Winning with Complexity: A New Supply Chain Formula for the Chemicals Industry

Natural supply chain management weighs each customer’s service needs against your own targets and capabilities

Rohit Singh
Rohit Singh

The 1960s and ‘70s were boom times for the U.S. chemicals industry. Innovation was at peak levels evidenced by the rapid development of new molecules, soaring demand for synthetic polymers and record profits.

But by the 1990s, the innovation pipeline slowed to a trickle. Patents were expiring, profits dwindled and the U.S. was ceding market dominance to more cost-efficient producers in the Asia-Pacific region.

In the decades since, the U.S. chemicals industry was caught in a growing web of complexity brought about by new competitive pressures, feedstock price volatility and the ever-changing demands of a highly diverse market. These and other factors put a crimp in margins and cast a shadow over future growth prospects.

Obstacles in the Path of Recovery

In seeking a solution, many companies succeeded only in getting in their own way. Rather than manage complexity to their advantage, some try to grow out of the problem through ill-conceived acquisitions and geographic expansion, or by chasing all orders irrespective of their value to the company or the cost of fulfilling them.

Others, conversely, make sweeping cost reductions across all markets and functions, essential and dispensable alike. In so doing, they open the door to costly production overruns or they shrink inventory well below the levels needed to fill orders.

Invariably, either tack—unconstrained growth or meat-ax cuts—winds up pulling the company into a vicious circle that further saps its ability to serve its customers and achieve profitable growth. The good news is that there is a third path.

Natural Supply Chains: Getting the Chemistry Right

Back in its go-go years, the chemicals industry was well-served by a one-size-fits-all approach to supply chain management and customer needs. The fact that customers were less savvy also helped.

Today’s customers, however, are far more sophisticated and diverse—and, in many instances, more cost-conscious—than before. Each brings its own idiosyncratic demands to the table, whether they are demands for quick delivery turnarounds, service add-ons, or other accommodations that test providers’ agility and strain their resources.

To meet these challenges, forward-looking companies replaced outmoded strategies with natural supply chain management, a market-back approach that weighs each customer’s service needs against the chemicals company’s own assets, capital, profitability targets and manufacturing capabilities, and the value the customer represents.

Armed with this analysis, the company can adapt a separate supply chain to each customer segment. The benefits are improved cost and operational efficiencies, leading to sustainable—and quantifiable—growth in profitability. The customers also come out ahead, assured of receiving on-time delivery of the products they need to satisfy their own customers and fulfill their own business imperatives.

Segmenting Customers by Their Needs and Value

As a first step in designing a natural supply chain, many companies conduct a triage-like regrouping of their customers that is based on their needs and the value they bring to the company:

  • Preference and premium service are reserved for high-value/high-need customers.
  • High-value/low-need customers can be served through a more cost-effective supply chain model that fully meets their requirements.
  • Low-value customers may be reevaluated and supplied through different channels, such as third-party distributors, or even dropped if they are too expensive to serve.

A Two-Part Solution

By definition, every natural supply chain is unique and putting the concept into action involves individualizing a creative solution to each customer relationship. Although this suggests a limitless array of possibilities, there is an elegant way to simplify the discussion—by fashioning two supply chains from one, the first designed for efficiency and the second for agility:

  • Efficiency: In serving high-volume, price-sensitive customers with consistent delivery needs, the supplier offers longer lead times, and predictable shipping and service costs. This model makes it possible for the manufacturer to minimize costs and maximize manufacturing productivity.
  • Agility: A supply chain built for agility is best-suited to small-lot orders from customers willing to pay a premium for high quality and customization. The aim is to capture these higher-profit opportunities by guaranteeing shorter lead times, tailored products and services, and flexible ordering.

Using What Works

Creating a natural supply chain doesn’t have to mean tearing old infrastructures down to the floorboards and rebuilding. Indeed, companies often find that their existing supply chain model and customer needs are already working in tandem. But they recognize that by modifying these relationships—such as by adding warehouse space to hold inventory closer to key customers or offering local packaging services—they can drive even higher profits.

It’s an idea that’s efficacy is demonstrated across a number of industries. A fashion retailer hampered by in-store availability shortages and lost sales tailored three supply chains based on each product’s demand characteristics. The company achieved a 40 percent increase in sell-through and a 7 percent decline in cost of goods. A specialty plastics producer facing steep competition and mounting inventory costs realigned its service offerings for four separate market segments, tailoring product flows for each. The result was a 15-fold improvement in return on investment (ROI) after one year.

Fitting the Supply Chain to the Sector

To be sure, the chemicals industry comprises many subsectors, each with its own set of challenges, customers and supply chain capabilities. Thus, a solution that works for an agrosciences company may not be suitable for an advanced polymers manufacturer. It’s essential to get the mix right.

Agrosciences companies must be able to forecast and respond quickly to seasonal—and highly unpredictable—fluctuations in demand. Synchronization of all global operations, from feedstock purchasing to product formulation and shipment schedules, is crucial to ensure that the right material is delivered to the right place at the right time.

Advanced materials companies are squeezed by rapidly commoditizing markets, geographic distance between demand and supply, an increasingly heterogeneous and geographically far-flung customer base, and constant pressure to innovate. Implementing natural supply chains requires strong capabilities in customer segmentation and getting all key functions—sales, research and development, inventory, and manufacturing—on the same page in order to respond quickly to customer requirements.

Commoditized polymers manufacturers today are buffeted by fluctuations in the price of raw materials, variable product demand, steep discounting by competitors and razor-thin profit margins. These companies must drive cost efficiencies by cultivating relationships with materials suppliers, while holding down manufacturing costs through efficient production scheduling that maximizes factory utilization and lean logistics.

Quantifying the Benefits

Chemicals companies that use natural supply chains typically see measurable gains across three key performance dimensions in six to nine months:

  • Improved service and growth: Companies report 15 to 25 percent gains in on-time-in-full (OTIF) service performance, improving customer experience and enabling growth.
  • Asset productivity: Companies realize significant improvements in both inventory and asset productivity. The former is reflected in a 25 to 35 percent reduction in inventory; the latter results in a 20 to 30 percent capacity release as hidden plants and other underused assets are exposed through end-to-end aligned policies and disciplined planning.
  • Cost reduction: On average, cost reductions in distribution, manufacturing, materials sourcing, logistics and supply chain management lead to a 5 to 12 percent improvement in earnings before interest, taxes, depreciation and amortization (EBITDA).

New Tools for Old

In the face of 21st-century challenges, many leading chemicals companies continue to cling to obsolete supply chain strategies. It’s a losing battle, waged with rusting weapons and outdated maps. But there are better alternatives.

As progressive companies in many industries show, natural supply chains offer a path to improvements in service, customer satisfaction, profitability and growth. Implemented correctly, natural supply chain management can position chemicals companies to make better bets, manage complexity more effectively and thrive amid the chaos.