Maximising Performance the Power of Supply Chain Collaboration

October 2005

Results of the EPCA-Cefic
Working Group Sessions
organised and sponsored by EPCA
in cooperation with Cefic

Alan Braithwaite (ed.)
LCP Consulting
October 2005

The Think Tank activities and this report are due to the courtesy of EPCA.
a.i.s.b.l The European Petrochemical Association i.v.z.w.
Avenue de Tervueren 149 Tervurenlaan
1150 Brussels - Belgium
Phone : +32 (0)2 741 86 60
Fax : +32 (0)2 741 86 80

Disclaimer

This document is intended for information only and sets out the results of a series of ‘think tank’ discussions. The information contained in this report is provided in good faith and, while it is accurate as far as the authors are aware, no representations or warranties are made about its completeness. No responsibility will be assumed by the participating associations, EPCA or Cefic, nor by the companies having delegated representatives to participate in the discussions, in relation to the information contained in this document.

Management Summary
CHAPTER 1 - Overview
CHAPTER 2 - The Chemical Industry in Europe: structure, trends and implications
CHAPTER 3 - The Foundation work in 2003/4 for this phase of the Think Tank Programme
CHAPTER 4 - The Working Groups connect to form a model of European Excellence
CHAPTER 5 - Working group Report Summaries
CHAPTER 6 - Competition Law and its implications for this initiative
CHAPTER 7 - Next steps for EPCA/Cefic
CHAPTER 8 - Acknowledgments and thanks

Management Summary

This report commands the attention of business leaders and stakeholders in the European Chemical Industry. The European Chemical Industry is moving into gradual structural decline which, in the bleakest scenario, could accelerate (see Cefic Report ‘Chemical Industry 2015: Roads to the future’). This work describes the conclusions of a large group of experts on the range of supply chain initiatives that their companies and the industry can deploy and that can contribute strategically to its sustainable future.

57 senior people from 38 leading entities have devoted time in working groups to reaching the conclusions of this report. Their aim has been to develop and validate supply chain measures that can maximize the performance and future of the industry; they have reached widespread agreement on the applicability and relevance of supply chain methods in the industry.

It was also clear to our industry specialists that the supply chain ‘best practice’ that is guiding other industries is much less evident in chemicals, although there are examples of it.

Supply chain excellence brings lower unit costs, higher capital productivity, increased customer retention and better end-to-end value for customers. Applying these concepts in chemicals requires a fresh and radical approach for an industry that has succeeded in the past with an established business model of scale, market pricing, and relatively low customer orientation.

The teams have estimated that the accumulated potential from a range of measures is up to €15 billion, 2% of turnover and €10/tonne. Clearly this average disguises a range.

If that is not strategic potential – then nothing is. We should expect CEOs and CFOs to be highly motivated by this assessment, which is why we believe this report and the work of the groups commands the attention of our business leaders.

CHAPTER 1 - Overview

This chapter provides an overview of the report and signposts for the individual chapters. The reader can use this as a guide to their specific areas of interest in the rest of the report.

The European Chemical Industry is a powerful force in the European economy but is moving into gradual structural decline. In the bleakest scenario, this decline could accelerate. Chapter 2 provides an overview of the situation and outlook.

In other industries, such declines are countered strategically by consolidation, rationalization, off-shoring and disposal to private equity firms. All of these responses are relevant and already evident, but the potential contribution of supply chain excellence is considerable and has been given only limited attention.

The threats of increasing feedstock and fuel costs, environmental and congestion measures in transportation and the relentless shift of manufacturing to the East combine to accentuate the business and supply risk for the sector. The industry has very high intensity in terms of its generation of transportation and logistics activity. We estimate that its logistics and supply chain activities have a cost of up to € 60 billion. Yet in spite of these huge costs, the industry does not have a track record of applying good practice in supply chain management. This is all the more surprising given the industry’s high levels major contribution to the EU economy and its process integration culture in manufacturing.

