07 May 2012 00:00 [Source: ICB]
As the chemical industry responds to global economic and social trends, the third-party logistics sector will have to find ways to manage in a complex world
Moore's Law is a rule of thumb in the history of computing hardware that says the number of transistors that can be placed on a circuit will double around every two years.
Gooch's Law says the same probably holds true for complexity in the supply chain. Left unattended the degree of complexity is probably going to expand at a similar rate. I like rules of thumb, because if my prediction doesn't come true, then, of course, it was always only a rule of thumb.
In September 2007 France-headquartered management school INSEAD and Management Engineers published the result of a study that was based on interviews with 47 CEOs and board members of 34 Western European chemical companies with sales greater than €1bn ($1.3bn) in 2005.
Five global trends were identified − economic, technological, market sector, regional, and regulatory − all of which have the potential to generate unnecessary complexity (and therefore costs) if not properly managed. We will look at those in more detail later.
In addition, and what may be more significant in the context of complexity, the CEOs and board members identified five major issues on their agenda that have since proven to be accurate (see box).
The threat of complexity is present throughout the whole value chain so let's return to the megatrends identified in the INSEAD survey, and consider the challenge these can present to 3PL management, and why they need to be constantly alert to this risk.
Economic trends With new plants being built in the Middle East, Asia becoming a major market, and asset optimization being the order of the day in Europe, it is inevitable that traditional product flows are going to be realigned, or in some cases reversed.
There will be major flows out of the Middle East, both East and West, and Intra-Asian trade is expected to grow strongly as capacity grows, and demand burgeons, driven by an expanding middle class.
The impact of shale gas in the US is difficult to predict, depending to what degree the gas will upgraded in the US, or exported as natural gas liquids.
Third-party logistics providers (3PLs) will be faced with the challenge of keeping up with these changes, and at the same time avoiding over-engineered solutions that can build unnecessar y costs into the supply chain. There will be occasions when they have to say "No."
There is also evidence that the pace of off-shoring is slowing, which means that some global supply chains could be replaced by more regional networks.
However, it is clear that 3PLs, which choose to sit tight in Europe and not participate in these global trends, will be faced with at best slow growth and possible extinction.
Technological trends We can expect to see the chemical industry pushing for more global products to reduce portfolio complexity, and customers from emerging markets will expect western standards of product quality and sophistication.
Successful 3PLs will have to provide advanced storage, product handling and transport equipment. They will also have to supply cleaning facilities in line with producers' global SHE policies to support local production and imported flows of product. There will need to be constant attention to avoid overly complex solutions.
Market sector trends We have alluded to the focus on asset optimization in Europe, and the production shift to the Middle East and Asia. This is particularly the case for base chemicals and polymers.
For specialties and fine chemicals there will be an ever-increasing pressure on costs and a trend to commoditization, which will be inevitably felt by 3PLs. There are imitation products in emerging countries so 3PLs have nowhere to hide, and no time to relax. They will need to be continuously streamlining and re-engineering their processes.
Regional trends The focus is almost entirely on China, which is still seen as a huge regional growth opportunity. At a 1% annual growth rate it is anticipated that the Chinese middle class will number 500m by 2020 − more than the total population of the US or Europe.
It is perceived that the market potential outweighs the risks, although for a 3PL this must be seen as a strategic play.Hoyer Transport, which established its first representative office in China in 1997, had to endure many years of difficult trading conditions before gaining any real traction.
On the other hand, the CEOs surveyed in 2007 considered India's lack of feedstocks, and problems with infrastructure and bureaucracy as reasons for delaying market entry strategies for five to 10 years. To date, only western bulk chemical storage companies have been present to any degree in India, but this remains a market with huge potential.
Russia continues to be primarily a feedstock source and base chemicals supplier, but property rights and corruption will prevent any major 3PL engagement unless through government supported JVs.
Regulatory trends Even though regulations may be hampering innovation and competitiveness in Europe today, in the longer term it isanticipated that there will be a move towards convergence.
So this may have a positive benefit in driving global standardized solutions and reduced complexity for 3PLs in quality control, packaging, labeling, and best practices.
The main challenge for chemicals 3PLs is managing complexity for profitable growth. Complexity is the outcome of an increasing number of products and customers in geographically remote markets.
Stabilizing complexity depends on structure, robust processes, and a willingness on the part of the 3PL to collaboratively engage in an open dialogue with the shipper on the true cost-to-serve and cost of variability - which customers value but are not always willing to pay for - and sometimes being prepared to walk away.
As management consultant Tom Peters says: "Almost all quality improvement comes via simplification of design, manufacturing, layout, processes, and procedures."
FIVE KEY ISSUES AFFECTING CHEMICAL 3PLS
1 Growth regions: there will be a focus on China as a market, and the Middle East for investments, with other BRIC (Brazil, Russia, India, China) countries and eastern Europe less favored. 3PLs will need to adjust their focus accordingly
2 Regulations: these will be potentially an opportunity to drive a level playing field, but Europe's chemical regulation Reach is seen as creating a competitive disadvantage for Europe.
3 Business portfolio optimization: CEOs are facing a dilemma between divesting non-core businesses, and capital markets expecting more diversification. This business restructuring has not left the 3PL market untouched and the rate of divestitures and mergers and acquisitions has continued quickly, with private equity also becoming increasingly engaged in this sector.
4 Innovation management: the power of west European companies to innovate is at risk through demographic evolution leading to loss of know-how - a concern that has also manifested itself in the logistics industry, where the search for talent is proving difficult.
5 Complexity management: companies which take the lead in developing new, innovative products and customer specific solutions carry the complexity cost burden, and part of this burden will inevitably be transferred into the supply chain.
Paul Gooch is founder and managing director of The Logical Group, a management consultancy providing supply chain and logistic solutions for the chemical industry, and to suppliers to chemical producers.
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