SAP for Chemicals: A Packaged Solution for Mid-market Companies
Written By: Predrag Jakovljevic
Published On: May 30 2006
A Rough-and-tumble Ride
Although one might get the impression that life has been kind to the chemical industry, that certainly hasn't always been the case. True, chemical players today are virtually minting money on their own terms, but only two years ago, the industry was moribund, and chemical products were selling like sludge rather than hotcakes. Chemical companies were rife with overflowing inventories, and their pricing power was anemic. But now, plants are operating at a feverish pace to meet demand; profitability and cash flow are at an all-time high (and still looking up); and storage tanks are emptying of inventory swiftly and briskly.
Part One of the series SAP for Chemicals: A Packaged Solution for Mid-market Companies.
But that doesn't necessarily mean that the industry has finally gotten it right: chemicals are a notoriously slow-moving lot, in spite of (or because of) their maturity, and the fundamental challenges to the industry are obviously not going to go away. With limited asset turnover, production flexibility, and product innovation (there's simply nothing left to discover or invent, especially for basic chemical manufacturers such as commodity producers of plastics and rubber; fibers; raw materials and intermediates; inorganic materials; fertilizers; and so on), the industry may well have painted itself into a corner.
The complexity of today's global chemicals industry creates significant hurdles for effective demand management, since both suppliers and their customers are subject to market uncertainties and price volatility. The growing trends of customization and segmentation mean that producers have a wider variety of products to manufacture, and more difficult choices to make for maximization of production efficiency and profitability. While more accurate forecasting can be achieved by blending statistical analysis, customer projections, and the knowledge of the sales and service teams, there is a natural limit to planning and forecasting accuracy, since inventing a better correlation from past events can help only so much. For a detailed tutorial on the chemicals industry see So What's the Big Deal with Chemicals?
SAP AG (NYSE: SAP) offers enterprise applications tailored to the chemicals industry. For a discussion of the SAP approach to packaged solutions, see SAP Industry Solutions for Mid-market Companies.
A recent SAP study (conducted jointly with Boston Consulting Group) confirmed that chemicals mid-market companies in particular realize the need to improve their business processes across the entire enterprise. The survey-based study was conducted with nine companies (five in the US and four in Germany), and showed the strategic areas these companies typically struggle with:
- Supply chain efficiency
Companies want to reduce inventory costs, improve cycle time through supply chain visibility and efficiency, reduce material costs through strategic sourcing, and institute collaborative demand and supply planning to reduce working capital
- Plant management
Enterprises are seeking ways to improve asset productivity through capacity use and investment management, and to increase operating efficiency through improved scheduling
- New product development support
Companies are looking to avoid early commoditization by actively managing product lifecycle and anticipating future requirements, and to maintain competitive advantage through collaborative design and rapid response to customer requirements
- Customer service and profitability
Businesses want to react more quickly to changing demands in product specifications, to optimize operating efficiency through improved scheduling, and, ultimately, to achieve business transparency
SAP's Chemicals Background
SAP is a well-known enterprise applications provider within the chemicals industry. Large companies and an industry Who's Who rely on SAP, including Dupont, Dow Corning, Eastman, Dow Chemical, Rohm & Haas, ICI, and Huntsman. Having targeted chemicals manufacturers virtually since its inception, SAP has captured almost all the Fortune 500 companies in this sector. But should SAP be a vendor to consider for the mid-market chemicals company? Indeed, of over 1,500 SAP customers in the chemicals industry, only about 10 percent have revenues exceeding the $1 billion (USD) mark, leading us to the conclusion that SAP is indeed a viable consideration. In fact, SAP serves as the enterprise resource planning (ERP) backbone for the majority of the chemicals industry, including the top fifteen globally, as well as seventy-nine of the largest hundred.
Frank Kochendoerfer, a SAP "chemicals industry principal," says that it is common knowledge that SAP has a very high penetration in large accounts, since 85 percent of all large global chemicals companies use SAP. He goes on to say that SAP nevertheless has many clients in the mid-market space (about 70 percent of all installations are in the revenue band up to $1 billion [USD]). In fact, SAP has about 1,300 mid-market customers in the chemicals space. Thus, although the market perception is that SAP is only for large enterprises, SAP in fact already has a substantial presence in the mid-market. According to Kochendoerfer, these companies are across all chemical segments, including organic chemicals, inorganic chemicals, rubber, plastic materials, paints and coatings, inks, fertilizer, and surfactants.
Furthermore, SAP believes this is only the tip of the iceberg: it has more than 5,000 subsidiaries of the largest chemicals companies already in its installed base, but its new global market opportunity consists of about 40,000 small-to-medium chemicals enterprises. To be fair, this is the estimated total number of global chemicals companies, according to industry associations. The target market for SAP is more in the 10,000 to 15,000 range, as the rest are very small enterprises.
