Chemical Companies See a New Competitive Advantage from Logistics Visibility
This article was co-authored with Darlene French.
As business practices are increasingly digitalized, understanding the status and location of any order is becoming easier for even the least technically inclined people. You order a package, check the tracking, and can predict with a fair degree of certainty when your dog will start barking at the delivery person at your door.
In the chemicals industry, however, logistics has been largely under the radar for the average person – until this year. Think of the changes we’ve seen recently: lengthy shipping delays out of China, unprecedented California port backlogs, and a widespread shortage of goods. Now, even casual observers realize how logistics issues are affecting chemicals companies and consumers.
For manufacturers, getting the essential supplies needed to make goods is job one. Too often, though, today’s chemicals firms find that ordered materials have not arrived on the production floor or at the contract manufacturer’s site as promised. And too often this harsh reality comes as a surprise for procurement leaders.
I’ve recently heard from chemicals industry leaders who have six-month order backlogs because they can’t get the materials needed to make products. For these companies and others struggling to meet demand with available materials, it can be a nightmare.
Limited transparency exacerbates materials shortages
Poor visibility creates significant blind spots for procurement organizations within chemicals companies. Without insight into which materials will be available and when, procurement teams can find themselves in perpetual crisis management mode while trying to support company operations.
To avoid this issue, chemicals companies need to understand the status of their inventory and asset maintenance and to be able to track delivery of materials they need. It is also important that they have the ability to collaborate when there are changes in demand or delays in shipments. These capabilities are not only important for direct materials used in the manufacturing process, but also for indirect parts and services used to maintain assets. Insight and collaboration can even help with the orchestration of contract manufacturers.
Yet in a recent survey by Oxford Economics, just 58% of procurement executives say they have real-time or near-real-time visibility into inventory levels in their own facilities. And only 50% of respondents have the same visibility into inventory at supplier facilities. This limited transparency and lack of a single inventory view makes it difficult to predict and prevent product shortages and overages.
When materials shortages occur, fewer than half of the executives can find alternative sources of supply quickly. Just 40% collaborate with direct materials suppliers on supplier-managed inventory, consignment, and other inventory programs.
This lack of collaboration may be the reason so many chemicals firms are facing critical backlogs and production delays.
Insight enables better procurement options
Some companies are tapping into powerful digital supplier and logistics business networks that are changing the game. These networks can be a golden ticket – one that helps supplier relationships and logistics become competitive advantages for chemicals companies.
Consider just a few network capabilities.
Some networks send logistics alerts to procurement teams when materials arrive in port. They can also track the advanced shipment notice delivery date, and alert planners if the materials didn’t arrive as scheduled.
That enhanced visibility is big. Some companies have been able to reduce their expedited shipments because they know where materials are and that they’ll arrive on time.
The opposite is also true. When procurement knows that materials will be delayed, they can be proactive. For example, they can try to secure that material from another local supplier by searching the network for other highly rated suppliers.
Or they can assess their materials inventory and determine which products they can make with the materials on hand. Then they can change the production schedule to make a different product. Insight into logistics broadens companies’ manufacturing options.
Collaboration drives better business decisions
The value of a logistics business network goes beyond data. It also supports more efficient, effective communication and collaboration with carriers.
Leading procurement executives are using collaboration features to work with carriers to identify and optimize delayed shipments. Carriers can offer details on shipment location, cause of delays, and realistic delivery expectations.
Some chemicals companies have been using this insight to reroute shipments. Instead of unloading in West Coast ports and shipping by rail to the East Coast, they are paying carriers to cross the Panama canal and unload at East Coast ports.
The cost is higher – one executive reported a cost of US$18,000 per car to ship from Shanghai to Boston – quadrupling last year’s cost – but sometimes spending more on logistics is preferable to losing three or more weeks of production to delayed materials shipments.
Logistics business networks offer new power to chemicals companies. Using data and carrier collaboration, procurement can understand where materials are, when they will arrive, and how to obtain them at margin-friendly prices. With better insight comes better decisions.
That’s an effective way to end the materials shortage nightmare and help logistics become a new competitive advantage.
Darlene French leads the North America Intelligent Spend & Business Network Center of Excellence at SAP. Kathryn Zwack is Director of Solution Marketing, SAP Business Network.