In the fourth and final part of our series, we take a look at the most important basic models of the supply chain in the chemical industry.
Basic models of the supply chain in the chemical industry
In the last blog post, we described the operating model or blueprint approach, which has critical implications for supply chain management of the future in the chemical sector. But how does such a model come into being?
The determining factors begin with the business model, i.e., the fundamental way in which the respective business segment creates value and earns money derived from customer requirements, and also include the company-specific architecture of value creation (the operating model) and the complexity of the product and customer portfolio.
Theoretically, about 15 individual factors could result in a multitude of combinations and hence models. In practice, however, CAMELOT considers three basic models to be sufficient – to which two others may be added in exceptional cases.
First, from the five business models for chemical companies used in CAMELOT, we postulated and roughly described a number of basic supply chain models – each business model would have to roughly correspond to a supply chain model. Subsequently, we superimposed the supply chains of about 50 real existing chemical businesses from our project history, worked out commonalities and identified determining factors. We compared the results with our theoretically determined models – in the end, we were left with three to five models that are verifiable in chemical companies, have proven to be robust and have stood the test of time in consulting practice.
Supply chain archetypes
Two of the most common models will be presented as examples:
- “Lean and simple” is a typical model for large-volume commodity businesses, such as those we find primarily in basic chemicals or polymers that are advanced in the life cycle. Here, everything is geared towards supplying customers cost-effectively and reliably as well as eliminating all superfluous cost drivers, e.g., regarding customer service offerings (“no frills”). This includes automation of order taking and processing (especially reordering). There is also significant potential in logistics, e.g., via control tower solutions. Value chain analytics allow integrated structures of vertically and horizontally integrated businesses to be steered – with regard to utilization optimization and optimal allocation of products to market outlets and plants in the production network.
- “Lean and flexible” is a model that is suitable for different chemical businesses. They all share the fact that they are under cost pressure and have a higher degree of complexity in their portfolio, e.g., due to product diversity or a higher proportion of small customers. These can be large-volume chemicals that are supplied in customized forms or have a fragmented customer portfolio, but also former specialties that are under massive price pressure from new competitors. This model can even be considered the “right” one for commoditized specialties, such as certain pigments, coatings, or fibers. Lean despite high complexity: an apparent contradiction that can only be overcome by using technology. In supply chains of this type, digital innovations come into their own, whether it be simplified processing of small orders (e.g., via web shops) or optimization of the product/customer portfolio with advanced analytics. If these businesses are close to the end customer, they are often suitable for Demand-Driven Planning approaches.
Commoditized specialty businesses in particular are often sold by larger chemical groups and increasingly find themselves in the hands of financial investors. The holistic realignment of such businesses following a spin-off – whether it be still under the umbrella of its parent company or already for the investor – is a situation in which the lean and flexible model has proved particularly effective in practice. For example, during a carve-out of a pigments business, functional costs were reduced by 5-12%, inventories were lowered, sales potential was identified in a newly defined business segment and structures were streamlined through outsourcing.
Portfolio management in the chemical industry will continue, as mentioned above. This will increase the number of situations in which supply chains have to be transformed under disruptive conditions and investments have to be used in a more targeted manner than before. The need for holistic, model-based improvement concepts is obvious. Defining and designing supply chain blueprints and incorporating knowledge about them into change projects is one task that can be assigned to a group-wide SCM function. In turn, knowledge of specific improvement approaches can be made available at a divisional level to multiple business units with similar requirements. Thus, digital innovations and holistic change concepts will also lead to an upgrade of supply chain management in the chemical industry.
Theses on the future of SCM
To sum up, we can say that
- the chemical industry will continue to have supply chains in the future that are differentiated according to business units or even business lines.
- However, these supply chains will follow a set comprised of few models (“blueprints”) and will be enhanced by appropriate digital solutions in a way that will enable them to deliver a strong contribution to the value of the company, primarily by optimizing capital commitment, but also supply chain costs.
- Thanks to the blueprint approach, supply chains will no longer change incrementally, but disruptively, which will provide more effective support for changes in the entire corporate structure (mergers, spin-offs, etc.).
- The prerequisite for this is that supply chain management is upgraded as a function within the company. It will help drive the aggregation of individual businesses into segments and will also be anchored at the segment or even group level to build the capabilities needed for digital SCM and make them available to all businesses.