Managing Demand: Considerations for the Chemicals Industry
Written By: Predrag Jakovljevic
Published On: May 12 2006
Managing Demand Effectively
Due to the inherent challenges of the chemicals industry, most chemicals companies are still unable to profitably respond to highly variable demand, or to execute predictable product supply strategies. Thus, optimizing their distribution networks and rationalizing their inventories are the keys to an efficient supply chain and smoother operations. Chemicals companies must also resolve the challenges posed by environmental regulations and the need for seamless data integration. For more information, see So What's the Big Deal with Chemicals? and Overcoming Chemicals Industry Challenges through Optimization of Distribution and Inventory.
Part Three of the series So What's the Big Deal with Chemicals?
With limited agility in manufacturing, logistics can provide some maneuvering space for the chemical industry. According to AMR Research, bulk manufacturers spend a median of 7 percent of revenue on total transportation costs, which is almost 5 points more than other industries pay on average. While inbound costs are often negligible because of co-location with suppliers (which sometimes requires nothing more than a simple pipeline), outbound transportation costs can reportedly reach up to 5 percent of revenue, compared to the 0.5 percent figure of other industries. With ever increasing numbers of products and delivery points, an efficient distribution network is vital to controlling inventory costs. Enterprises should be able to optimize the supply chain network by finding the most economical way to supply each customer, such as by changing distribution locations to support more frequent service; changing transportation modes; making packaging changes; or improving forecasts to reduce overall inventory levels.
Chemical manufacturers have historically tended to sell what they made (batches or a continuous stream of prime products, by-products or co-products that cannot be reprocessed, or specialty chemicals for a particular customer), but this strategy is no longer working (except for some commodity manufacturers). The aforementioned increasing complexity of the business (in terms of more competitors, more customers, more products, broader geographic coverage, and prohibitive occurrences of the "bullwhip effect," whereby a small change in demand at the consumer level can lead to massive changes and inventory buildups upstream with suppliers, on short notice) has forced manufacturers to make only what they can sell with certainty, instead of adopting the "if we make, they will buy" approach. Recently, they have been crafting plans based on historical data, executing those plans, and developing analytics to measure performance, so as to be able to discern whether the right product is being made and sold.
Managing demand effectively (with accurate prediction and timely fulfillment) is fundamental to optimizing the supply chain, given that demand is the force that drives the chemical supply chain. But as mentioned many times before, the complexity of today's global chemical industry creates significant hurdles for effective demand management, since both suppliers and their customers are subject to market uncertainty and price volatility. The growing trends towards customization and segmentation mean that producers have a wider variety of products to manufacture, and more difficult choices to make to maximize their production efficiency and profitability. While more accurate forecasting can be achieved by blending statistical analysis, customer projections, and the knowledge of sales and service teams, there is a natural limit to planning and forecasting accuracy, since inventing a better correlation from past events can only help so much.
With the novel sense and respond approach, the gap between planning and reality (execution) can be closed (see SCP and SCE Need to Collaborate for Better Fulfillment), since sensing signals from the real world (such as vendor-managed inventory [VMI] updates, supply chain exceptions—events and non-events alike—and downstream promotion-based demand peaks) and responding to them promptly should allow a company to better adapt its fulfillment and manufacturing capacity to real-time demands. Order fulfillment features should assure that flexible demand plans are instantly available throughout the organization. Distribution planners can thereby target inventories to meet specified customer service levels; logistics managers can concurrently receive just-in-time (JIT) replenishment plans to maintain proper service and inventory levels; and production schedulers can see the status of every order and the impact of every change. Most importantly, the planners can see the financial impact of every decision, whether major or minor.
Better Business-to-plant Links
There are some cross-industry capabilities that are especially pertinent here as well. The chemicals industry may be the one that has the most recently realized the need for better business-to-plant (B2P) links, to achieve more predictable product supply and deliveries, more agile manufacturing processes, and a reduction in manufacturing costs (see The Importance of Plant-level Systems). Plant-level system investments in chemical companies have thus far typically involved a data historian (a database with series-based time rather than relational data); advanced process control (APC) and plant automation software; data reconciliation and yield accounting (in order to create mass flow and energy balance snapshots of continuous process flows); and—particularly of late—a plant or manufacturing intelligence software layer to make sense of real-time production data for improved, also real-time informed decision making (see Plant Intelligence as Glue for Dispersed Data?).
The B2P integration process is being driven by Instrumentation, Systems, and Automation (ISA)-95, an international standard for defining the interface between business and manufacturing systems. The first part of ISA-95 consists of a dictionary of common information technology (IT) terms for both business and manufacturing personnel. The second part adds details to illustrate these terms, and describes production by personnel available, materials used and produced, equipment used, and production for scheduling and costing. The third aspect of ISA-95, still under development, defines contextual models for the disparate activities between manufacturing and business systems.
When looking for a vendor, various considerations should be included:
- Can the vendor provide a list of relevant chemical industry references?
- Does the vendor provide for the unique requirements of the chemical industry? (If the model cannot fully define the realities of the user-specific chemical processes and practices, it cannot possibly manage these realities.)
- Was the solution built specifically for the chemical industry (good), or does it use a generic solution employing templates (OK, but not necessarily excellent), or is it simply a generic product (bad)?
- Is the solution a single, integrated application with one common model, or is it a collection of interfaced modules?
- Is the solution a complete application, or is it a modeling language that forces users to create their own solution?
- Can existing personnel (such as planners or IT staff) support the system, or does it require specialized assistance from an operations research or modeling group?
Enterprise systems have brought many benefits to chemical environments, but for individual enterprises, gaining these benefits requires the selection of a solution that can deal with the unique needs of the business. Although only a handful of vendors claim they can support these needs, some first-class options do exist. Only by focusing on the requirements that will make or break the project will the chemical operation select the right solution and gain these benefits.
This concludes the three-part series So What's the Big Deal with Chemicals?
About the Authors
Predrag Jakovljevic is a principal analyst with Technology Evaluation Centers (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade (Yugoslavia), and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.
Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years of experience as an executive in the software industry, and has been called the "father of process ERP." He is a frequent author and award-winning speaker on topics such as gaining value from ERP, SCP, e-commerce, and the impact of technology on industry.
He can be reached at Olin@ProcessERP.com.