As well as being a safety-conscious industry the chemical industry in Europe is also highly capital intensive. But though change is needed, it will not be easy to achieve.
Talking about the problems facing the sector, Jos Verlinden, logistics manager at the European chemical manufacturers’ association, CEFIC, says the think tank set up by CEFIC and the European Petrochemical Association (EPCA) is due to report in October and it is likely to put forward a number of ways to improve the competitiveness of the industry’s supply chain in Europe.
CEFIC and EPCA admit the industry has taken a conservative approach to its supply chain, concentrating instead on product development and production improvements. This will have to change.
‘The supply chain has become an important issue,’ says Verlinden. ‘In this industry it accounts for around 8-10 per cent of total costs; a high proportion by the standards of many sectors. Moreover, supply chain costs represent a much higher proportion of the net value added in chemicals, roughly 37 per cent.’ This is significantly more than in other sectors such as metal products or automobiles where the percentages are respectively, 18 and 28 per cent. This is a reflection of the relatively low value per tonne of chemical products but the high costs of moving and storing them.
Verlinden adds: ‘Over the past few years, chemical manufacturers throughout the world have overhauled their production and there are now only limited opportunities to realise savings there. The focus now is on the efficiency of the supply chain.’
He notes also that the chemical industry has been behind some others in adopting new technology to improve the visibility and transparency of the supply chain – not necessarily RFID, but more tried and tested IT systems. While chemical firms have invested in ERP systems some are not maximising the gains because they haven’t yet re-engineered their supply chains.
Even payment terms have an influence. Because most chemical producers still invoice at the end of the month instead of using rolling credit – as computerised accounting allows – there is a certain lumpiness in the flow of material through the supply chain.
Chemicals remains a transport-intensive industry, he adds, and the European industry tends to have higher costs in this area than, say, the US. Cefic calculates, for example, that it costs e59 to distribute a tonne of commodity plastics in Europe, but only e12 in the US.
Cefic is also looking at the competitiveness of the industry in Europe compared with manufacturers in the Middle East and, to some extent, China, where much recent investment has gravitated.
Kevin Ayling, supply chain business consultant at process industry software specialist AspenTech, believes the Middle East, along with South East Asia and China will be the big growth areas for industry investment. ‘They’ve got the space, they want to diversify and they’ve got the raw feedstock. So the investment will be there, not in Europe or North America because of the sheer cost of building facilities.’ Where Europe might score is in the production of more specialised chemical or pharmaceutical products and in an allied area – the recycling of pre-formed plastics and other products.
In a report previously produced by the think tank, ‘Supply Chain Excellence in the European Chemical Industry’, EPCA and CEFIC said: ‘The industry’s share in the global chemical market is likely to decline as a result of the rapid growth of chemical production in Asia-Pacific countries and the Middle East. For example, it has been predicted that over the next decade their annual growth rates for ethylene production will be, respectively, 3.5 and 8.5 times faster than that of the EU.’ The European chemical industry is the largest in the world – 29 per cent of global sales – but industries in other parts of the world are growing much faster.
So the supply chain is becoming an increasingly important component of the chemical industry. However, savings in the supply chain could be difficult to secure as it itself is under pressure with more congestion, rising fuel and labour costs lengthening downstream supply lines and customers demanding shorter order lead times – not forgetting new environmental and safety controls.
But there are things the industry could do to counteract these trends, especially if it acts collectively, says the report. These, moreover, could improve service as well as cut costs.
One answer might be rationalisation of product ranges. Over the years producers have tended to increase their portfolios but this has led to an inefficient supply chain as the number of SKUs available from each company increases. Some of this could he implemented by companies working independently but most measures would require intercompany collaboration such as making up more bulk loads, more effective application of the cost-to-serve principle or more vendor managed inventory.
Other measures would need horizontal collaboration between similar firms such as swap arrangements, pooling of logistics resources and action to improve supply chain skills in the industry.
