The chemical industry can look back on three years in which supply chain management (SCM) issues have rarely been higher on the agenda, even for top management. Supply chain disruptions due to coronavirus restrictions, scarcity of transport and handling capacities, and the loss of suppliers and customers due to the war in Ukraine – all these developments were initially responded to with a build-up of higher inventories, but these are now being rapidly run down again in view of the uncertain economic outlook. There has been no shortage of hectic – and in some cases dramatic – activity. Supply chain management among chemical companies has been operating in perpetual crisis mode, and the need to respond to supply chain turmoil has meant that conceptual approaches often fell short.
It is not yet possible to predict with certainty whether 2023 will bring a calming of supply chains and prices, or whether political events, the development of the Corona pandemic in China, or unexpected factors such as natural events will make for unpleasant surprises once again. Nevertheless, it is already becoming apparent that in their response to the changes, chemical companies are dividing into two groups:
- Some assume that with a return to a “normal state” – however that may be defined – in 2023 or 2024, the importance of the topic of supply chain management will also decline again. It will once more become an essential, but non-strategic (i.e., not relevant for the company’s own competitive position) function that meets external challenges reactively and incrementally.
- Other chemical companies have identified and defined supply chain management as a strategic issue that they will continue to pursue as a priority, even if external conditions return to normal. In their view, their future competitive position also depends on significantly increasing their conceptual, technological, and staffing capabilities in supply chain management. These companies are then better prepared for a potentially permanently volatile planning environment.
The two schools of thought do not differ a great deal in the topics to be addressed, because these are set to a large extent by external factors. However, companies that see SCM as a strategic challenge approach these topics in a more long-term and systematic way. We would like to illustrate this using five topics that are likely to set the agenda this year.
Supply Chain Risk Management / Resilience
The fact that early recognition and, above all, faster and better reaction to disruptions in the supply chain creates a massive advantage is something most players have probably recognized, especially since the benefits are now readily quantifiable. Meanwhile, the willingness to systematically build up and increase the necessary capabilities and to continue to invest in them varies. At present, we are seeing initiatives to improve risk management and resilience, particularly in the life sciences, pharmaceuticals, and agrochemical sectors. The focus is shifting away from early identification of risks to preconfigured responses to typical disruptions and to structural improvements. These involve, for example, systematically identifying bottleneck resources (e.g., plants or suppliers) in complex value chains, or narrowing the options to be considered in response to events expected in disruptions (e.g., the failure of a supplier or massive price increases of raw material). Often, these initiatives make use of Advanced Analytics, for example in developing digital models of value chains (somewhat inaccurately but frequently referred to as “digital twins”). Others in the industry go so far as to develop enterprise-wide “risk management frameworks” that are intended as a basis for all future risk management analysis (e.g., calculating the impact of risks), actions (to mitigate risks), and systems (e.g., IT tools). We have presented many of these approaches in more detail in the article “Trends 2023 – Stepping into a new supply chain era”.
The question for the chemical industry in 2023 will be whether it can keep pace with these pioneers or will fall behind in forward-looking risk management. Interest should actually be particularly strong among companies with complex, global value chains and a high degree of outsourcing. Thus far, there has indeed been no lack of recognition of the importance of using Advanced Analytics, for example, to simulate disruptions in value chains, but there has often been a lack of ability and willingness to implement such innovations. This willingness, in turn, will be more pronounced among chemical companies that have defined SCM as a strategic topic.
Regionalization of Supply Chains
One response to the disruptions of the recent past – especially if you don’t see them as a closed issue – is to try to make value chains more robust and less risk-prone, and in the case of global value chains, this often means regionalizing them. Regionalization includes the options of higher buffer stocks in warehouses in the destination region, more warehouses in the destination regions, or even moving certain value-adding steps, e.g., formulation or compounding, closer to the customers.
In an industry that is strongly geared to exports, taking into account the factors of energy costs as well as skilled labor, this tends to mean a relocation to other regions and thus an unfavorable development for Germany as a business location.
