Industry
Supply Chain Management

Chemical supply chains transforming from push to pull

A proper S&OP process is very much demand driven, and hence production needs to follow customer demand rather than being utilized to the max: the supply chain model changed from push to pull!
Leon Van der Loo

Supply Chain Management finally takes over from Manufacturing!

Being in supply chain management positions in the chemical and pharmaceutical industry for over 15 years, I’ve met with Peter Devos, Managing Director of the European Chemical Transport Association (ECTA) who also has large experience in the chemical industry. We’ve had an interesting discussion on supply chain developments in that industry.

We’ve both seen huge developments in the past 10 years, not at least because the ever-increasing digitalization has become a key driver for globalization and creates an enormous opportunity to better balance supply and demand, to increase ‘end to end’ visibility in the supply chain and to explore more logistics collaboration between partners and customers.

Chemical industry : asset driven from nature

The chemical industry historically is very much asset-driven due to the high capital investments. The power and the siloed organizational structure of manufacturing organizations in large chemical companies therefore traditionally is large and had often blocked integrated supply chain thinking and implementation of proper Sales & Operations Planning (S&OP) methodologies for long time. The high capital intensity after all drives the need to maximize capacity utilization and to minimize costs of goods sold, so the supply chain model is very much push driven. As indicated by CEFIC (The European Chemical Industry Council) the capacity utilization in the chemical industry has a long-term average slightly above 80%.

From local to global S&OP…and to Integrated Business Planning

Although S&OP thinking is there for many years, it often has stayed at rather local levels. To implement global S&OP’s, cross-organizational (global) ERP systems and associated (advanced) planning systems are needed and quite often this is not the case. The increasing digitalization and the speed of having the necessary data available to perform global S&OP going along with it, is changing the supply chain thinking in companies from push to pull. The latest systems even have real time data available to steer business decisions at all levels in the organization. As an example, I’ve implemented full visibility of marine transport together with a global freight forwarder not too long ago, enabling us to get marine cargo data (ETD, ETA, ATA etc.) directly into our ERP system. This was a big step forward in controlling (improving!) customer service levels at global scale. Supply chain dashboards have benefited from this and are becoming highly advanced. Integrated business planning is the talk of the day in many large companies these days!

Customer responsiveness has increased enormously and therefore companies’ ability to react quickly on market needs and developments as well. As Darwin stated: “It is not the strongest of the species that survives, it is the one that is most adaptable to change”. With increased responsiveness capabilities, companies become more agile and they feel the need to in this quickly changing world.

Enabling global production capacities…what are the effects?

When companies are moving to global S&OP’s, the effects on individual plants and employees are huge and should not to be underestimated. Plants are being transformed to flexible “swing plants” to fulfill the global demand. Local for local production becomes less important and “global for local” is the new planning norm, taking into account global capacity, global energy and manufacturing costs and global customer demand. The capacity of a plant cannot be seen on its own any longer and someone should give direction on how to utilize the sum of all plant capacities in the company. And there we go… supply chain departments get the ever-wanted independent leading role in companies, because they own the planning and are the ones having the global overview! Thus, planning decisions become more centralized. Again, the continuously improving IT tools do support this more complex decision making process.

Demand driven supply chains .. and what should manufacturing do?

Having said so, this also changes the historical dominant role of the manufacturing organization. A proper S&OP process is very much demand driven, and hence production needs to follow customer demand rather than being utilized to the max: the supply chain model changed from push to pull!

The effects are high: in favor of the global picture, plants no longer are fully loaded. Manufacturing should learn how to run a plant most efficiently, for example at only 60%, and this is very new to them.

  • Is there sufficient knowledge to run plants efficiently at rather low utilization rates?
  • What is the effect on the workforce?
  • Does this mean companies must start thinking about increasing their flexible workforce base?
  • Is that possible at all for such a knowledge intensive industry like chemicals?

For sure in the coming years, companies do need to think about their culture and people management skills (and this for sure strongly influences talent management), and this might create a new (r)evolution!

See you at LogiChem 2017?

At LogiChem 2017, the trend towards integrated business planning, digitalization, global supply chains, optimization of (logistics) networks, is again visible. I hope I will have discussions with more supply chain professionals like the one of last Friday with Peter Devos. Let me know if you’re in for such a chat!

Thanks for reading

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Leon Van der Loo