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Electronic databases, e-networking, digital commerce and online markets have all taken the commercial world by storm. Last year BusinessInsider declared that Amazon is now bigger than Walmart. Alibaba is worth more than both of them. It is clear that the business world is going digital, so why is the chemical industry so reluctant to join in?

Well according to Stefan Gurtzgen, senior director of chemicals at SAP and contributor at specchemonline.com, most chemical businesses believe that their competitive edge is in areas other than the ability to market their chemical products effectively. In fact he outlines several business models that chemical manufacturers and supplies are clinging to and explains how these models are fatally flawed.

He writes, “One differentiating strategic success model was customer proximity or having chemical processing facilities and/or technology service centres close to the customer. However, with customer bases going east, eroding customer loyalty, and increasing demand and erratic geo-politics in the digital economy, customer proximity is no longer enough to drive sustainable growth and profits.

Being close to feedstock was another strategic model, in particular for commodity producers. Here also, the advent of shale gas in the US, the oil price rollercoaster and innovative technologies turning coal into chemicals, driven by China, changed the game and diminished the advantage of feedstock proximity.

Lastly, those companies which pursued ownership of intellectual property and technology know-how as a differentiating model are being challenged, due to the rapid commoditisation of speciality products, few new blockbusters being developed and launched and low cost competitors entering the market.“

It seems that older strategic models for chemical businesses are no longer, or are at least less, relevant than before. Instead, Gurtzgen suggests that chemical firms should be embracing technology. They should use digital capabilities to improve the way that they manufacture chemicals, purchase feedstock, organise logistics and above all sell their products.

This is a fact supported by a 2014 Accenture report entitled ‘The Chemicals Industry: Getting ready for next generation B2B’, which stated that there is a, “…new chemical industry customer.” Warning that, “Within a decade, perhaps half or more of a typical company’s traditional workers—those who grew up with paper based invoices and product information— will be retired. Their younger replacements will be ‘digital natives’ for whom rich, electronic-based interactions are the norm and whose expectations of the digital experience are rising rapidly. These will be the buyers that chemical companies must reach. Chemical companies seeking to meet these expectations will be in position to stay close to their customers, which is an increasingly critical asset in a competitive industry.”

Computers are playing a larger and larger role in our lives, from how we communicate with friends, shop online, find love and do business. The chemical industry is aware of that, and is leading the way in using technology to manage chemical processing plants and digital chemistry that can simulate chemical compound development. But isn’t it missing out on an easier way to connect?

Surely the use of digital marketing, E-networking, big data and targeted online campaigns will create the competitive advantage that Gurtzgen sees has gone. No one expects a chemical company to replace Amazon in terms of online trades any time soon, but why do chemical businesses still remain unsure about using the digital world to gain a marketing advantage?

Whilst the chemical industry is generally thought to be in good long-term health, there is much concern over how chemical prices and profitablity will be effected by the current low price of oil. When the price of a barrel of oil was closer to the $100 mark, the discovery and development of shale gas deposits in America offered the chance for many chemical businesses to make healthy profits. Their cost competitive advantage was obvious and the road to open numerous ethane and naptha processing plants was clear.

Now that the price of a barrel is so much lower, many chemical industry chiefs are concerned that the boom years in the US shale gas chemical market may be over. Will they be replaced with years of losses, plant mothballing and bankruptcy?

Here are two qualified opinions on the matter:

Al Greenwood, from ICIS Chemical Business, states in his report, “In some cases, the decline in [oil] prices has eroded some of the margins of US-made products. Naphtha prices have fallen with oil, reducing costs for foreign producers, who overwhelmingly rely on it as a feedstock. US companies rely heavily on natural gas liquids (NGLs) for feedstocks. Prices for these, however, have also declined. As a result it is believed that the US has maintained its cost advantage, even if margins have eroded.”

He does however add a cautionary word for the future, stating that, “The decline in oil prices has caused a sharp drop in oil rig count, which will lower demand for oilfield chemicals. The decline could leave some companies with high-cost inventory on their books.”

Meanwhile, Jerry Keybl, Project Leader at bcg.prospectives, believes that, “Because ethane is a by-product of natural-gas drilling, it tends to trade at its marginal disposition in the market. Since 2012, the supply of U.S. ethane has greatly exceeded the market’s ability to consume it. As a result, the price of ethane has fallen to its fuel equivalent, which is historically low per gallon and per British thermal unit (BTU).”

Despite these current low prices, he is still optimistic for the future of the American shale gas chemical industry, stating, “The development of shale resources has increased the supply of natural gas and NGLs in North America. The abundant resources will promote competitive prices for natural gas and NGLs for many years. In the medium term, through the early 2020s, historically low prices for NGLs, especially ethane, will drive market dynamics. I believe that the North American chemical industry’s feedstock advantages are sustainable, notwithstanding the recent sharp decline in crude-oil prices.”

