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Supply chain field report: Insights from the chemical industry

By Paul Lord | November 14, 2014 | 1 Comment

  • After a month of travelling around the chemical industry (both in Europe and North America) to interact with and hear from supply chain leaders, it is clear that progress has been made.  Supply chain operators in the industry have a better handle on the details.  Practitioners are no longer over-simplifying complex topics like inventory management and supply chain optimization.    They can articulate the significance of constraints and the value and limitations of process standardization, segmentation and automation.   Some takeaways from recent Logichem and Elemica Reveal events.
    • The chemical industry is once again speculating on supply-driven advantages as it tries to capitalize on the shale gas revolution.    The crude oil-to-natural gas price ratio is a key indicator that quantifies the extent of feedstock cost advantage enjoyed by North American olefin and plastics production.   This index peaked over 60 in 2012 and varied from 25 to 35 in 2013.   However, the market is already shifting to correct and the index has now dropped to 22 in response to a 30% increase in U.S. crude oil production since 2012.  A strengthening dollar and the emergence of natural gas exports to Europe will put further downward pressure on the North American advantage.  Yet the chemical industry will be building new capacity through 2017 according to Wall Street analysts, who are ‘hoping’ for an uptick in demand from the automotive and housing sectors.  A return to pre-2007 housing starts is unlikely and consumer spending will likely face headwinds from employment concerns and a large existing debt load.   If all this capacity is built, asset rationalization will be required and distribution patterns will be re-defined.  Supply chain strategists and planning leaders would do well to maintain flexibility as they contemplate longer term commitments.
    • New constraints emerging.  Some businesses have seasonal demand peaks to contend with.   Others have difficulty operating their plants in cold weather and need to adjust production capacity factors in supply planning decisions.  Distribution constraints have now emerged.    The U.S. trucking industry is losing 30,000 drivers per year according to one source, due to an aging workforce and attractive upstream oil and gas employment alternatives.  Trucking productivity is further constrained by safety regulations enacted to limit driver hours, and bulk carriers are reducing their fleets since they cannot utilize the expensive specialized equipment profitably.   Rail transportation is no better.   Bulk rail cars are difficult to come by due to upstream oil and gas activity.  One logistics leader declared that she is prepared to BUY rather than lease rail cars if it ensures security of supply.  Two Canadian railroads were forced to give priority to grain cargoes at the expense of other freight last winter, further exacerbating difficulty caused by heavy snowfall.  Despite (or perhaps in response to) these challenges, numerous companies still want to solve the problem by outsourcing logistics operations.  This may address short term supply chain operating talent questions for scheduling and coordination tasks, but the risks and constraints related to rail and trucking are not going away.   Outsourcing may create a false sense of security, and make structural constraints less visible and manageable.      Logistics cost reduction is now secondary to ensuring resilient supply capability, as illustrated by a timely Logichem presentation by Nova Chemical.     Service providers and logistics leaders report difficulty getting the attention of senior business leaders to ensure they comprehend this threat and engage in strategic discussions about the ramifications.
    • Supply chain leaders don’t really care about technology trends.  Let’s not try to impress them with discussions about cloud, social, mobile and big data.   Analytics only matter if they enable faster and better decisions leading to desired outcomes.  At this point, supply chain leaders are trying to figure out how to architect and harness processes and manage master data so that they can achieve visibility, manage exceptions, collaborate and improve performance.  Technology is definitely a part of this, but IT and solutions partners need to connect the dots and communicate about capabilities, outcomes and benefits rather than features and tactics.  Discussions at the Elemica Reveal conference surfaced this issue and attendees were searching for the best rationale to use for selling their initiatives.

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  • “Technology is definitely a part of this, but IT and solutions partners need to connect the dots and communicate about capabilities, outcomes and benefits rather than features and tactics.”

    Great point. The tech needs to do what supply chain managers need it to do; no bells and whistles required. If the tech can deliver on it’s promise than people will follow it in droves, but it can’t wait to deliver.