Potential for cost reduction
Over the past decade, many chemical companies around the world have overhauled their production operations. In Europe, the scope for further cost reduction in the production process is now limited given the size and age of much of the plant capacity. There nevertheless remains significant potential for improving the efficiency with which chemical products are distributed. Indeed, few other activities offer as much potential for cost reduction.
Realising this potential will not be easy but European producers will have to grasp the nettle and make supply chain productivity improvements of 3 – 5 per cent a year to maintain their competitive position.
Borealis – short-listed for a European Supply Chain Excellence Award in 2004 and a leading contributor to the CEFIC think tank – feels it is important to drive innovation and value through the supply chain, explains supply manager, Laurence Jones. ‘We’re switching our supply chain approach from providing a service to giving a competitive edge.’
This all comes at a time when the European plastics industry is facing increased pressure from the high price of crude oil, the fragile state of many European economies and the strong euro which has driven up the relative cost of its products in overseas markets. This comes coupled with pressures on the supply chain itself including increasing road congestion, higher transport taxes and restrictions on driver working times.
And CEFIC’s figures suggesting 8 – 10 per cent of total industry costs are accounted for by the supply chain are credible, according to Borealis’ vice president supply chain Jeremy Bentham.
Kevin Ayling adds: ‘Working in such a specialised field it is tempting, but risky, to develop a silo mentality in which you get used to the performance standards of your own industry. You may be satisfied by 80 per cent capacity utilisation but what if other industries are achieving 95 per cent?’ This is especially pertinent at a time when the chemical industry is being squeezed by the sharp rise in crude oil prices.
‘Some of the supply chain systems and techniques adopted in sectors such as consumer packaged goods have been of use in the chemicals business but it is important to recognise that the different process industry sectors each have their unique characteristics,’ says Ayling. ‘Those who design software for them must have a deep understanding of how chemical processes themselves work. Forexample, AspenTech’s software for the polymers industry incorporates sophisticated transition controllers that can optimise switching from one product to another and thus reduce the amount of transition material – or scrap.’
The capabilities of AspenTech’s software can also help chemical companies structure their supply chains to respond effectively to the strategic challenges facing the industry.
‘The leaders in the industry review their operations on a regular basis. There are all sorts of factors to consider like – should you manufacture close to sources of raw material, or to your customer? Many chemicals consist of a large volume of water – how much of that do you transport around? And you may find that a plant is, say 92 per cent efficient in terms of its production – but does it make any money?’ says Ayling.
Computer models can be powerful tools but they must be tailored to take into account the special nature of each company’s business. For example – how should the system respond to a customer demanding an extra two barrels of product at a day’s notice; tricky if they’re in Europe and the production plant has been located in Australia? Production people tend to like to run their plants for relatively long periods making the same product but this may not always suit the sales force – again something that must be taken into account.
Demand for plastics is volatile, to a greater extent than that for chemicals, says Bentham. ‘Polyolefins in particular have a history of volatile demand and this is becoming more so.’ He attributes this to the bullwhip effect compounded by the fact that people have been known to speculate on possible shortages.
Chemical production may be a highly sophisticated business and the range and variety of products may be ever growing but in some respects it resembles a commodity market as in oil or metals. In fact, points out Borealis’s public affairs manager Nancy Helledie, her firm has been a vocal critic of plans by the London Metal Exchange to set up a plastics futures market, arguing that it would introduce more speculative froth.
Rather than compete in a purely price-led market, Borealis would prefer to put its energy into product innovation and offer world class, on-time delivery. The plastics industry’s record in this respect is not bad, says Bentham. ‘Most competitors achieve 95 per cent though we are trying to be best in class with 98 per cent. It’s important to offer differentiated products but if you let customers down it’s easy to let your competitors in.’
