Up to speed?

10 July 2000 00:00  [Source: ICB]

The pace of conducting business in the Internet age is hotting up for the chemicals industry. AdJan Brouwer, of Andersen Consulting, reports

The pace of change in the chemicals industry is testimony to the business value of the Internet. Because the economics of exchanging products, information and money have changed, companies can achieve near immediate global reach, radically cut costs, have the potential to increase revenues and enhance customer service just by using the Internet.

As a result, value is being created in different ways and being re-allocated along value chains. This is sparking a revolution in the industry as new players enter the market and established players align themselves into previously unimagined virtual partnerships.

Current e-commerce activity

The first wave of 'chemicals on the Internet', when companies started using the World-wide web, resulted in sites springing up that were little more than corporate brochures online. The interactive sites with Material Safety Data Sheets (MSDS) and dynamic product features have become commonplace, and some chemical companies have developed their own web-based order fulfilment capabilities. Several third-party marketplaces have emerged and some chemical companies have formed consortia to build seller-centric marketplaces. As e-commerce strategies become more sophisticated and complex, chemical companies are leveraging the Internet platform in a variety of ways.

As well as providing a marketing, supply-chain and customer-service tool, companies are using the Internet to transform internal processes and to better manage knowledge. Expansion in Internet activity within many chemical companies is evident across three dimensions.

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First, the Internet enables corporate cost reduction through more efficient use of information, improved transaction efficiencies and the provision of self-service activities for internal functions, such as human resources. Second, companies can derive real business value from customer data generated by online activity. Third, firms can provide valuable services to customers as demonstrated by Dow Chemical's myaccount@dow.com, a secure customer-specific extranet which provides customers with a method of managing their accounts, and acts as an intelligence-gathering device.

Traditional activity on the Internet has tended to be a 'virtualisation' of business processes, where supplier, manufacturer and customer relations remain intact. With myaccount@dow.com, customer interaction is transferred to the web, but executed in the same manner, so that the Internet has been used primarily as a communications tool.

The emergence of independent marketplaces, such as ChemConnect, CheMatch and Ventro, has acted as a catalyst, forcing established players to acknowledge and embrace the power of the Internet. Chemical companies are pursuing more aggressive and innovative e-commerce strategies. For example, Dow Chemical has developed a highly sophisticated web presence, with last year's launch of both myaccount@dow.com and Dow e-Mart, its global web-based procurement system.

Dow e-Mart is an online illustrated catalogue of 80 000 items from 47 suppliers. With the use of a procurement card, employees can point and click to order items from safety equipment to software peripherals. Myaccount@dow.com provides online access to everything from order status and account history, to repeat orders and payment information.

In recent months, several seller-centric marketplace consortia have been established, involving large industry players. The marketplaces announced to date include plastics, elastomers, and industrial chemicals. Additional consortia are likely to include solution-based communities focused on more narrow industry verticals.

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Chemical companies recognise the value of partnerships to deliver an increasingly sophisticated and competitive online service. The industry is experiencing three distinct types of alliance:

• Joint ventures between established industry players
• Partnerships with industry players and independent trading sites
• Chemical companies aligning with non-industry players.

The first is illustrated by the web-based procurement exchange formed by 14 energy and petrochemical companies, led by Royal Dutch/Shell and BP Amoco. The system was established to cut procurement costs and it is estimated that the companies involved will benefit from a projected 5-30% cost reduction. Ethyl recently led a collection of chemical production companies in the formation of Envera, a web exchange developed to streamline supply chain management.

The second, joint ventures, is radically reshaping the chemical industry. An example is that of BP Amoco Chemicals, Dow Chemical, Eastman Chemical, Rohm and Haas and other chemical companies investing equity in ChemConnect. In addition, these firms have committed to using ChemConnect as their preferred third-party platform for Internet-based chemical trading. These ventures are evidence of the powerful impact independent trading sites have on the chemical industry as it transforms itself to compete in e-business. Additional alliances are being formed in the procurement space and in the establishment of the seller-centric marketplaces.

The third type, chemical companies aligning with non-industry players, is a more recent development, and one with serious implications for the future of the chemical industry. The Internet has raised expectations about customer experience, reflecting a fundamental shift from a seller-driven to a buyer-driven world that will be increasingly orientated towards solutions. Such alliances indicate that success in today's virtual marketplace depends upon creating networks of cross-industry partners, to deliver broader solutions to customers and other clients further down the value chain.

Eastman Chemical, for example, has announced a contract with eCredit to provide credit and financing decision capabilities for its e-commerce and bricks-and-mortar sales channels. This partnership allows Eastman to leverage the full suite of eCredit solutions, including the eCredit Global Financing Network, to automate key credit-management processes, improve working capital and customer service, and manage risk and collections.

