Business and Digital Trends in the Chemical Industry: Sourcing and Procurement
In this blog, we discuss specific topics in sourcing and procurement associated with and derived from major business trends affecting the value chain in chemicals. For details, we refer you to the initial blog where we introduced the overall value chain. We concentrate on the following areas in which we address those challenges from both business and SAP perspectives:
- Margin pressure and supply chain resilience as a top priority topic, especially in volatile times
- Needs and benefits of business networks to enable you to achieve the next level in supply chain integration
- Sustainability considerations as necessary global topics relevant for all enterprises
2 Business trends and their impacts in sourcing and procurement
2.1 Margin pressure and supply chain resilience
One dominant business trend mentioned in the introduction is that chemical companies need to resist margin pressure. Margin pressure is mainly caused by new competitors from China and the Middle East, a shortage of certain raw materials, and high investments in chemical plants due to sustainability requirements and strict government regulations. Purchasing costs in the resource-intensive chemical industry share a large portion of the sales revenue of the produced goods. Therefore, management decisions regarding cost reductions and the increase of ROI and growth will most likely influence a company’s procurement department. A further challenge in procurement departments of chemical companies is that many of them procure raw materials such as oil, gas, and coal in large quantities traded on the commodity market. The top and bottom lines, as well as the ability to plan, are affected during these times of volatile prices. Chemical companies must quickly and accurately identify and hedge risk exposures and optimize short- and long-term raw material pricing to achieve cost advantages and strengthen their competitiveness. ese tendencies are observed along larger investments in business software solutions to improve processes in the long run.
Demand bundling as a cost-saving measure
Regardless of continuous or batch production, the output quantity in chemical parks or plants can be high. Therefore, your procurement organization must ensure the continuous replenishment of raw materials to secure the production process. Chemical companies often run several identical chemical parks or plants in parallel with decentralized procurement processes. In combination with a centralized procurement approach, your chemical company can strengthen its position toward suppliers by bundling demands across decentralized entities. This bundling practice is often executed together with a strict single- or dual-sourcing strategy. Nevertheless, lock-in effects and supplier dependencies increase the risk of supply shortages in favor of harsh price reduction targets. In addition, horizontal cooperation across your company’s boundaries might allow this practice to be further enhanced.
The SAP S/4HANA solution for central procurement helps to streamline bundling processes across decentralized plants in chemical companies. In addition, this solution strives to centralize decentral procurement processes by bundling demands as purchase requisitions to joint purchase orders or central requests for quotations and distribute central contracts to decentral sources of supply.
Contract management to control sources of supply
From a procurement strategy perspective, we recommend that you apply the Kraljic portfolio purchasing model as a standard classification tool for materials. We recommend the practice of negotiating and creating short-term contracts for raw materials with high availability (Kraljic: “non-critical items”) among many suppliers. Procurement managers can simply switch between the contracts as sources of supply or even use quota arrangements to further automate their call-off purchase orders. The machine learning–based SAP Fiori app “Monitor Materials Without Purchase Contract” can be directly supported in SAP S/4HANA to further detect frequently purchased materials without a continuous source of supply fitting in this category.
We advise you to negotiate on long-term contracts to secure supply and continuous replenishment for specific raw materials offered only by certain suppliers (Kraljic: “bottleneck items”). With a focus on safeguarding the supply of materials, you should avoid single-sourcing situations, if applicable. You need a coherent documentation of all agreements and contract-related specifics (dates, terms, conditions, and penalties) to execute the operational procurement of those bottleneck items. SAP solutions can offer support with various contract management tools along the lifecycle of a contract. Support starts with the operational contract management in SAP S/4HANA to more strategic views about contracts in the SAP Ariba Contracts solution and the SAP S/4HANA solution for enterprise contract management.
Securing the supply (chain) versus cost reduction
Strong volatile times, such as during the COVID-19 pandemic, trade wars, or geopolitical conflicts, have revealed that even “non-critical items”, as per Kraljic’s portfolio, can turn into “bottleneck items”. In the past 30 years or more, there was only one perspective when procurement and supply chain management were discussed: process efficiency and cost reduction practices. This was supported by measures that originated in Japan to reduce overlap and waste (Kaizen and Muda processes). Even in 2021, many procurement managers observed that harsh cost-cutting negotiations with suppliers and a reduction in supply sources were among the top priorities.
During the subsequent crises mentioned above, a turnaround in viewing the procurement team’s role and its supplier relationship appeared only on top of economic warfare practices. As a result, procurement managers in chemical companies are now confronted with the dilemma of saving costs on the one hand and securing supply and material provisions on the other. In a medium-term perspective, companies need to strengthen supplier management, and sourcing strategies should tend more to multiple sourcing instead of single sourcing. While the latter is pure strategic procurement practice, streamlined supplier management solutions can efficiently support chemical companies. The SAP Ariba Supplier Lifecycle and Performance solution, in combination with the SAP Master Data Governance, Supplier application (sometimes referred to as MDG), helps ensure easier onboarding processes in accordance with SAP Business Network and provides transparency along the supplier lifecycle.
2.2 Needs and benefits of business networks
Driven by constant process optimization demands and margin pressure and the need for transparency and visibility across the entire supply chain, business networks emerged during the past 10 or so years. The benefits of business networks are more than obvious, especially in procurement, where close supplier relationships are maintained.
