Chemical companies scramble to cut supply costs

Supply chain survival

25 March 2009 00:00  [Source: ICB]

Supply chain management organizations are busy putting out fires fanned by a turbulent market and severe price fluctuations. Is relief in sight?

NOW MORE than ever, chemical companies are being challenged to cut costs, while striving to maintain the quality and safety of their products under the relentlessly crushing weight of economic depression. As such, they are scrutinizing every detail of their supply chain management to find the best ways to cut down on costs.

"First and foremost, chemical companies are under severe cost restrictions because revenues have gone down. They are trying to get their cost down, and turning to their supply chain functions to evaluate how they are buying and sourcing," says Bob Engel, national director of client service for the supply chain management practice area for Resources Global Professionals, a US-based business consulting firm.

Engel says companies are looking at how the world has changed and if they are still getting the right price for the items they are buying.

"Regardless of whether you are in the chemical business or any business right now, supply chain organizations are being challenged at the leadership level to find ways to get costs down," Engel says.

"I think companies are forced to do some of these cost-cutting measures and reduced orders in the face of reduced cash flow," adds Vaughn McCoy, senior global procurement manager for US-based Eastman Chemical.

Strategies to help supply chain functions operate effectively include minimizing inventory, increasing worldwide competitive sourcing options, and more effectively communicating on price changes, says McCoy.

Other strategies include having an understanding of the raw materials used in production and their cost, and keeping up with transportation and international duties, he says.

Chemical manufacturers are responding to price volatility by minimizing inventory, delaying orders until product is absolutely needed in the hope of getting the best price, managing labor to cut costs most effectively, and delaying salary increases, McCoy says.

"[There is also] increased communication with the supplier base to help them realize the dynamics of supply in an effort to keep market share [and] more communication internally with the business to make sure they understand the most current cost positions on key raw materials," he adds.

However, Engel points out that keeping pace with price volatility is more difficult when revenues continue to plunge.

"Chemical companies generally have not had an opportunity to control prices. They are having to stay current with the market, and before the economic crisis hit, there was already tremendous fluctuation when the price of oil and demand for their products were rising. Today it is just the opposite: where once there was a high demand/limited supply situation, there is now nearly no demand because the global economy has basically shut down," Engel says.

"The economy is saying that it doesn't need these products and materials, so the demand has gone away. But the supply is over-abundant. This makes it difficult to manage cost when there's little to no revenue coming in," he adds.

And the margins that chemical companies still require even when there is no demand only add to the pressure to sell inventory, meet competition, and reduce costs, Engel explains.

RIDING OUT THE STORM

The chemical industry needs to be flexible and quick to anticipate and then respond to the reduction of demand, as well as highly volatile energy, freight and raw material costs, according to Tim Bett, director for Europe at UK-based Bisham Consulting.

"Operating in a planned environment is key, as it is far less effective just to respond to events," Bett says.

"Efficient and flexible supply chain management is essential if chemical manufacturers are to continue to supply reliably and cost-effectively. Fundamental to this is a robust sales and operations planning process to ensure that demand and supply are aligned, thereby minimizing the need to tie up working capital in inventory," he says.

In terms of any new supply chain strategies that would significantly impact the way chemical companies source or distribute, Bett emphasizes that now is not the right time to make radical changes.

"I am doubtful even that the majority of companies should be striving for 'best practice'. As long as the supply chain fundamentals are in place, now is more a time for 'fit for purpose,' improving the efficiency of what you have, and making sure you prioritize," he says.

At Logichem 2009 (scheduled for March 31-April 2 in Dusseldorf, Germany), supply chain leaders from the chemical industry will share their experiences of dealing with these turbulent market conditions.

"This year, the focus day on demand planning is particularly relevant. If you do not understand the demand side, you will forever be fighting fires," Bett says.

"The perceived trade-off between high service and low inventories is often an emotive issue and can become an artificial barrier to lowering working capital. It is not difficult to use transactional history to produce a curve illustrating the high-level relationship between working capital and service - for example, OTIF [on time in full] - and therefore the options available. This enables a more fact-based discussion to take place while taking the emotion out of the debate. Further analysis often shows that it is possible to improve service to the top 20% of customers while reducing the overall level of working capital," he explains.

BATTING FOR BEST PRACTICE

What is the deal with the conceptualized notion of best practices?

"These are best practices in the supply chain that are going to be embraced by people in the chemistry business, energy business, manufacturing business, [or] financial business," says Engel.

Best practices are a benchmark and guide for supply chain management effectiveness and improvement, according to Resources Global.

"Company leadership is expecting more from our supply chain management profession and expecting the supply chain organization to be more transformational versus tactically focused," Engel says.

To achieve supply chain success, Resources Global recommends 10 fundamental strategies to consider when implementing a best practices plan:

1. Establish a governing council

2. Align the supply chain organization

3. Recruit supply chain professionals

4. Set the strategic sourcing strategy

5. Establish key supplier alliances

6. Manage total cost of ownership

7. Manage compliance and risk

8. Optimize company-owned inventory

9. Gather information on a timely basis

10. Establish processes and controls.

Resources Global says a governing council is "absolutely mandatory" and should be responsible for driving strategy by giving direction to and helping to align the supply chain strategy.

"The council should be made up of influential business unit leaders, C-level suite [chief level managers], and representatives from supply chain management," says Engel.

Other duties of the governing council include removing barriers within the supply chain organization, influencing internal decision-makers to achieve internal buy-ins from the business units, for example, and ensuring that the supply chain organization is involved in the early stages of planning and forecasting.

In terms of aligning the supply chain organization, each company must decide whether to have a central or decentralized alignment according to the needs and character of the company.

"There is no prescribed answer on how to organize, although a common theme is having a centralized consensus with a decentralized execution. In a perfect world, the supply chain organizations will have the functions of sourcing, materials and management, logistics, and contract management," Engel explains.

Meanwhile, he points out that strategic sourcing is the cornerstone of supply chain management: "Strategic sourcing that implements cross-functional and geographic teams for a unified decision-making process with supply chain organization guidance and leadership must become a standard practice," he says.

"No two companies operate the same way, but all having guiding principles for success," he adds.

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By: Feliza Mirasol
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