Customer demand for a seamless, integrated online service is having a profound impact on the chemical supply chain. Chemical companies forming strategic partnerships with logistics companies illustrate this. In February 2000, Eastman announced its virtual logistics venture, ShipChem.com, in alliance with Global Logistics Technologies. Such integration of the supply chain will offer enormous advantages for efficiency, and help to enhance loyalty.

Concerns/barriers to growth

There is evidence, therefore, that chemicals companies are responding to the demand for dynamic and innovative e-commerce strategies. However, despite of the obvious business benefits of global outreach, costs reduction and increased customer service, some remain unconvinced about the long-term value of the Internet. Security is a particular concern, as is liability and the liquidity of some of the new trading sites.

This reticence is reflected in a recent study commissioned by Andersen Consulting, in the Netherlands, in collaboration with the Dutch Chemicals Industry Association (VNCI). Andersen conducted research with the members of the VNCI at the annual meeting in May 2000. Of the 80 companies questioned, 45 respondents recognised the impact of e-business on the industry, suggesting that this would account for 20% of overall industry business by 2005. However, this figure was reduced to 10% when respondents evaluated their own companies, showing a marked reluctance to commit resources.

Moving forward

With this in mind, what trends can we expect to see emerging over the coming months? The current trend of joint ventures will continue as companies seek to establish a full-service solution capability. The nature of these alliances will change and it is likely that, once companies have formed the necessary alliances with logistics firms, manufacturing partners will become the next target. This customer interaction will encourage powerful integration at the supply-chain, R&D and application levels. These partnerships will become more critical as chemical companies are pressured into investing in capabilities that enhance customer service.

It is well known that the cost of retaining a current customer accounts for a fraction of the cost of winning a new one, and customer service is often the single most important factor in customer retention. According to a recent Andersen Consulting report, How Much Are Customer Relationship Management Capabilities Really Worth? What Every CEO Should Know, a typical $1bn business unit could add up to $100m in profit by enhancing customer relationship management capabilities - thereby improving customer contact from average to superior.

For example, in 1999, Geon, a leading North American-based polymer services and technology company, recognised the need for an e-commerce programme to maintain exceptionally high levels of service, while reducing overall costs. In September 1999, it launched GetGeon.com, a customer self-service solution. Dimensioned for 25 concurrent users, GetGeon.com enables the swift accomplishment of five key objectives: revenue enhancement, cost reduction, increased productivity, marketing effectiveness and improved customer support and satisfaction. Inherent in this model is 24-hour/seven-day availability and one-to-one customer communication.

The partnering trend will continue and inevitably the number of e-players will fall. The questions that the industry needs to ask itself are: what constitutes a 'winner' in this predicted fall-out and who are these likely to be? It is those players that are shown to have a long-term business model that will that reap the potentially immense long-term financial rewards from e-business in the chemicals industry? When it comes to predicting the likely winners and losers of the partnering trend, it is likely that of the current e-commerce chemical companies, a far smaller number will survive in the long term.

A further likely development is a reduction in supplier loyalty, as the transparency of the Internet will encourage chemical companies to use the Internet to screen and select key suppliers. The cost efficiencies attached to this strategy are obvious. BASF leads the field, having conducted the first methanol auction online earlier this year. An estimated eight players were involved and the outcome was a cost reduction of around 10%. Suppliers will need to respond to this trend with improved customer services to encourage loyalty.

Geon is also a dominant player in supply-chain integration, having established the first B2B e-commerce solution of its kind, integrating its supply chain with a newly formed resin joint-venture. The site features automatic links between enterprise resource planning systems, operating machine-to-machine, requiring no human interaction. This supply-chain integration capability has created a strategic channel that leverages its extended supply chain, enabling real-time integration from select customers all the way through to key suppliers. This venture is proving to be a winning formula, not only for Geon, but also for the supply chain, as this allows the company to cut inventory, make better forecasts and reduce costs.

Conclusions

Leading companies in the chemicals industry are clearly developing strategies to take advantage of the power of the Internet, and also to manage issues that are an inevitable part of e-business, such as the demand for transparency. Driving these strategies are the key capabilities of customer-relationship and supply-chain management. New business models are being introduced and, as a result, nimble players are entering the market and threatening to eclipse established players. It is no surprise, then, that companies such as Dow Chemical, DuPont, Bayer, BASF, BP Amoco and others are forming consortia to develop new marketplace models.

The challenge for these new consortium-driven companies, however, will be the ability to deliver. Most of the key players in the industry have developed e-commerce strategies and many have appointed directors or vice presidents of e-business. Business planning procedures that traditionally took months, or years, to complete are now having to be reduced to weeks, and even days. Is the chemical industry prepared for e-speed? AdJan Brouwer is an associate partner with Amsterdam-based Andersen Consulting's chemicals practice, who specialises in e-commerce. He is a member of the e-commerce Chemical Industry European Leadership team within Andersen Consulting.

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