The giant even provides some hard facts with respect to tangible benefits for some of its mid-market chemicals customers, supported by several independent resources. Some elements of improved supply chain efficiency include reduced inventories (overall inventory by an average of 7 percent and high value inventory by an average of 5 percent), improved resource utilization (clerical labor reduction by an average of 16 percent and a reduction of Environmental Protection Agency [EPA] tracking costs by an average of 25 percent), and improved performance in terms of scrap or reject reduction, by an average of 8 percent. On the other hand, potential non-quantifiable improvements in managing plant operations come from integration of external partners and suppliers, greater forecasting accuracy, tied planning to execution and sourcing (faster response time), and higher flexibility, in terms of custom products and packaging.
Chemicals Industry Specific Solutions
SAP has been delivering on its chemicals industry strategy by expanding its capabilities for manufacturing and supply chain management (SCM), broadening its composite package applications in areas such as emissions management, and focusing on mid-market companies. These industry-specific solutions have been occurring as SAP evolves its ERP customers from a client/server environment (under the aging SAP R/3 product) to mySAP Business Suite, which features a service-oriented architecture (SOA) powered by its integration and business process platform, SAP NetWeaver. This is the technical foundation for composing SAP xApps (cross-applications or composite applications), mySAP Business Suite solutions (including mySAP ERP), partner solutions, and customers' custom-built applications. In 2003, SAP announced that it would no longer be developing SAP R/3, although it will continue to provide maintenance and support until 2009, and will offer customer-specific maintenance after that, for a price. The replacement, mySAP ERP (SAP's core ERP solution, which now runs on SAP NetWeaver), includes improved functionality for business process management (BPM), and serves as a foundation for companies transitioning to SOA (see Multipurpose SAP NetWeaver).
In 2005, SAP launched an adoption program to help companies with this transition, and the re-licensing turnout for mySAP ERP and for mySAP Business Suite (amongst larger user companies still running SAP R/3 as the corporate backbone) has been small but growing: mySAP ERP was released to all customers in May 2005, and has since captured more than 1,400 customers. It is somewhat ironic that the smaller (typically technologically disadvantaged) chemicals companies who are brand new customers will be able to take advantage of SAP's latest business process platform and more flexible ERP platform, mySAP ERP 2004 (which is at the core of the SAP ERP Chemicals Packaged Solution), and thus overtake their larger brethren. AMR Research's late-2005 alert, "SMB Chemical Companies May Be Able To Leap-Frog With SAP" sums up the point within its title.
SAP had vigorously enhanced R/3 to achieve nearly a perfect fit for some process industries (such as chemicals) and to dispel notions that the product was only for use at a corporate, white collar level (rather than in real manufacturing plants and remote divisions), but it has done so at the expense of perceived or actual complexity, and with a resulting high total cost of ownership (TCO). To be fair, during the ERP growth era, when many companies implemented ERP because of Y2K or business integration needs, there was no central blueprint for rapid implementation (and no standard chemical-specific business processes), and companies embarked on expensive re-engineering projects sight unseen with their chosen consultants. Over the last two years or so, the SAP Chemicals IBU and SAP Best Practices teams have systematically worked together to deliver a packaged ERP product to mid-market chemicals companies, with price breaks and simplified implementation that make it attractive to SAP, its partners, and targeted smaller customers.
In the chemicals industry, SAP is focusing on the mid-market, defined as companies with annual sales between $50 million (USD) and $1.5 billion (USD), via the package's preconfigured templates for reducing implementation times and costs. As said earlier, SAP estimates that it holds 40 to 55 percent of the mid-market in the chemicals industry, and 85 percent of large chemicals companies. However, the vendor wants to provide solutions for every company size, rather than attempting a "one size fits all" approach. Thus, SAP Best Practices can also be used for subsidiaries of larger companies, with flexible installations for all (both SAP and non-SAP customers) from the ground up, or into existing infrastructures using SAP's Business Configurator (BC) sets.
Accordingly, SAP offers the SAP ERP Chemicals Packaged Solution; Kochendoerfer claims that this is easy to install, implement, and maintain, and that it has full-fledged industry functionality (rather than being a "light, stripped down" version). The solution is a substantial investment by SAP and many of its implementation and consulting partners. It covers components like material management, logistics, manufacturing operation management, plant maintenance, warehouse management, sales and distribution, quality management, dangerous goods management, administration, and industrial hygiene and safety. However, while these are part of SAP's Best Practices for Chemicals solution, emission management is out of the packaged scope, and is only available as a separate composite application (SAP xEM).
Interestingly enough, mid-market chemicals companies do not get any concessions owing to their size—they have to deal with the same unforgiving regulatory and competitive pressures as their larger counterparts, as described above. They are often forced to deal with equally complex supply networks and trading relationships, while still having to compete with the economies of scale of larger plants and distribution networks. Thus, being concerned with providing sufficient functionality (complexity is inherent to the industry, and there is only so much a vendor can do to simplify the solution), SAP Best Practices for Chemicals aims at providing an approach to support the entire value chain, starting with market-oriented planning (sales planning, capacity planning, planned independent requirements, and material requirements planning [MRP]), and then going through product development (recipe management, customer collaboration, and quality management [QM]), procurement, manufacturing, and sales and distribution. The process loop closes with financials and controlling (the flagship SAP FI/CO module, which features product cost controlling, profitability analysis, and overhead cost controlling).
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.