The drive for cost cuts and 'simpler structures' at Shell

20 June 2001 17:13  [Source: ICIS news]

Shell has made a great deal of progress in its transformation into a chemical company more focused on productivity.

The move back towards the cracker has been accomplished in three years. It has seen the sale of 10 businesses and a reduction in capital employed in chemicals from $12.7bn to $8.5bn (Euro9.86bn). The number of production sites have been cut from 54 to 11 and the workforce from 21 000 to 9000.

The performance gap with its peers has been closed, chief executive, Evert Henkes, told analysts in London on 14 June. This is the most important practical and psychological point. At the beginning of 1998 Shell had a return on average capital employed (ROACE) of 7.2%. At the beginning of this year, ROACE was 14.8%.

This is a credible performance by anyone’s standards particularly given the state of most of the markets Shell operates in today. The portfolio is much more focused now, and Shell says it is stronger, which augurs well for the future.

The company has focused on its strengths, emphasised world scale assets and concentrated on a high degree of olefin to derivatives integration. The businesses remaining in the portfolio have very good reasons for being there. The change has been considerable but the logic behind it has been clear.

Having delivered the transformation, though, the company now has to prove that it can continue to at least match the performance of others, notably ExxonMobil. This means levering technology and capital effectively and using all the new means at its disposal to perform better, ultimately to cut costs further and lift productivity.

Shell says that its operating model is to ‘deliver bulk petrochemicals, to large industrial customers, through simpler structures, providing the lowest total delivered costs’. The challenge is to extract more value from the business and production network. How Shell differentiates itself when others are doing much the same, remains to be seen.

Getting everyone in the business working together is a key element in eventually implementing plans to optimise the supply chain or cut working capital. Henkes outlined some of the important objectives which he and his management team say are deliverable this year. A new round of cost savings will see the annual saving total reach $650m by the end of 2001. This is a tough target. It is $100m more than that set at the end of 1999 and $300m more than the original target set when the change process began. Henkes also says that the Basell polyolefins joint venture with BASF will achieve costs savings of Euro250m ($212m) by 2003 compared with the Euro100m expected this year.

The realignment of the Shell portfolio may have knocked the company from the number one spot in petrochemicals but it has produced a set of businesses with the potential to perform better. Part of the challenge has been to create a new cost efficient mindset across the company and, although this has taken time, Shell is getting there.

The message has been to drive for ‘simpler structures’ – from basic management to information technology (IT). These new structures have destroyed old national and regional boundaries and broken down the barriers to change which have stifled creative management for years.

Building on this simpler structures idea, the company is trying to motivate employees now involved with common work processes, in global networks, incorporating what the company calls ‘winning attributes and behaviours’. Shell firmly believes that the way it works in chemicals can be the differentiator, tying the way it structures and networks the business with a clarity of purpose and focus that can help create greater value.

On a more readily recognisable level, Shell says that it will continue to invest about $800m a year in chemicals mostly on brownfield sites and in Asia and on building on synergies with the Basell operations. Recent news reports about the company talk about its interest in Saudi Arabia, Iran and Singapore. This figure does not include the significant investment planned for the Nanhai cracker in China.

By: Nigel Davis
+44 20 8652 3214

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