Damco eGuide

KEY LOGISTIC TRENDS IN THE CHEMICAL INDUSTRY Current developments and their effect on global supply chains Anthony Elwine, Global Head of Chemical

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Table of Content 01. MANAGEMENT SUMMARY

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02. THE MAIN ISSUES IN TODAY’S CHEMICAL INDUSTRY

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External influences impacting supply chains Changes happening upstream Changes in feedstock availability Internal globalisation and centralisation

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03. THE CONTEXT: TRENDS IN THE GLOBAL MARKET

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Consumption: a large market with a healthy growth Production: Europe loses its competitive edge Feedstock: lower costs have large effects

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04. HOW DOES THIS AFFECT LOGISTICS? 

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More collaboration, but not globally Managing external risk factors with S&OP Differentiation in service offering Using IT for process integration More focus on sustainability and risk management

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05. FUTURE DEVELOPMENTS IN THE SUPPLY CHAIN

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Sales through partners to remain stable Destination hubs on the rise A push towards bulk packaging Determining optimum lead time Optimising inventory Costs will not go down

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06. IDENTIFYING OPPORTUNITIES FOR OPTIMISATION

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Sourcing and category management Order fulfilment Transport planning Transport execution Freight auditing and invoicing Performance analytics

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07. IMPLEMENTING SUPPLY CHAIN IMPROVEMENTS

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Explore the possibilities

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01. MANAGEMENT SUMMARY In our conversations with clients in the chemical industry, a number of issues keep consistently coming up. Among these are the impact of external influences on their supply chains, changes happening upstream in their business processes, the effects of changing feedstock availability, and the consequences of centralisation and globalisation within their companies. Although the specifics will be different for different sub-segments, there are a number of developments in the global chemical industry that have an impact on the supply chains of producing companies. While the market is still expanding, China has now replaced Europe and the NAFTA area as the global growth engine. Europe has also lost its competitive edge as a production region, while North America benefits from low feedstock costs due to its shale gas. The resulting changes in trade volumes and trade lanes will necessitate a variety of adaptations in the industry’s supply chains. Some of the responses to these developments that we have observed in working with our clients include a larger emphasis on collaboration, increasing investments in S&OP processes to manage external risks, and a tendency to differentiate their service offering. IT platforms and resources are used more and more to integrate the processes of multiple parties in the supply chain. Sustainability, high on today’s corporate agendas, fuels a drive towards greener supply chains. Based on customer interviews and surveys, we can say a few things about the future. The share of sales through partners or agents appears to remain stable, while the use of regional hubs is expected to grow significantly. Also, there is a clear push away from small to larger packages and bulk transport. Most companies are aware that optimal lead times will be a powerful differentiator; regional hubs are an instrument for keeping inventory low while offering good customer responsiveness. The industry expects that overall supply chain costs will remain stable or increase. In our work with clients in the chemical industry we have identified a variety of opportunities for supply chain optimisation in all phases of the supply chain process. For order fulfilment, transport planning, and transport execution the common theme is that the further one goes back in the order raising process, the more opportunity this offers to optimise the flow of goods. Outsourcing these functions may be advantageous but can also create risks. Having good analytics available may have significant impacts on supply chain performance.

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02. THE MAIN ISSUES IN TODAY’S CHEMICAL INDUSTRY Damco has long-standing relationships with many of its clients, and as part of our interaction we have regular conversations about the issues they are facing. While many of these issues are specific to particular sub-segments – a consequence of the fact that the chemical industry is highly segmented – there also are several challenges that we see larger numbers of our customers grappling with. External influences impacting supply chains Aggregating a variety of topics, the issue that we probably hear most often from our customers is that external factors affect the performance of their supply chains. While the exact nature of these factors may vary from case to case, the result is always that companies feel a need for increased flexibility to be able to service their end markets consistently, mitigating or containing the impact of external disturbances. Changes happening upstream Clients often report that changes are happening upstream in their business processes, directed at increasing their company’s responsiveness to customer needs and supporting customer segmentation, which may counteract the need to closely manage their order-to-cash cycles. This may result in a complicated balancing act between these two objectives. Changes in feedstock availability Another theme that tends to come up regularly is the effect of global changes in feedstock availability, of which the growing importance of shale gas is the major one. The question here is how those changes will affect the growth of the market, both as a whole and in particular regions. Internal globalisation and centralisation A final challenge that is often mentioned is that many organisations tend to become more globalised and centralised in their operations and procedures, with the consequence that regional autonomous operating units must adopt more global and harmonised approaches. Many of our customers are not ready for such a truly global approach and seek to optimise their supply chains within their regional span of control.

