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Guest Blog: Why the Chemical Industry Cares About Supply Chain Costs and Innovation

Chemical Industry

Just a couple months ago, Kristopher Glotzbach highlighted some of the key factors in serving the chemical industry. Taking an even higher level view, I’d say that what the chemical industry cares about most from its supply chain are safety (including regulatory compliance), security, cost efficiencies, and innovation. I’d like to share some thoughts on the last two priorities—cost efficiencies and innovation, starting with cost.

You might be thinking, “isn’t everyone concerned about cost in their supply chain?” Yes, that’s true. In a 2012 IDC Manufacturing Insights survey , we found that 53% of North American manufacturers of all kinds, shapes, and sizes pick reducing overall supply chain costs as their top supply chain priority. But only a few manufacturing industry segments characterize the primary focus of their supply chain as cost, and the chemical industry is one of those. (Most others pick product quality as the focus of their supply chain.)

Viewing Supply Chain Costs in the Chemical Industry as Controllable Costs

I think that this laser focus on cost for the chemical industry supply chain has to do with the fact that these companies see the supply chain as a cost they can manage closely (i.e controllable). This contrasts with the cost of feedstocks and energy, which they’d like to manage just as closely but often can’t (i.e uncontrollable). So how do chemical manufacturers expect to reduce their supply chain costs? Most told us through reducing procurement costs, followed by reducing transportation costs. That means that evaluating a global third party logistics provider (3PL) should include some due diligence understanding of how they can help you manage contract compliance in addition to reviewing the actual transportation costs. When your employees procure transportation services, do they use the company that you have under contract? If the answer is no, or not always: why not? Is there something the 3PL can do to make it easier or more desirable for your employees to use your contracted carrier? Follow through on that conversation as you’re reviewing your relationship with your 3PL.

Translating Innovation into Flexibility in the Supply Chain

Back to innovation: We’re increasingly seeing signs that companies in the chemical value chain are prioritizing demand planning/forecasting and production scheduling over supply chain execution challenges like warehouse management and transportation management. Some of this has to do with the industry’s need to manage processes and complex assets; we think it’s also related to a more customer service focus. Their customers want more product options, new products, and more environmentally friendly products, and on schedule—even if there’s a plant fire that limits the availability of a major ingredient or a major hurricane that stops supply for days or longer. That means that this industry is always evaluating new ingredients and potential substitutes. Consequently, the chemical industry is usually adapting or building new supply chains. Translating innovation into 3PL services means flexible capacity and extensive reach—when and where you need it. So while you might be tempted to look at a 3PL for cost savings, don’t forget to consider how they can also help with contract compliance and the flexibility to change as your company “innovates” your products, processes, and most importantly, your supply chains.