In a recent report entitled ‘meeting the need for a new supply chain in chemicals’ McKinsey outlined the need for chemical companies to strengthen their supply chain in order to improve results and the competitive advantage.
Then versus now
In the report McKinsey pointed out that traditionally, chemical companies built their supply chains around manufacturing processes. In doing so, companies were aiming to mainly keep production costs under control. However, the report says that this strategy is only functional in a market with steady growth and demand. Now, economic stability is not certain, and neither, therefore, are demand levels and trends. Chemical companies are reportedly having to ‘manage growing product complexity and increasing customer requirements for differentiated products and rapid response times.’ The industry has however been unable so far to increase its flexibility in the supply chain and McKinsey believes that a new approach is needed.
The new supply chain
Supply chain management and the approach taken toward it can have long lasting and rapid impacts on a chemical company. McKinsey, speaking from its own experience has said that companies that invest in their supply chain see:
- 5 – 10% improvements in service levels.
- 10 – 30% reductions in costs.
- 10 – 20% reductions in inventory.
- Increased agility and market responsiveness.
At the moment up to 10% of the chemical industry’s costs go to funding the supply chain and when compared to other industries, McKinsey has said that it has ‘middle of the pack capabilities compared with other industries.’ The chemical industry, according to the report needs to learn to manage supply chain ramifications that occur due to changing product portfolios. In a further comparison with other industries, the chemical sector reportedly spends up to 15% more on logistics than other industries and need up to 20% more stock in inventory to maintain service levels than other industry companies. However, it has been noted by McKinsey that logistics costs can be higher due to the hazardous nature of some chemicals that are transported and handled.
Supply chain excellence
McKinsey does say in the report that while ‘research suggests that while the individual requirements of different companies lead to a wide variety of supply chain solutions, three common characteristics stand out among the strongest performers,’ namely:
- A customer back supply chain strategy – making the customer rather than the manufacturing assets the focus of the supply chain.
- Disciplined cross functional coordination – maintaining focus on the job in hand and planning.
- Investment where it matters most – understanding which parts of the supply chain are most problematic, costly, etc.
In conclusion, in the report, McKinsey outlines that it believes that improving supply chain performance can help chemical companies meet pressing and testing commercial challenges. Also, it concludes that ‘world class supply chain performance requires companies to take a systems view of their entire supply chain, with changes across the organisation, close collaboration among functions, and a relentless focus on customers.’
Written by Claira Lloyd, based on a report by McKinsey.
Read the article online at: https://www.hydrocarbonengineering.com/petrochemicals/05112014/chemical-supply-chain-improvement-mckinsey-1519/