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03. THE CONTEXT: TRENDS IN THE GLOBAL MARKET Before addressing specific issues and challenges, it will be helpful to sketch a high-level picture of what is currently going on between supply and demand in the global chemical industry. Consumption: a large market with a healthy growth With a value estimated at over 3 trillion euros1, the market for the global chemical industry is significant. Sales growth from 2013 to 2014 was nearly 4%, but looking at a 10-year period the growth of the industry has been in excess of 10% per annum. The main driver for this growth has of course been Asia, and more specifically China. From 2012 to 2014, China sales grew 25% and the Chinese market is now double the size of Europe (see figure 1).

Figure 1 - Market values by region, 2014, in bn €. The Chinese market is almost twice as big as that of Europe.

A comparison of the European Union with the NAFTA region shows that they are roughly the same size in terms of sales. It is important to note that over the 10-year period ending in 2013, Europe lost its crown as sales fell by 14.5 percentage points (from 31% to 16.5%). The NAFTA contribution to global sales also saw a decline – not as dramatic as Europe, but still a fall by some 9.2 percentage points. This does not mean that the industry is not growing in Europe and North America; it is just that it is not growing as fast as the rest of the world. China, with an 8.7% share in 2003, in 2013 claimed over four times as much. This shift can be attributed to a number of different reasons, including lower labour costs in the emerging economies, regulatory changes in the marketplace, and the effects of taxes and high energy costs. It is safe to predict that this trend will continue. Production: Europe loses its competitive edge Changing our orientation from the sales element to the production landscape, again we find that the three most important regions are NAFTA, Europe and Asia, where Asia includes China and Japan (see figure 2). http://www.americanchemistry.com/Jobs/EconomicStatistics/Industry-Profile/Global-Business-of-Chemistry

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Figure 2- Chemical exports by region: Europe is (still) the largest exporting region.2

Although Europe was the largest exporter in 2013, it has clearly lost its competitive edge. Energy and feedstock prices have been and are Europe’s Achilles heel. Emerging markets have been able to take advantage of lower energy prices and low-cost feedstock – a development that we now also see starting to happen in the US. Feedstock: lower costs have large effects Much has already been written about the rise of shale gas and its implications to the North American economy. Shale gas also has a downward effect on global oil prices. In a logistics context it is relevant to look at the challenges created by this type of change. What we see is that generally, as with any significant industrial change, the local and wider government landscape tends not to be able to keep pace with developments. Consequently, challenges in the infrastructure that are either caused or not rapidly addressed by governments tend to delay the possibility to optimise supply chains from those emerging markets. A similar observation can be made for the commercial sector, which also poses challenges that may slow down the potential growth in the North American market. Is there sufficient trucking capacity in the destination markets? Are the ports ready to handle the volume of products that can be expected? Any challenge can be overcome, of course, but the question is: at what cost?