The working hypothesis for this EPCA/Cefic initiative has been that the supply chain can have a highly beneficial impact on the European Chemical Industry and brings the potential to arrest the decline. This is not a claim that supply chain concepts are the sole saviour of the sector; however the work of the expert groups this year has shown that it can contribute substantially.

The origins of the work during this year were founded in a smaller think tank exercise in 2003/4 under the sponsorship of EPCA with Cefic support. A summary of this work is contained in Chapter 3. In essence, that group found that there were widespread opportunities to apply supply chain thinking and practice in the industry. It provided a four dimensional framework for improvement: core to the company: vertical – working with suppliers and customers: horizontal – working with other companies in the sector: and working with LSP to improve performance.

The core theme of all these dimensions was increased collaboration. However the work of the original think tank stopped short of validating and valuing the concepts in relation to the industry. The report proposed a next step, drawing on wider involvement from the industry, to validate and quantify the potential from the four dimensions of improvement through investigation and endorsement by practitioners.

The work in 2004/5 was organised into four working groups dealing with Collaboration principles and practices (WG I), LSP Capabilities to support the new processes (WG II), Skills, talent and training to implement supply chain concepts (WG III), and The Impact of Safety Security and the Environment (WG IV).

The diagram following shows the way the work groups were related.

There have been 57 executives from 38 entities participating across these work groups, making this a representative effort that can be given high credibility. Chapter 8 provides the details of the contributors together with a vote of thanks to them all.

In overview, the working groups all concluded that the potential from effective supply chain management based on benchmarks, cases and examples can be at least €10 per tonne. Chapter 4 provides an overview of how this is derived.

CHAPTER 2 - The Chemical Industry in Europe: Structure, Trends and Implications

The chemical industry is facing challenges of unprecedented scale. It was against the background of these challenges that the working groups were chartered to determine the supply chain potential.

Growth in sales in the industry of 4.5% pa between 1999 and 2004 has been secured by imports and price levels; volume growth in production has been only 0.9% pa.
Chemical industry production is lagging European industrial growth in general and is below GDP.
European chemicals has seen its share of global sales decline by 4% in 10 years.
Capital investment in the industry has declined by 26% since 1998 and R&D has reduced by 24%.

Notwithstanding these depressing statistics, the industry is integral to every sector of the European economy and contributes 12% of manufacturing value add and 2.4% of GDP.

Its capital intensity and high levels of process integration make the financial performance of the industry extremely vulnerable to quite small declines. As a result, the speed of decline could accelerate; any and every action that can help to arrest this situation is therefore strategic for firms. They are also crucial for the European economy.

In March 2004, Cefic published a report titled ‘Chemical Industry 2015: Roads to the Future’ following two years of research into the chemical industry in Europe.

Its headline conclusion was bleak, foreseeing structural decline:
“… the EU as a major chemical production region is at risk. To secure the industry’s long-term competitiveness, decisive action by both industry and authorities is required to steer the critical drivers determining the future of the industry in the right direction over the next ten years”.

For those who are already familiar with this conclusion and its implications, we apologise for its repetition in this section. Nevertheless, it is important to restate the key messages as it is easy to lose sight of the big picture. Using a military analogy, it is hard to see the whole battle when pinned down by the immediate hostile fire of daily business life.

The key facts on the industry – together with their implications have been well documented by Cefic and Eurostat. They are as follows. The EU 25 Chemical industry:

generates revenues of nearly € 600 billion – around 28% of the world total.
employs nearly 3 million highly productive people who are nearly 9% of the total employed in manufacturing in Europe.
contributes 12% of total manufacturing value add.
serves every segment of manufacturing as well as direct consumer products.
accounts for 45% of the EU’s entire manufacturing trade surplus.
has steadily increased its levels of export to 25% of total output (excluding pharma chemicals).
has consistently reduced its real prices since 1996 vs. the consumer price index.

