Environmental and social pressures have indirectly increased expenses for companies participating in the chemical industry. Still, these enterprises need to identify ways in which finished products can be competitively priced.
How do they achieve this goal? By scrutinizing facets of their supply chains and finding the most efficient way to procure and distribute goods. It's a concept that revolves around the "natural" supply chain, a term that inspires a vague understanding among some professionals.
A burgeoning economy
Although the chemical economy is competitive, that doesn't mean North American organizations partaking in this sector will struggle to find business. Investor Place noted statistics from the American Chemical Council, which anticipated the industry to reach $1 trillion in 2018. Last year, it was valued at $789 billion.
Although the Chinese and European markets will experience lackluster growth as a result of this activity, the North American segment is expected to contribute a significant amount to this burgeoning sector, primarily due to the region's growing shale energy sector. In general, the North American economy appears to be faring better than its Chinese and European rivals.
Chemical industry improvements are largely driven by increased focus on research and development. The source referenced the ACC's estimate that R&D investment will reach $68.7 billion in 2018 - $12.1 billion more than 2012.
A need to reduce costs
In addition to the attention R&D endeavors are expected to bring, notable chemical companies are dissecting ways in which overhead can be decreased. For example, Dow Chemical Chairman and CEO Andrew Liveris noted the enterprise intends to cut $1 billion in fixed costs over the next three years. How can such an ambitious endeavor be delivered successfully?
Now enters the concept of the "natural" supply chain. Dennis Cassidy, Jayant Gotpagar and Marcus Morawietz, contributors to Strategy and Business, noted this practice involves deducing how every facet of the business - customer service, marketing, logistics, inventory management and so on - contributes to the costs accrued over a specific period of time. It consist of identifying how certain procurement actions, partnerships and needs enhance or hinder the bottom line.
In regard to chemical companies, this process begins with forming and segregating three distinct categories:
- Basic compounds,
- Specialty materials
From there, these segments are then further subdivided to determine how producers add value throughout the manufacturing and distribution initiatives. For example, while one form of purchasing and logistics may be needed to support supply volumes with long lead times, another approach can be utilized to best handle products with short lead times.
Is it all just talk?
Although the natural supply chain development approach may not seem all that special, implementing it in the appropriate manner yields favorable results. The holistic concept behind the method involves scrutinizing how each partnership contributes to or damages profits. This is when procurement enters the picture. It's advisable that companies look for suppliers and partners that not only offer materials, but residual support, guidance and expertise regarding those products.
For instance, Swiss chemical enterprise Lonza Group presents itself as a "partner of choice" in biotechnology. The company provides insight into mammalian and microbial fermentation, in addition to intuition regarding the life-science manufacturing. This allows its partners to gain a better understanding of the goods they're purchasing, thereby enabling them to deliver said items to the market more quickly.
From a statistical standpoint, Cassidy, Gotpagar and Morawietz noted one particular chemical production business increased fulfillment instances by 20 percent, decreased inventory expenses by 40 percent and cut overhead by nearly 20 percent.
Although the natural supply chain concept may appear ambiguous at first, the approach can deliver clarity to distribution and procurement when executed step by step.