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http://www.wto.org

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04. HOW DOES THIS AFFECT LOGISTICS? The global market trends that we identified affect the way the chemical industry runs its logistics. Trade patterns are shifting and we see increasing competition between producers, especially in North America, to seize market share as their growing production comes into the market. We also see, as mentioned earlier, that new destination markets start playing a role. It is not yet clear whether the growth in Asia will continue or whether it will be replaced by other key destination markets such as Latin America and Africa. More collaboration, but not globally One of the changes we have noticed in the way the chemical Industry approaches its logistics is that a growing number of chemical producers are collaborating much more with their logistics service providers than they used to do. This seems to have happened naturally: a number of the producers already had very country-specific or region-specific supply chains, and as their businesses have expanded they have taken those local or regional relationships to a global platform. However, we do not see many logistics providers catering to the needs of the chemical industry on a global basis, and especially not in the new and emerging markets. Managing external risk factors with S&OP There is a growing awareness of the risks created by external factors, which was even increased further by the recent incident in Tianjin. These days everybody is aware that unfortunate occurrences in emerging markets can have a significant impact on share values. The recommended way to deal with these factors is by implementing Sales and Operations Planning (S&OP) principles, integrating the sourcing of materials, their movements and their delivery into one process. Differentiation in service offering A growing number of companies are attempting to differentiate their service offering, for example by segmenting their products and establishing different lead times for customer delivery per segment. All of this falls under the umbrella of being able to optimise the flow of goods within the supply chain, ensuring that the cost-to-serve is kept within given parameters while delivering the products in a timely manner. Using IT for process integration One way we see the industry approaching these challenges is by using IT resources and platforms to connect and integrate processes of multiple parties in the supply chain. Companies are reaching out to either cloud providers or logistics providers for what has become known as ‘control tower’ solutions. The general difference between the two routes is that cloudbased service providers only deliver dedicated software, while logistics providers may also make their expertise available to support clients on their journey within the supply chain. More focus on sustainability and risk management Due to increasing environmental awareness, especially in consumer markets, sustainability claims a high place on the agenda of many producers. When optimising their supply chain, more companies are trying to harvest the benefits of changing modes of transportation (most importantly, replacing airfreight by other modalities) and offering greener solutions. Greening the supply chain is a two-edged sword: as a rule, 1% reduction in carbon footprint corresponds with 1% lower costs. Similarly, the risk element in supply chains is receiving growing attention.

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05. FUTURE DEVELOPMENTS IN THE SUPPLY CHAIN Damco regularly conducts surveys among its clients to spot trends and take inventory of their expectations of the future. This enables us to adapt our service portfolio and infrastructure, so that we are ready to respond when new demands arise. In a recent survey of the chemical industry a number of observations stood out that will be relevant to share in the context of this eGuide. Sales through partners to remain stable Sales in growth markets is generally being handled through partners rather than by the producing companies themselves. Our customer interviews indicate that there is no intent in the industry to significantly change that approach (see figure 3). This observation is relevant for supply chain managers because the involvement of partners affects the way they can manage costs and can benefit from procurement leverage when offering different Incoterms to their customers.

Figure 3- Our survey indicates there will be no significant change in the distribution of sales between producers and agents.

Destination hubs on the rise Supply chains today are not as stable and simple as they once were. The geographical expansion of destination markets, combined with the expected development of new origins and the reality of continued volatility and disruptions, dictates that increased flexibility will need to be built into the supply chains. As a response, we have seen several of our customers position products in physical warehouses in destination markets. The advantage is of course that it reduces the lead time for serving customers, but the drawback is that it is a costly exercise. Therefore more and more companies are now investigating where to hub products from a region or a number of regional distribution points, to give them increased flexibility to ship their products to market in a cost-effective and timely way (see figure 4).

Figure 4- The industry expects a significant increase in distribution via regional hubs.

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A push towards bulk packaging Another interesting snapshot in the customer interviews has been the question how organisations will package their products to get them into the final consumer markets. While there was a belief that emerging markets would prefer to receive goods in more of a bulk scenario, that change has been manifesting slower than was expected. This means that the chemical industry still has a significant push towards converting more products to bulk, rather than shipping in more and smaller consignment orders (see figure 5)

Figure 5- The share of small packages will drop in favour of larger units and bulk packaging.

Determining optimum lead time The question always comes up what lead time to offer. As before, different commodities or different products will be associated with different parameters. In figure 6 we have generalised the data somewhat, which enables us to see that the midpoint between the first quartile and average is where most companies are looking to target their responsiveness. The thirdquartile segment obviously equates to customers receiving the product directly from plant. In this situation the lead time will be the obstacle; cost-to-serve is optimal, but customers are generally not willing to wait too long before receiving their goods. In a competitive environment, a combination of low cost-to-serve and short lead times will be a powerful differentiator.

