 "Lessons to be learnt from B2C supply chain model by chemical industry")
The chemical industry has undergone significant change post-liberalisation. Changing demand profiles & trade patterns, increasing logistics cost, rising competitive intensity and focus on QSHE have resulted in pressure on product margins and overall profitability. The need of the hour for chemical companies is to figure out how to best serve their most profitable customers at the lowest cost. Going forward alternate supply chain management models will be needed to address the challenges faced by chemical companies.
Changing landscape
The Indian chemical industry has undergone significant change over the years with the entry of MNCs post-liberalisation. Along with the growth in industry size to approximately $ 110 billion, the trade deficit has also widened from Rs 12 billion in 1991 to Rs 500 billion currently. While the erstwhile product portfolio consisted predominantly of basic chemicals which currently face commoditisation, the share of specialty chemicals is now increasing. Customers have become more demanding, thanks to dynamic needs of end-user markets due to influx of new technologies & product innovations.
Changing dynamics at the global level is also impacting the Indian chemical trade. With the origin of Indian imports of liquid chemicals gradually shifting from Middle East to South East Asia, the epicenter of chemical manufacturing and trade activities could move from the West coast of India to its East coast. In fact, 3 out of the 4 PCPIRs under development in India lie in the East coast (Vizag, Paradip and Cuddalore).
Complexity of chemical logistics
The logistics cost as a percentage of sales for select chemical companies in India has increased by 8% per annum in the past 4 years. The inventory levels as a percentage of sales have also increased by 7.5% per annum in the same period.
In recent past, decent topline growth of most companies has diverted the attention from the impact of creeping SCM inefficiencies on bottom line. At times, a traditional B2B approach for chemicals has resulted in acceptance of such inefficiencies as a norm.
Precedents
To overcome the challenges faced in inventory planning, European chemical companies are increasingly establishing Vendor Managed Inventory (VMI) models with key account clients to achieve inventory cost optimisation. Many chemicals have continuous production process, making it difficult to achieve lean solution. Moreover, due to volatile markets and inaccurate forecasting, companies may need to carry excess safety stock in order to avoid losing sales. Vendor Managed Inventory model enables greater collaboration with customers on demand forecasting and inventory management.
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Dell’s famed supply chain transformation is a potent example of how a company re-designed its supply chain model to keep pace with market dynamics. When Dell expanded its business from its traditional online stores to other segments, it realised its configure-to-order supply chain model was not equipped to handle the demands of different business segments. Hence, it created multiple supply chains to cater to different segments of the PC industry through different channels. For example, while the supply chain model that served enterprise/ institutional clients offered greater customisation and better response time, the one that served its retail business was designed to achieve lower costs as it was a price-sensitive segment.
Differentiated replenishment model
One of the alternative models can be a “Differentiated Replenishment Model”, which will allow chemical companies to tailor their supply chain strategy to each customer & product type instead of adopting ‘one size fits all’ approach. The first step towards adoption of a differentiated replenishment model is customer segmentation, followed by differentiating the supply chain strategy for each segment.
Customer segmentation
In contrast, consumer based industries such as FMCG, retail, consumer durables, etc align their supply chain models (Refer ‘Graph 2’) to different customer segments and operate through multiple channels. Chemical logistics can take a leaf from the B2C supply chain model and segment its customers for better collaboration.
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The benefits of customer segmentation have hitherto not been fully realised by chemical companies as they usually employ makeshift techniques without requisite effort. Instead of resorting to just margin or volume based segmentation, a multi-dimensional approach to customer segmentation can be undertaken along following axes:
This exercise will enable chemical companies to identify their most profitable customers and customise their supply chain strategy accordingly to serve them in the best manner possible.
Creating a differentiated supply chain strategy requires SLAs to be tailored for each customer type depending on customer needs and behaviour. The ‘Graph 3’ gives an indicative outlay of such strategy.
Conclusion
Supply chain complexity and challenges for chemicals are increasing and needs alternate SCM models, which are tailor-made for each product & are differentiated for end use segments. For such models to succeed, customer collaboration is important. Chemical companies adopting alternate SCM models will get multiple benefits like operational profitability and customer satisfaction and in turn achieve competitive advantage.
____________________________________________________________________________________________________
Siddharth Paradkar is the Principal – Logistics and Supply Chain at Tata Strategic Management Group, a management consulting firm
Sangeeta Misra is an Associate Consultant in the Logistics and Supply Chain practice at Tata Strategic
Avinash Singh is a Consultant in the Logistics and Supply Chain practice at Tata Strategic
Changing landscape
The Indian chemical industry has undergone significant change over the years with the entry of MNCs post-liberalisation. Along with the growth in industry size to approximately $ 110 billion, the trade deficit has also widened from Rs 12 billion in 1991 to Rs 500 billion currently. While the erstwhile product portfolio consisted predominantly of basic chemicals which currently face commoditisation, the share of specialty chemicals is now increasing. Customers have become more demanding, thanks to dynamic needs of end-user markets due to influx of new technologies & product innovations.