Seamless data exchange within a business network
Large chemical companies are managing an average of more than 50,000 suppliers that are delivering not only raw materials but also services and infrastructure. When managing these suppliers from a strategic business point of view, meaning negotiating, reviewing, and classifying them, your company also needs to take into consideration the technical aspects of supplier integration. Before business networks emerged, many suppliers were connected by standardized document types (such as EDIFACT or ANSI X12) or even nonstandardized point-to-point data connections through electronic data interchange (EDI). These scenarios cause higher IT implementation and maintenance costs for both suppliers and their chemical company customers.
With the support of business networks, you can achieve a many-to-many integration along the supply chain. Your chemical company can integrate directly with one or more business networks to connect with suppliers through standardized interfaces, which leads to process efficiency and IT cost optimization. As there are several business networks existing and competing, the decision-makers in your chemical company need to evaluate requirements and benefits. Creating interoperability with specific chemical networks such as Elemica, SAP Business Network is an overarching network layer incorporating SAP Business Network for Logistics, SAP Asset Intelligence Network, and SAP Business Network for Procurement as integrated subnetworks.
Integrated processes and automation
Besides the above-mentioned technical integration, we can see a streamlined business process integration across the boundaries of chemical companies as the next level of supply chain integration. Operational and forecast data need to be exchanged between suppliers and customers of every tier combination in the supply chain to achieve seamless procurement and inventory processes. Forecast data together with fixed demand data from customers, such as sales orders or schedule lines, is building the foundation for all procurement activities. The more concise the input data is, the more concise procurement operations can work. The SAP Ariba Supply Chain Collaboration for Buyers solution integrated with the SAP Integrated Business Planning for Supply Chain solution can help deliver this needed precision.
Quality processes are seen as crucial in forecasting data in chemical companies since materials undergo complex certifications and face strong quality requirements. This is especially the case for externally procured materials. To accelerate the process speed, we advise you to outsource quality inspection activities if applicable (for example, an inspection at goods receipt) in the direction of the supplier who performs the activities according to a customer’s quality inspection plan. The capability of quality collaboration as part of SAP Ariba Supply Chain Collaboration for Buyers supports chemical companies executing this process.
Automation of procurement or procure-to-pay processes is another possibility to reduce process cost and increase process efficiency. These optimizations can start with very mature automated requirement-to-order processes. Purchase requisitions from material requirements planning runs are automatically allocated with sources of supply, converted into purchase orders, and shared with suppliers through a business network. Further automation potential is seen in payment and finance processes that accompany procurement processes from invoice automation to AI-powered supply chain financing.
2.3 Sustainability considerations
Increasingly, chemical corporations as resource-intensive companies need to consider sustainable aspects. Procurement managers are confronted with an ever-growing number of governmental sustainability regulations as well as with a certain market pressure for sustainable operations and products from customers downstream in the supply chain. The latter requirement leads to more transparency along the upstream supply chain, where operational discrepancies that do not meet sustainable standards are revealed within tier-N suppliers.
Decision-makers in procurement can tackle sustainability requirements from two perspectives. From the material perspective, recycled products and ingredients are the focus. Striving toward a circular economy, procurement managers must emphasize selecting suppliers that provide materials with high degrees of recycling and reusability. The supplier base for these materials is constantly growing, as laws and guidelines regulate recycling rates more stringently. In addition, there is increased attention to reusable materials during the value chains. We observe this in the chemical industry in packaging materials like big bags or drums that accompany procurement, manufacturing, and distribution processes. This is also observed in specific chemical finished goods such as thermoformed plastic that are procured externally. From an SAP point of view, long-term practical and proven tools such as empties management can support those processes.
From the supplier perspective, it is planned to consider a holistic focus of sustainability, integrating environmental, social, and economic aspects. Sustainable aspects such as forbidden child labor or low water consumption, which can be proved either through certificates, self-assessments, or on-site visits, should be integrated in supplier selection and supplier review activities along the supplier lifecycle. Questionnaires can be tailored to meet those requirements with the SAP Ariba Supplier Lifecycle and Performance solution.
Transparency along the upstream supply chain
The above-mentioned processes discuss mostly tier-1 relationships in supply chains. To achieve full transparency from the usage of ingredients or materials in a finished chemical product to the very beginning of the supply chain, we need to analyze larger portions of complexity. As chemical companies often serve as suppliers to manufacturers, they are stuck in the middle of this visibility pressure coming mostly from the end customer of the supply chain.
Furthermore, chemical companies often use classical batch-managed materials to identify and track materials and related batches inside the ERP system of chemical companies. This starts with creating batches for goods receipts, where the supplier batch number is assigned and ends with a new batch number when the finished product is created at the production facility. The usability of batches tends to be limited when continuous production processes like tubular or flow tank reactors or plastic extrusion are applied across several tiers upstream of the supply chain. A possible solution to overcome this obstacle and to achieve more transparency in the upstream supply chain, especially for raw materials that are commingled several times, is the GreenToken by SAP solution. GreenToken is a blockchain-based cloud solution that creates a digital twin along the tiers of the supply chain where raw materials are commingled. This solution can make shares of the different raw materials for finished chemical goods transparent, in combination with the mass-balancing approach.
3 Conclusion and Outlook
In this blog, we discussed specific impacts of major business trends in sourcing and procurement in the chemical industry. We presented proposals and ideas that can help chemical companies to manage challenges regarding margin and cost pressures, participate in business networks, and draw positive effects from sustainability aspects. We plan to show the impacts of those major business and digital trends in the areas of research and development in the next blog.