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W.R. Grace break-up illustrates the choices in supply chain segmentation

By Paul Lord | February 12, 2015 | 0 Comments

Today’s Wall Street Journal article “W.R. Grace: The End of an Empire” is notable by its mention of supply chain and enabling technology considerations impacting and resulting from the company’s decision to split into two specialty chemical firms. Financially, the company is taking risk by reducing its portfolio diversification (S&P has downgraded them to BB-plus) in pursuit of higher P/E multiples (they believe they can get 10-20% more than the current 17.5).

Operationally, the WSJ notes that each of the businesses may lose some pricing leverage in its sourcing negotiations. What does not get mentioned is that the two companies will also struggle to retain and leverage scarce supply chain talent. Each company will be smaller than $2 billion in revenue, which is typically below the threshold where companies can effectively establish centers of excellence and other organizational approaches to managing and advancing supply chain knowledge, processes and capabilities. The only talent-related comment in the article was that the current CEO, Fred Festa, would be able to ‘keep the top job…and give his No. 2, Gregory Poling, a 38-year Grace veteran, the CEO post at the spinout’.

Not surprisingly, Mr. Festa noted that he likes ‘to be able to make decisions fast’. However, speed (like scale) is relative and neither the old W.R. Grace nor its successor companies was faced by anywhere near the challenges of decision governance and portfolio complexity managed by industry giants BASF, Dow, Exxon Mobil and SABIC. The most revealing admission in the article was that Mr. Festa was ‘frustrated when the company was choosing new software to process orders from customers. Different parts of the business wanted different types of software. The process dragged on, heading towards a compromise that pleased no one.’

The challenges of supply chain software selection are something we at Gartner observe frequently with our clients. We can only hope that this was not a driving force for the break-up of W.R. Grace. All that would have been needed would be to loosen the tight grip that the IT organization has on every system selection, apply Gartner’s pace layering model and classify order management as a system of differentiation rather than a system of record (see “Applying Gartner’s Pace-Layered Application Strategy to Supply Chain Applications and Processes”). This might have resulted in the selection of two order management systems, or the allowance of some custom features that deviated from a standard configuration. Scale and efficiency should never be the sole guiding principle for selection of a system that delivers value to customers. Sacrificing leverage of purchasing power and diluting the impact of scarce supply chain talent should not be the price of serving your customers. This is what supply chain segmentation is all about. (See “Does Supply Chain Segmentation Apply to Chemical Companies?”)

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