., Plano ,TX 75024; Email: [email protected]). He is responsible for developing thought leadership and driving SAP solution adoption in the chemical and oil-and-gas industries. With over three decades in various executive roles at BP Oil, BP Chemicals, Kuraray America, Panda Energy and IBM prior to joining SAP, Mike has gained a broad and deep industry knowledge base that he leverages to help his clients to innovate and transform their business through the application of digital technology.