Market outlook: ‘Anti-fragile’ supply chains a new priority in chemicals

Saurabh Tejwani

09-Jan-2015

For most of their history, chemical companies considered logistics availability as a given, and planning around logistics constraints was only done on an exception basis (for example, hurricanes, winter storms). Operations planning has traditionally focused on the manufacturing assets, storage constraints and demand level.

However, events in the logistics market over the past few years have made chemical producers rethink their strategy. In an A.T. Kearney Chemical Industry survey (“Tactical Logistics Management, 2014”), about 70% of respondents indicated that the area of logistics planning and optimisation is highly relevant for them, but only 20% of respondents have dedicated responsibility in this area.

Various factors have challenged the reliability of chemical company supply chains. The global chemical industry has experienced significant ups and downs in volumes since the economic recession in 2009.

chains Rex Features

Rex Features

Chemical company supply chains are facing new challenges to their reliability

After a significant drop in 2009, there was a rapid recovery in 2010, followed by decline through 2012, and the sector has recovered to levels of about 4% growth. In the past few years, there have been significant capacity additions in the Middle East, US and China depending on the type of advantaged feedstock (oil and gas in the Middle East, natural gas in the US, and coal in China).

Changes in supply and demand locations and volume have led to more dynamic chemical flow patterns while producers face increased competition due to the capacity additions. This has made supply chains more complex and difficult to predict, and requires them to be more flexible and reactive. At the same time, the logistics sector is experiencing a very tight supply market as demand continues to grow while transportation companies have been less likely to invest in new capacity ahead of the demand.

These conditions have been specifically difficult in the US due to both structural and non-structural factors. The structural factors are expected to challenge the US road market for a few years to come. Mandated use of electronic logging devices and new restrictions on driving hours will shrink available capacity in an already tight market.

There has been an acute driver shortage, with between 30,000 and 35,000 trucking jobs unfilled; the industry will need to add 100,000 drivers annually over the next decade. In addition, carriers are not willing to forward-invest to expand their fleets as they still tackle driver shortages and low returns on investments.

Also, there are limited alternatives for transportation in the US as there is limited capacity increase and service-level improvement expected from rail carriers.

In addition, some non-structural factors made things even more difficult this past winter. The extremely cold weather and multiple winter storms exposed the severity of the challenge.

Over the past year, carriers routinely declined orders, there were cases of no-shows for trucks, and delivery performance reached historically low levels. This led to a challenged relationship between chemical companies and their customers as many experienced plant shutdowns due to raw material supply shortages.

The impact on US chemical companies was even stronger than other industries as:

  1. Drivers prefer signing up for simpler and less hazardous cargo;
  2. Value per unit volume is higher for other industries that are often willing to pay a premium price to ensure better delivery performance;
  3. Chemical companies often do not own transportation assets (unlike Walmart and Coca-Cola) and hence have a lower degree of control over their supply chain; and
  4. The requirements for chemical companies are higher (for example, prior content constraints, temperature requirements) making them less flexible to alternate trucking arrangements by the carriers.

DELIVERY RELIABILITY

A.T. Kearney’s C3X survey shows that customers consider delivery reliability to be one of the most important buying criteria consistently over the years. Though customers have accepted the market realities around product availability and pricing, delivery reliability is most valued.

The A.T. Kearney study showed that customers are willing to pay up to a 5% price premium for suppliers with strong delivery reliability and product availability performance. Given the difficult transportation market and the importance of supply chain reliability to customers, many chemical companies have realized that overcoming these transportation challenges is critical to meeting their growth ambitions.

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In a study conducted by the World Economic Forum in 2012, 93% of respondents agreed that priority of supply chain and transportation risk management was higher than the previous year.

Chemical companies need to design robust supply chains that not only overcome these challenges, but also provide them with leading capabilities that can distinguish them from competitors. As companies look to become more resilient, several elements should be considered:

SUPPLY CHAIN STRATEGY

  • A well-defined supply chain strategy that is aligned with the business strategy (for example, cost focus or reliability as a differentiator)
  • Modal mix and transportation asset ownership and deployment strategy (for example, own fleet, dedicated capacity, or third-party logistics providers, or 3PLs)

LSP COLLABORATION

  • Balanced usage of 3PLs vs directly working with carriers
  • Relationships with strategic carriers and protocols to ensure preferred treatment from carriers, especially in times of crisis

PLANNING AND TRACKING

  • Logistics planning capabilities (long-term, mid-term, and tactical) with an interlinkage with sales and operations planning (S&OP)
  • Accurate metrics to track supply chain performance. including both leading and lagging metrics

TWO-WAY COMMUNICATION

  • Customer communication protocols for both day-to-day management and during adverse events
  • Event resolution mechanisms and internal communication protocols
  • Two-way communication (customer surveys and feedback)

These considerations should be evaluated to understand the current state and also to help define the future state of the company’s supply chain.

In addition, companies should evaluate the lead time, service, and inventory trade-off to determine the targets. Improved inventory management practices and warehouse optimisation can be a part of the solution to improve supply chain reliability.

To ensure success of the program, include the critical impacted functions as a part of the initiative (for example, supply chain, procurement, or business). As companies look to catalyse improvements in their supply chain resilience, they can take the following steps to get started:

  • Identify the value of a robust supply chain for your company. Engage your customers to understand their needs and shape your company’s supply chain priorities to match their needs.
  • Evaluate your performance. Look at historic supply chain performance, identify metrics that need to be measured, and establish targets if not already in place. Andy Walberer
  • Clarify the owner. Identify the direct owners for improving your supply chain.
  • Engage key leaders. Supply chain leaders need to engage business and other functions in order to truly shape their strategy and implement solutions.

Now is the right time to get started to get ahead of the game and make your supply chains “anti-fragile.”

  • Andy Walberer is a partner with A.T. Kearney and leads the firm’s Americas Chemicals Practice. He is based in Chicago, Illinois, US and can be reached at andy.walberer@atkearney.com. Saurabh Tejwani is a consultant with A.T. Kearney. He is based in New York.
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