As CEFIC observes, there is a limit to how far SKUs can be allowed to increase. Other industries have bumped up against the proliferating SK’ problem, notably consumer packaged goods, but Laurence Jones says: ‘There’s nothing wrong with increasing SKUs if they add value customers are willing to pay for, but if customers do not want to pay for increased complexity all we have succeeded in doing is adding costs that will come from our bottom line. For example, as we supply polyolefins into some demanding industries, specialised packaging is a reality but in these cases there is true value to customers and thus the case for increased complexity is justified. Otherwise, we are driven to decrease any complexity that destroys value.’
Constaints and economics
In fact, by the standards of many other industries chemical firms have a relatively small number of SKUs, though the number has been increasing, says Ayling. However, the constraints and economics of the production process are by far the most significant factor driving supply chain decisions, something that makes the chemical industry almost unique.
One way computer modelling techniques could help resolve the dichotomy between mass production and the need to offer a multifaceted product line-up is by finding opportunities to aggregate demand, says Ayling. That way, some of the small batch production could be turned into relatively large batches. ‘If you can use supply chain optimisation tools to aggregate demand in this way you could start to break down some of the traditional thinking about the most profitable way to operate your plant,’ he explains. ‘By using the tools to sequence production more efficiently it is possible to achieve an increase in throughput of around 10 per cent.’ Software can also make it easier to make decisions on ‘tolling’, which is using another company’s plant to make chemicals on your behalf, or product swaps. ‘It’s all about visibility and communication within the company. Is what you’re promising to the customer capable of being produced?’
Borealis has invested in a single ERP system covering plant, sales and supply chain operations and frankly cannot imagine how it would cope without it, though it reckons it is ahead of the game in its sector and has insisted on an integrated approach since the company was formed in 1994. Most transport booking is by ERP link and the company is hooking up raw materials suppliers. Traceability will become increasingly important, especially in sensitive areas like high tech electrical cabling, automotive or food packaging.
Bentham believes that in time RFID will play a bigger role in the industry, the main barrier to the technology’s adoption being the need to come up with a solid business case. ‘The chemical industry has been a bit lagging in areas like bar coding, but if that’s the case why not go straight into RFID?’
Borealis is active on the CEFIC think tank that is looking into collaboration within the industry. Some ideas, like petroleum industry-style product swaps might be controversial and difficult to realise in practice but there is potential for collaboration in the use of external service providers. Unlike some in the industry, Borealis is already a major user of third-party storage, taking its cue from other industries such as electronics, where third-party storage is already widely used.
As to how the industry might be structured in the future, there are a number of trade-offs to consider. If there are only a small number of large plants they will be efficient when producing only one product but if they are required to frequently change product they will push out large amounts of transition material while they are in transition mode. If large numbers of different products are needed, it could be more efficient to have more, smaller plants even though this might mean some loss of economies of scale. Newer chemical plants tend to manage the transition process better than older kit, a consideration that might influence investment decisions.
Certainly says Laurence Jones, the trend of the past 10 to 20 years in Europe has been toward megaplants, but this approach is better suited to bulk commodity chemicals and needs to be rethought. ‘Big isn’t always beautiful,’ as Nancy Helledie puts it.
Another approach, and one that is only just beginning to be investigated in detail, is to make basic product in large plants and finish to order in smaller plants closer to the customer. Bentham says: ‘It’s not something we as an industry do much of today but if you really want to drive costs out, it could be the way to go. After all the same approach is used in the steel industry where mini-mills have sprung up making specialised products.’
But all these changes would mean a major reinvestment in plants as well as other infrastructure like pipelines – a slow process in a capital-intensive industry.
As in many other sectors, there has been heavy investment in SAP and other ERP systems in the chemical and petroleum industries says IBM Business Consulting Services. However, the industry is still some way off making full use of the technology and from enterprise-wide integration. ‘In fact, there is probably more horizontal than vertical integration in the industry at the moment,’ says EMEA business development and solutions sales manager, Lothar Zügel.