Changing dynamics at the global level is also impacting the Indian chemical trade. With the origin of Indian imports of liquid chemicals gradually shifting from Middle East to South East Asia, the epicenter of chemical manufacturing and trade activities could move from the West coast of India to its East coast. In fact, 3 out of the 4 PCPIRs under development in India lie in the East coast (Vizag, Paradip and Cuddalore).
Complexity of chemical logistics
The logistics cost as a percentage of sales for select chemical companies in India has increased by 8% per annum in the past 4 years. The inventory levels as a percentage of sales have also increased by 7.5% per annum in the same period.
In recent past, decent topline growth of most companies has diverted the attention from the impact of creeping SCM inefficiencies on bottom line. At times, a traditional B2B approach for chemicals has resulted in acceptance of such inefficiencies as a norm.
Graph 1: B2B supply chain model
The chemical industry is very diverse with close to one lakh products across a range of categories and SKUs. Different handling, storage and transportation services are needed for different products. Diverse customer segments, transport intensive nature, elongation of supply chains and involvement of a large number of stakeholders further increase the logistics & SCM complexity of the chemicals industry. Going ahead, the competitive intensity is only going to increase, making it essential for chemical companies to adopt alternative SCM models to curb rising logistics cost burden.Precedents
To overcome the challenges faced in inventory planning, European chemical companies are increasingly establishing Vendor Managed Inventory (VMI) models with key account clients to achieve inventory cost optimisation. Many chemicals have continuous production process, making it difficult to achieve lean solution. Moreover, due to volatile markets and inaccurate forecasting, companies may need to carry excess safety stock in order to avoid losing sales. Vendor Managed Inventory model enables greater collaboration with customers on demand forecasting and inventory management.
ALSO READ: Entry into EU via the Netherlands can lead to cash flow optimisation
Also Read
Graph 2: B2C supply chain model
Dell’s famed supply chain transformation is a potent example of how a company re-designed its supply chain model to keep pace with market dynamics. When Dell expanded its business from its traditional online stores to other segments, it realised its configure-to-order supply chain model was not equipped to handle the demands of different business segments. Hence, it created multiple supply chains to cater to different segments of the PC industry through different channels. For example, while the supply chain model that served enterprise/ institutional clients offered greater customisation and better response time, the one that served its retail business was designed to achieve lower costs as it was a price-sensitive segment.
Differentiated replenishment model
One of the alternative models can be a “Differentiated Replenishment Model”, which will allow chemical companies to tailor their supply chain strategy to each customer & product type instead of adopting ‘one size fits all’ approach. The first step towards adoption of a differentiated replenishment model is customer segmentation, followed by differentiating the supply chain strategy for each segment.
Customer segmentation
Graph 3: Differentiated supply chain strategy model
The typical supply chain model of a chemical company (Refer ‘Graph 1’) has goods coming from manufacturing operations and imports to a large central storage from which the goods are distributed to customers through a single channel.In contrast, consumer based industries such as FMCG, retail, consumer durables, etc align their supply chain models (Refer ‘Graph 2’) to different customer segments and operate through multiple channels. Chemical logistics can take a leaf from the B2C supply chain model and segment its customers for better collaboration.
ALSO READ: Optimising gas processing assets using process modeling toolsProcess
The benefits of customer segmentation have hitherto not been fully realised by chemical companies as they usually employ makeshift techniques without requisite effort. Instead of resorting to just margin or volume based segmentation, a multi-dimensional approach to customer segmentation can be undertaken along following axes:
- Customer needs: Price, product quality, service levels, delivery schedule, lead time, etc
- Customer attractiveness: Profitability, cost-to-serve, volume of business, future growth potential, strategic importance, etc
This exercise will enable chemical companies to identify their most profitable customers and customise their supply chain strategy accordingly to serve them in the best manner possible.
Creating a differentiated supply chain strategy requires SLAs to be tailored for each customer type depending on customer needs and behaviour. The ‘Graph 3’ gives an indicative outlay of such strategy.
Conclusion
Supply chain complexity and challenges for chemicals are increasing and needs alternate SCM models, which are tailor-made for each product & are differentiated for end use segments. For such models to succeed, customer collaboration is important. Chemical companies adopting alternate SCM models will get multiple benefits like operational profitability and customer satisfaction and in turn achieve competitive advantage.
____________________________________________________________________________________________________
Siddharth Paradkar is the Principal – Logistics and Supply Chain at Tata Strategic Management Group, a management consulting firm
Sangeeta Misra is an Associate Consultant in the Logistics and Supply Chain practice at Tata Strategic
Avinash Singh is a Consultant in the Logistics and Supply Chain practice at Tata Strategic