As indicated above, with the surge in demand following the expiry of many coronavirus restrictions, inventories were built up to cushion fluctuations in supply and demand. In the past year, inventories were often reduced again, not only due to easing tensions in the supply chains, but also due to the fear of possibly running into a recession with excessive working capital.
While some chemical companies leave it at short-term knee-jerk actions, others have realized that without an increase in capabilities in inventory management (e.g., in setting and reviewing targets) and in supply chain planning, these oscillations cannot be stopped in the future. This is where inventory management touches on the topic of planning, which is currently being driven heavily by changes in supporting IT tools.
Implementation of New Planning Tools
After waiting for some time, many chemical companies have now started to implement new software to support supply chain planning. One driver behind this is the foreseeable end of maintenance for SAP APO. When it comes to the motives and goals of implementation, the differing approach to supply chain management again becomes apparent. While the implementation of new tools (be they SAP IBP, OMP, Kinaxis, or others) is for some chemical companies merely a technical migration, a kind of compulsory exercise, others use it to improve their planning processes or even to introduce innovative planning concepts (such as, for example, Demand-Driven MRP).
For the latter group, too, the implementation of new tools poses a complex challenge because the individual business units within a chemical company often differ greatly in the maturity of their planning concepts and processes:
- In some businesses, there is a lack of even elementary prerequisites for modern planning, such as a living S&OP process. Here, the previous software was either not used or only insufficiently used. In these cases, a foundation with better processes and data should be laid before the implementation of new tools.
- Other businesses have run the previous planning software close to the standard. Here, the least problems arise in the transition to new solutions (possible would also be standardized cloud solutions), although it’s necessary to check whether improved planning concepts are possible that are now also supported by the software.
- A third group of business units has strongly tailored the previous software to their individual needs (customized), often with intensive conceptual use of SCM. The question arises as to which of the tools available today supports these approaches most closely or with the least amount of customization – or whether the previous approaches need to be reconsidered. It is not surprising that precisely this user group in particular is often still hesitant about the introduction of new tools.
Only those chemical companies that consciously consider all the options and make the right decisions, e.g., in identifying the planning functions that are critical to success or the sequence of implementing, will really create value here. This value should also be demonstrated, which requires supply chain management to be able to map the returns into a plausible business case that can also be tracked. In many other cases, one has to put it bluntly, the “stranded investments” for the previous, often underutilized tools will only be followed by more.
Supply Chain Management as Part of the Investment Story
From the perspective of the top management at chemical companies, adjustments to the business portfolio continue to be the most important value lever. It is often underestimated that a lack of supply chain management capabilities can be a serious barrier to profitable growth, whether organic or inorganic. M&As often bring together businesses that have very different levels of maturity in SCM, and this opens up the opportunity to quickly take the entire company to a higher level – if it is seized.
Giving supply chain issues and capabilities greater importance in portfolio measures demands a lot from the SCM of chemical companies: The importance of SCM for growth or successful integration must be demonstrated by examples and quantified wherever possible, the maturity level of SCM organizations must be determined quickly, and improvements in the context of integration must be swiftly identified and backed up by a business case.
Here we have the classic chicken-and-egg problem: The more strongly a chemical company’s SCM is currently positioned and the better its capabilities, the more likely it will be to bring the supply chain aspect to bear in the M&A process as well. Here, too, those companies that have recognized SCM as a strategic issue will gain a competitive advantage in the long term.
In our whitepaper on the future of SCM in the chemical industry, we predicted that the importance of this function, which has often been neglected in the past, would increase. This was based on developments that were visible before the corona and post-corona disruptions, such as changing customer requirements and new technologies. With and through the disruptions, this upgrade has received an additional boost. However, this will also widen the gap between chemical companies that are strategically driving SCM realignment and those that are more reactive. This differentiation will be clearly demonstrated by the way in which the 2023 agenda outlined here is handled.