January 16, 2018 Specialty Chemicals: Navigating Complexity

With lower profitability and a more competitive market, specialty chemicals companies face unique challenges and must find new ways to grow.

by Eric Kaufman, Director, Chemicals Industry, AspenTech

The specialty chemicals market “has emerged as one of the most important chemicals segments worldwide. Reports estimate the sector to have a global volume of around $850 billion and project further market growth at around five per cent to exceed $1 trillion before the year 2020.” (Dr Michael Reubold, Managing Editor, CHEManager, January 2016).

The specialty chemicals market is also in transition.

Reubold asserts that over the last ten years, “the specialty chemicals industry has experienced lower overall profitability within a more competitive environment. With the rapid growth of newly industrialized economies and rising standards of living in many developing countries, the center of gravity of the global chemical industry is shifting. As traditional western players are facing increasing pressure from rival producers and local players try to capture a larger share of the global market, specialty chemicals companies around the world must find new ways to grow and compete.”

Complexity at an all-time high

Escalating complexity has become a hallmark of our interconnected and interdependent world. Research conducted by IBM in its 2010 report, Capitalizing on Complexity: Insights from the Global Chief Executive Officer Study, reveals that “Seventy-nine per cent of CEOs anticipate even greater complexity ahead” and that “more than half of CEOs doubt their ability to manage it.”

Companies are grappling with an ever-increasing array of decisions and in many instances are attempting to apply processes, methods and tools that were developed in a bygone era of lesser complexity. Their inability to cope with complexity is resulting in more unforeseen consequences, higher costs and lost opportunities.

The huge volume of data available today is now forming an integral part of the decision making process. Data and analytics capabilities have advanced considerably in recent years, and are revolutionizing many different industries, including speciality chemicals. “Data and analytics have even greater potential to create value. Organizations that are able to harness these capabilities effectively will be able to create significant value and differentiate themselves.” (McKinsey Global Institute – The Age of Analytics: Competing in a Data-Driven World, December 2016.)

Such data and analytics solutions are now reaching the market and are becoming part of many organizations’ digital transformation initiatives. Making complex data from many sources useful and applicable to the business needs of companies in complex, capital-intensive industries is of keen interest to specialty chemicals producers who need the insights to improve their decision-making processes so as to better control and optimize operational processes.

The specialty chemicals business is no stranger to complexity or its impact. Specialty chemical producers are facing increasing business and operational complexity as product portfolios expand, customer requirements become more demanding, manufacturing operations become more complicated and business portfolios become transformed by mergers and acquisitions.

What used to be relatively straightforward decisions regarding what products to produce, where, how and when, are no longer simple or even consistent over time. Producers must contend with a multitude of potential production and fulfilment options and a highly dynamic environment. Applying the historically tried and tested processes, methods and tools does not always address today’s complexity in specialty chemicals and can result in both profit erosion and lower customer satisfaction if not managed properly.

On the surface, complexity appears to be something to be tamed or managed out of existence. It can, however, represent a significant business opportunity. According to McKinsey’s 2010 report on managing organizational complexity, “if complexity can be seen not as a problem to be eliminated but as a challenge to be managed and even exploited, businesses can generate additional sources of profit and competitive advantage.”

For example, navigating complexity in specialty chemicals by applying advanced supply chain modeling and optimization solutions can both unlock new profit opportunities and increase customer responsiveness, enabling market share gains against less agile competitors hindered by complexity.

Challenges unique to speciality chemicals producers

The increasing business and operational complexity faced by specialty chemicals producers is a threat to both customer satisfaction and profitability if not properly managed. What are these challenges?

Shifting business portfolios – the specialty chemicals landscape is being continually transformed through rapid product diversification and heavy merger and acquisition activity. Company business portfolios are constantly changing as producers add and divest divisions, enter new markets and participate in mergers. Combined with the well-established trend towards globalization, this shifting landscape has increased the complexity of company business portfolios.

Uncertain demand patterns – specialty chemicals producers face uncertain and unpredictable demand patterns with limited visibility of future customer orders. When compounded with growing customer portfolios spanning many end-use markets, visibility into demand variability represents a key challenge for specialty chemicals producers.

Expanding product portfolios – specialty chemicals producers continue to innovate their products in order to maximize differentiation, increase customer loyalty and enter new markets. The combination of new product introduction and frequent adaptation of existing products has resulted in a significant expansion in the number of products produced, leading to higher operational complexity.

Moving closer to customers – the trend of moving closer to customers is well established within specialty chemicals, with producers offering both customer-tailored products and customer-specific service arrangements. While the increased customer intimacy has been a source of differentiation for producers, it has also increased the complexity of their operations.

Multi-stage manufacturing operations – specialty chemicals manufacturing operations have grown in complexity as producers utilize multi-product, multi-stage batch processes to produce advanced products with extensive bill-of-materials requirements.

Compliance – the ability to document and certify both product quality and procedural compliance is a growing issue for specialty chemicals producers, whether it is driven by government regulations, end-use market requirements or specific customer requirements. Requirements for batch and lot level traceability are becoming common in many segments and add further complexity to operations.

Achieving exceptional customer service and profitability

For specialty chemicals producers, the equation is clear: production of differentiated products, efficient inventory management and on-time product delivery at the best cost results in exceptional customer service and profitability.

By taking the key steps to align their business and achieve these goals using today’s sophisticated supply chain software, business leaders can conquer market uncertainties and operate an agile, responsive and winning specialty chemicals business.

The formula for effective supply chain operations involves:

• Empowering people with information
• Standardizing business processes
• Sharing the plan
• Driving business alignment
• Enabling the best operational decision through information and “what-if” analyses
• Investing in technology

Today’s best-of-breed supply chain software offers specialty chemicals companies immediate visibility of the information they need and the opportunity to carry out the full spectrum of “what-if” analyses. Coupled with smart use of analytics and data, these capabilities, in turn, help them to streamline workflows, reduce costs and quickly reach more informed decisions.

In its 19th Annual Global CEO Survey, PwC interviewed 59 chemicals executives in 31 countries and concluded that even in this most complex of markets, growth and success are possible with the right response:

“Chemicals CEOS are facing a tough business environment that’s becoming increasingly complicated to read and adapt to, but many still see opportunities for growth increasing over the long term. They rate climate change as a top force changing stakeholders’ expectations, together with technological advances and a shift in global economic power. They’re changing their organizations in response, with customer needs firmly at the centre and increasing their focus on building distinctive capabilities.”

Eric Kaufman
Director, Chemicals Industry
AspenTech

Eric drives go-to-market strategy for AspenTech’s global chemicals business, spanning basic petrochemicals, polymers, and specialty chemicals. Previously Eric led business consulting for AspenTech as well as planning, lead process engineer and operations support roles for ExxonMobil oil and chemicals businesses. Eric is a graduate of Babson College’s Executive Development Program and holds a B.S., Chemical Engineering, from Cornell University.

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