By any standards this is a story of success and scale, delivering real economic value. The detailed facts and figures available in reports from Cefic and Eurostat provide a comprehensive viewpoint.

Behind these figures is a trend that is less encouraging:

“… this position is slowly eroding, the EU’s share of global output declining from 32% a decade ago to 28% today”.
The Middle East with its access to feedstock and ambition to add value is increasing share of output.
“Asia-Pacific, and China in particular, is absorbing an increasing share of global chemicals production.
- First of all because that region’s rate of industrial production growth exceeds much of the rest of the world.
- Secondly, … its pattern of demand is more chemicals-intensive than developed economies.
- Thirdly, is the dynamism in the emerging countries of industries … that are very important end-users of chemicals.
Investment intentions for Europe in some categories such as Ethylene are almost zero.
The employment of highly skilled graduates in the industry is estimated to be declining by 10% pa from a peak in 1996.
While labour productivity growth in the 90’s has more than offset wage inflation, in the last 4 years this has not be sustained and unit labour costs have risen.

Together the negatives combine to suggest that the decline is underway; in spite of continued revenue growth this is a sector that is losing global share and standing. Cefic’s report last year suggested that the high levels of industrial interdependency in chemicals could result in a ‘tipping point’ where deteriorating economics become difficult to arrest or reverse.

In this context, the scale and significance of supply chain and logistics is remarkably important.

We estimate that the industry is responsible for 1,500 million tonnes of movement per year.
This represents 5% of freight tonnes lifted in the EU and around 8% of tonne-kms.
Consignments of chemicals move 48% further on the road network and 80% further by rail than the EU average for freight.
The industry spends on average 8 to 10% of its total turnover on supply chain and a significant part of that is on transport costs – a total of € 60 billion pa.

The threats to the sector of increasing energy costs, traffic congestion and associated regulation, emissions controls combined with customer migration to the East make this supply chain intensity a structural risk that must be countered.

And the pressures of the landscape for the industry in social, environmental and political terms are substantial as reflected in the quotes following:

Regulation is a key factor generating adverse effects on the competitiveness of the EU chemical industry. In this field Europe continues to tighten its environmental regulations putting domestic producers at a comparative disadvantage. … Moreover, the interpretation and implementation at national level is divergent and not coherent.
Chemicals contribute to and suffer from a current transport infrastructure that is already overloaded with high levels of congestion in important parts of Europe. The situation will become even worse with the estimated 50% increase in freight volumes in the coming 10 years impacting on both service and economics.
Environmental controls on the movement of all types of freight are steadily tightening. Governmental organisations have suggested that current taxes on freight transport, especially by road, would have to rise significantly to fully recover environmental costs. Governments are particularly concerned about the projected growth of CO2 emissions from the freight transport sector. It is likely, therefore, that taxes on freight movement will rise. The resulting increase in transport costs per tonne-km will impact more heavily on those sectors, such as chemicals, which are relatively transport-intensive and spend an above-average share of sales revenue on transport.
Safety and security are increasing concerns due to the hazardous nature of the product combined with socio-political interruptions (terrorism and strikes). There have been a string or marine explosions and this risk exists on land too.

Relative to less onerous standards in other regions, Europe must learn to operate more competitively. The industry must help itself or face the most pessimistic scenario of accelerating decline. The situation requires a radical shift, generating tangible value to re-invest in sustainability.

And the public image of the industry is poor. People in the chemical industry are among the highest paid, reflecting its scale and economic success. But, because of the general perception of power and pollution and risk contribution, the sector finds it difficult to get the advocacy that both its industrial contribution needs and its track record deserves. The decline in graduate employment in chemicals is a further factor that is disconnecting new opinion formers from any commitment to the sector.

The working hypothesis for this EPCA/Cefic initiative has been that the supply chain can have a high impact on the European Chemical industry and brings the potential to arrest the decline.