So while chemical traders still need some caution, it seems that expert opinion leans towards the survival of the American shale gas chemical industry for the medium and long term.

If it is to continue its success, then how will other regions cope with the continued influence of American shale gas development? Can the European chemical market survive without a cheap source of energy and feedstock? Will the Middle East and Russia remain competitive with oil at such a low price? Or will other regions, such as South Africa, Canada, Argentina and China develop their own shale gas reserves and turn the chemical prices on their head once again? This, for now, remains to be seen.

Supply chain risk is a major issue for all chemical product manufacturers, buyers, sellers, and traders, and in these increasingly uncertain times, the risks of something going wrong are high. Today’s chemical raw material prices are more unstable than ever, making the possibility of reduced profits (or increased losses) from poor chemical supply management a real problem.

Whilst logic would dictate that the global economy would give chemical traders greater options to maintain good supplies, the fact is that long distance logistics can cause as many hiccups.

So how can chemical supply chain risks be reduced? Here are some top tips from chemical industry experts.

1. Multiple Suppliers vs. Single Supplier

According to The Hackett Group’s ‘Study of Key Issues’ as published by Chemical Info, the top concern for supply chain executives (mentioned as a major or critical concern by 92% of respondents) was improving supply chain flexibility. But is it always best to have many suppliers?

As Joshua Nelson, Director of Strategy & Operations Supply Chain Practice at The Hackett Group says in the report, “The emergence of supply chain risk mitigation as a key issue has caused many procurement managers to reassess their reliance on single sourcing strategies.  Before embarking on a change in sourcing strategy, it is important that procurement managers evaluate the supplier relationships for each category of good and assess supply chain risk holistically, across all risk categories.

For example, while multiple vendor sourcing may reduce dependency on a single vendor and reduce capacity risks it may increase other supply chain risks, such as quality, contractual, or management risks.  An objective evaluation will assess total risk and will guide procurement managers to the appropriate sourcing decisions.”

2. Segment Your Supply Chain.

According to Sunil Chopra and ManMohan S. Sodhi of MIT Sloan Management Review, while it may be more expensive for your business’s day-to-day running, segmenting your supply chain can lower your exposure to risk in the long term.

In their 2014 report entitled, ‘Reducing the Risk of Supply Chain Disruptions’, they make the analogy of early oil tankers that were designed with two metal containers connected by a single pipe. As the tanker sailed, the oil would slosh from one tank to the other, making the ship very unstable and increasing the risk of capsizing. Today’s tankers have more compartments and so are more expensive to build, and heavier, so they are more expensive to fuel, but are cheaper in the long-term due to their reduced risk.

As their report states, “In a similar vein, executives need to ensure that the impact of supply chain disruptions can be contained within a portion of the supply chain. Having a single supply chain for the entire company is analogous to having an oil tanker with a single cargo hold: It may be cost effective in the short run, but one small problem can cause major damage.”

3. Be Ready to Use One-Off Suppliers.

Businesses such as Alibaba or ChemCats provide online markets or business databases that are able to provide short notice or one-time offers to trade a specific product for a specific date and price. Whilst there may be risks involved by using an unknown chemical supplier, a trading platform such as Spotchemi (who sponsored this article) offers a service where your potential business partner is vetted by trusted financial ratings companies, such as Bisnode, COFACE and TCM Group. Their online market also allows businesses to place an ‘offer to buy’ on its digital chemical marketplace, greatly increasing your chances of filling your chemical supply chain gap.

Spotchemi can also use its large database of chemical manufacturers and suppliers to locate specific products on your behalf, or in helping you to make new potential supply chain business partners. Making contact ahead of the crisis can be a key part of reducing risk.

4. Focus Your Risk Management on Your Bigger Suppliers.

Chances are that your chemical business, like most others, has a core of business partners and agreements that make up your supply chain. These top suppliers provide most of the materials that you need to do business. Consequently, you should focus your risk lowering attention on these business partners. Whilst logic may state that your smaller, less frequent suppliers are more likely to let you down, you may well be able to manage if their supply chain with you breaks down. How you cope if one of your larger chemical suppliers went bankrupt?

As Michael Volkov, CEO of the Volkov Group explains in his blog article ‘Applying Practical Strategies to Supply Chain Risk’, “One key factor in focusing on supply chain risk is to rank each vendor or supplier by the annual amount of money spent on each vendor or supplier. In this situation, most companies spend roughly 80 percent of their budget on their top 20 vendors and suppliers. Focusing risk management on those primary vendors and suppliers is an effective strategy for focusing risk profiles and priorities.

At some point, companies may find it costs more to collect information about companies in their supply chain than to mitigate the risks by representations and warranties from companies certifying as to standards they employ when contracting with vendors and suppliers.“

Is this list of top 4 ways to lower chemical supply chain risk valid? What further ways are there to reduce risk?

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