The importance of supply chain management (SCM) is often underestimated, especially in large diversified chemical companies. However, it offers untapped opportunities for European chemical companies to stand out from the competition and achieve measurable improvements.
There are three reasons to revaluate supply chain management:
- The primary drivers are the ever-increasing demands from customer industries to ensure flexibility, delivery reliability and, if necessary, customized product quality. If an individual chemical company doesn’t want to fall behind the competition, it has to keep up without building up massive working capital.
- This balancing act is facilitated by new approaches and technologies: digital solutions that supply chain management can use to manage increasing complexity in the operational business. However, these types of solutions also require greater coordination across business areas.
- New approaches to clustering or segmenting chemical businesses support the targeted use of digital solutions for specific clusters of businesses, thereby avoiding the mistakes that have often caused company-wide supply chain initiatives to fail in the past.
In combination, these factors will enhance the position of supply chain management in the company, both qualitatively and organizationally, enabling it to make stronger contributions to satisfying customer requirements and thus to increasing the value of the company. Supply chains will continue to be segmented according to individual businesses, but the supply chain function will become more embedded on the corporate level.
We begin our series of articles by asking to what extent the strategic framework for SCM in the chemical industry has changed. We then show what potential can be achieved in supply chain management using digital solutions, how a company-specific approach to supply chain realignment can be designed and the impact that both of these have on the SCM function in chemical companies. Finally, we will outline some of the basic supply chain models in the chemical industry.
Underlying conditions for SCM in the chemical industry
Customers in the chemical industry, such as those from the automotive accessories, packaging or food sectors, often have a lower level of added value, sometimes achieve lower margins and therefore depend on a well-coordinated supply chain. Many of these industries are also ahead of the chemical industry with regard to supply chain digitization. It is therefore not surprising that they demand the same standards from their suppliers as they do from their own company.
In contrast, the chemical industry has so far neglected supply chain management as a distinguishing competitive feature. This is true regardless of the many individual, very intelligent solutions that often transcend the supply chain and link production planning, product and customer portfolio management or margin optimization across entire value chains. There is no lack of creativity or attention-to-detail, but there is a lack when it comes to systematic operation of all levers at the entire company level using the latest technologies, and company-wide transparency of efforts and exchange of experience on potentials in the supply chain are insufficient.
There are several reasons why supply chain management has not yet been systematically used as a value lever at the entire company or group level. Most large chemical companies have been organizing themselves into strategic business units (SBUs) for more than twenty years, initially for strategic reasons. This was also accompanied by a differentiation and fragmentation of supply chains and supply chain management, which in some cases is no longer even present at group level.
SBU structure continues to dominate
CAMELOT assumes that most large, diversified chemical companies will continue to opt for the strategic business unit model and the decentralized structure of SCM will continue to be the case for the foreseeable future. A more functional organization, like that which exists in medium and smaller chemical companies, could only prevail where (often smaller) businesses with focused product portfolios emerge from their companies via portfolio management and ownership changes.
The trend is rather going in the other direction: individual chemical companies have even been strengthening their decentralized positioning in recent times. As long as portfolio streamlining and growth through acquisition are at the top of CEOs’ agendas, this preference will not change. The differentiation of supply chains also does justice to the diversity of the businesses and has generally proved its worth. There will be ‘no one size fits all’: different supply chains will continue to exist under the umbrella of one chemical company or even one business unit.
The implicit selection of differentiated supply chains has undeniable advantages: the chemical industry as a whole has fared better in competition than predicted around the year 2000, and many individual businesses have developed well thought-out solutions to business-specific supply chain challenges. But the differentiation of supply chains is also a fragmentation, the disadvantages of which are becoming increasingly apparent: while business units are managed according to operating profit, there is a lack of operational responsibility for supply chain performance, which is why the relevant KPIs (e.g., net working capital) are unsatisfactory in many chemical companies, with corresponding negative consequences for profitable growth. Supply chain know-how and skills are not systematically collected and further developed or are only done so inadequately. This weakens an organization’s ability to recognize and apply innovation quickly.
Risks of fragmentation
Lacking this ability is dangerous, especially in the current environment. On the one hand, the cost pressure (from new competitors, high energy prices, etc.), to which the chemical industry in Europe and Germany is exposed, makes it necessary to consistently exploit all potentials for improvement. This forces the use of cost and know-how synergies by pooling resources in the supply chain. On the other hand, many chemical companies are responding to the commoditization of their products or corresponding customer requirements by increasingly differentiating their product/service offerings, e.g.. through customer-specific configuration. This in turn drives complexity and cost in the supply chain. Supply chain management in the chemical industry is thus faced with the challenge of supporting differentiation while at the same time streamlining cost structures – seemingly squaring the circle.
In the next article, we will illustrate why this balancing act can succeed today: The Future of Supply Chain Management in the Chemical Industry, Part 2