IBM is talking to some major global chemical firms on how best to interface production plants and business processes, using its middleware solutions. The problem for the industry is that plants tend to be heterogeneous and typically last about 30 years. Historically, they have been left to their own devices in developing IT systems. ‘Industrial IT has tended to be the responsibility of each production manager,’ explains Zügel. ‘But now, linking them is not such a big technical problem. It’s more a question of mentality and, importantly, of an adequate value proposition.’ The basic idea is to use real-time and appropriate data from the shop floor. ‘We could create and figure out a value proposition for selected business processes using a KPI analysis.’
There are big gains to be had, not least in areas such as plant maintenance and organising when it is needed, not when a schedule says it should be done. One example is condition-based monitoring of devices or so-called predictive maintenance plans. Better integration would also mean fewer wrong order confirmations – the error rate in the industry is currently running up to at about 20 per cent, he says. Lack of integration between ERP systems and production plants is the main cause of these problems – lack of valid, real-time data.
Zügel hopes this will create a domino effect in the industry and ultimately lead to a demand- rather than a supply-driven industry. ‘The first thing is to reduce maintenance costs, which would have an immediate impact on plant profitability, but stocks are the next frontier.’
Another interesting area is managed inventory. At the moment, it can take up to three days to open a ‘refill’ order using ERP systems and send out a purchase order when the job is done manually. This has encouraged the industry to pad out its supply chain. But electronic order processing could cut the delay dramatically – reducing reorder points and working capital.
Ross Systems focuses on process manufacturing industries including chemicals, and is finding a ready uptake for its products as manufacturers try to reduce costs in the face of surging oil prices, while at the same time complying with an increasing legislative burden. The latest rules, now at proposal level in Brussels, are the ‘REACH’ rules (Registration, Evaluation, Authorisation and Restriction of Chemicals) which will put further limits and rules on the storage of dangerous chemicals and which ‘could be make or break for some of the smaller manufacturers and importers’, according to Ross’ managing director, Steve Baxter.
Meanwhile, making and moving chemicals is a complex enough process as it is, adds Baxter. ‘Process industries are different from manufacturing operations. The manufacturing process itself is subject to all sorts of variables that don’t arise if you’re bolting together a fridge or a car – like relative concentrations of active ingredients.’
But producing the paperwork is almost as involved as making the product itself. All documentation – and much is on paper rather than in electronic message form – has to be produced in sequence with the chemical itself and, in this global industry, producers also have to be aware of the varying requirements of countries. Bear in mind that, besides the main chemical, you may well have to deal with one or more by-products.
It’s the complexity of the process as much as anything that has held chemicals manufacturers back from integration but many are beginning to grasp this nettle, says Baxter. In fact, it is becoming a hot topic, he says, citing the example of US-headquartered Schenectady, where Ross recently completed an integration exercise covering 21 plants in 14 countries. ‘This will really allow the firm to leverage the economies of scale,’ he says.
Compared with most sectors, investment in facilities and people are both necessarily high in chemicals.
UK-based logistics firm, Potter Group, which operates a specialised, secure site at Droitwich, points out the legislative burden on the industry has increased, highlighting the fact that the business in the UK is now regulated by no fewer than seven national and EC regulations and standards.
Safety and quality considerations are driving the move to outsourcing. Potter Group customers include Akzo Nobel Automotive Plastic Coatings, whose business manager Anthony Lancina says that a ‘zero parts per million reject rate is expected – perfection is only just good enough’. Potter’s Group’s share for this contract alone was e400,000, to refurbish a warehouse.
Lancina describes it as ‘a low volume, high value operation which must have the flexibility to respond quickly to the needs of our customers’. Akzo is now developing the relationship further by building a colour mixing plant on the site. Combining this operation on the same site as the warehousing reduces risk by minimising miles travelled by potentially dangerous chemicals. It also cuts operating costs.
The COMAH (Control of Major Accident Hazards) regulations are also influencing the production process. COMAH is based on thresholds and this has provided an incentive to reduce stockholdings on any one site to avoid complex and costly procedures – good supply chain practice anyway.