CHAPTER 3 - The Foundation work in 2003/4 for this phase of the Think Tank programme

This report builds on the work of a smaller Think Tank Group in 2003/4 that had three principal goals:

to examine opportunities for using supply chain management to increase the long-term competitiveness of the European chemical industry.
to learn lessons from supply chain best practice in other sectors.
to recommend changes to the design and operation of European chemical supply chains.

The report from that think tank identified the issues and the dimensions of potential improvement from applying supply chain concepts in Chemicals. It said:

“A series of measures are proposed which collectively could transform European chemical supply chains. They would not only offset the upward cost pressures, but also enable companies to offer a superior distribution service more cost-effectively.

[...]

In summary, the long list of supply chain improvement measures identified by the think tank group fall under six general headings: collaboration, segmentation, co-ordination, system optimisation, standardisation and liberalisation. Many of the measures are mutually reinforcing and, if implemented as part of a package of supply chain improvements, could yield major economic and environmental benefits. Some will, nevertheless, require fundamental changes in business processes, trading practices and managerial mindsets.”

The 2004 report provided the conceptual improvement framework illustrated below:

The guiding thought was that companies could look at their supply chain and logistics in terms of:

Core to themselves – what they can do internally to improve their operations.
Vertical change – what can be done to manage the supply chain better by working with suppliers and customers on programmes such as VMI, CPFR, modal and packaging changes ( see glossary for definitions).
Horizontal change – what companies can do by co-operating together to reduce costs, such as adopting shared services, back-loading and pooling, training and development, and applying common standards.
LSP development – enhancing the capabilities that LSPs bring to the industry and how shippers work with them.

The 2004 report concluded that:

“Collectively the initiatives represent a substantial pool of potential improvements. The benefit profile will vary from company to company depending on their specific combination of products, markets, sources and capabilities. Partly for this reason, and partly because of time limitations, it has not been possible to model the impact of these measures or estimate the resulting economic and environmental benefits. These benefits are, nevertheless, likely to be large and will but require more collaborative models to be adopted by individual players.”

These collaboration models will be essential for several reasons:

Investment in shared capacity, of vehicles, terminals and ICT systems, may exceed the financial scope of service providers and individual producers.
Industry-wide consultation, and possibly advocacy, will be required to ensure that the regulatory environment is conducive to the safe and efficient operation of chemical supply chains.
The nurturing of logistics and supply chain skills in the European chemical sector will benefit from industry-wide rather than company-specific initiatives.
The willingness and ability of the logistics service sector to innovate will need to be challenged and developed to meet the chemical industry’s strategic imperatives.
Cross-sectoral collaboration will be required to achieve higher utilisation of freight terminals and equipment.

The presentation of the 2004 think tank concluded with a general invitation for participation in working groups to unpack, validate and quantify the directions that had been identified; these were to be the first steps of industry collaboration to gain momentum for radical change.

As a result four working groups were established along the supply chain themes using the points above. The formation of the working groups is illustrated in the diagram:

Working Groups:

WG 1: Collaboration principles and practices
WG 2: LSP Capabilities to support the new processes
WG 3: Skills, talent and training to implement supply chain concepts
WG 4: The Impact of Safety Security and the Environment

The working groups have met 5 to 6 times each, depending on the specific group and with membership in total of 57 people from 38 entities. This has proved to be an energetic and active process in which excellent contributions have been made to creating the picture in this report.

Supply chain and logistics is not usually a core function within prevailing organisation structures in the chemical industry; business unit and product market structures are the dominant focus. Unlike other industry sectors, SCM is seldom represented on the Board.

But the expertise and appreciation of the issues and potential exists, as evidenced by the high levels of expertise brought to the working groups by the participants. The clear implication of this experience is the need for a mindset shift in the way supply chain potential is addressed. Where previously, logistics and supply chain functions have been distributed between logistics, production planning, procurement and commercial verticals, in the future organisations will need to find