Figure 6- Lead time (in days)

Optimising inventory Inventory levels represent another variable that our customers seek to optimise. We have aggregated the responses (see figure 7) to draw some conclusions. Overall we see that the market is quite good in terms of managing inventory, with variations between different subsegments. The key understanding is that retaining more product closer to the destination market raises inventory levels and creates more costs. Optimising the flow of goods then again comes back to withdrawing products from those destination markets and creating more flexible regional hubs that can serve several destination markets, rather than having inventory sitting in the final markets based on a Sales & Order Planning process.

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Figure 7- Inventory levels (the number of days finished products are stored in a company warehouse).

Costs will not go down The central question for any optimisation effort is where the money is being spent in the supply chain. The answers to this question can vary considerably, not only because the actual cost distribution may be different for different organisations, but probably even more because of differences in the way they allocate those costs within the business. This explains why organisations report that logistics costs contribute anywhere in the range of 4% to 25% of total costs, with an average of 10%. Figure 8 shows the breakdown of that average. A majority of customers are telling us that they expect that, due to expansion and servicing customers on a more global basis, the cost base of their supply chain will either remain at the same level or increase.

Figure 8- Sea transport contributes more than 60% to total logistics spending. (Total cost of delivery includes all direct and indirect cost related to land/sea transportation and warehouse operations.)

The costs associated with ocean freight should be mentioned separately here because the current situation is exceptional. The ocean market business is healthy from the viewpoint of shippers, but not from the perspective of ocean carriers. Yes, there will be procurement opportunities, but they are driven by market supply and demand, not by sustainable actions that could be implemented by the chemical producers.

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06. IDENTIFYING OPPORTUNITIES FOR OPTIMISATION Against the background of this chemical logistics landscape, the logical next question is in what ways today’s supply chains can be optimised. Based on our experience of working with customers in the chemical industry we have identified the major opportunities for various aspects of the supply chain. Sourcing and category management We already touched upon the topic of sourcing and category management in our description of the ocean freight market, where we see that the larger companies have the required leverage to negotiate directly with the ocean carriers. Smaller companies are trying to level the playing field by tapping into the capabilities of non-vessel-owning common carriers (NVOCCs) with the aim of benefiting from their procurement power. In this construction, they may or may not work with the carriers directly. Damco has coached small and mid-sized companies who have used NVOCCs but never got around to working with carriers directly on their journey to convert some, part or all of their volumes into direct carrier contracts. A topic that tends to come up in our conversations with ocean carriers and trucking companies is the relationship between the industry and its service providers. While words like ‘partnership’ and ‘collaboration’ are often used, the reality is usually that producers have a group of selected vendors to whom they talk more often than others, without there really being a true spirit of collaboration between the producer and their service provider. We believe that creating truly collaborative relationships can open up significant advantages for the industry. Order fulfilment We find that in some organisations the order fulfilment (also designated as order management or customer fulfilment) teams are part of the supply chain, while other clients place it elsewhere in the organisation. This reflects the widespread question where order fulfilment should reside. Another, and related, observation is that within the industry we see supply chain management moving further upstream in their processes, making order management or order fulfilment a critical point to start optimising the supply chain. One of the potential short-term arguments for moving further upstream is that it makes it possible to either outsource or offshore the order management process. Typically this decision is based on differences in labour costs, but it introduces the challenge that in lower-cost economies people tend to move around quite frequently. This can be remedied with robust SOPs and efforts to keep the pipeline of talent filled. In companies that we have worked with on integrating the order management function, we have seen that this offers a better opportunity to optimise the orders placed to the supply chain organisation. In some cases we have witnessed the amount of less-than-full truck or container loads decreasing or almost disappearing because the organisations were able to optimise how these orders are being processed into the supply chain. Transport planning Once an order has been raised, the opportunity to postpone it has diminished, but there is still an opportunity to combine it with other orders and optimise the flow of goods within the supply chain. Of course your teams should also be thinking about how to optimise their orders as part of their daily routine, and it pays to create time for that on a structural basis. Typically 11

we see them working to their maximum, solving current operational challenges, unable to commit any time to planning efficiency. Transport execution At the transport execution layer, even more than in planning, we usually see the people so busy dealing with the current day-to-day activities and managing their supplies that there is no capacity left to optimise their approach. The common theme in order fulfilment, transport planning, and transport execution is that the further one goes back in the order raising process, the more opportunity there is to optimise the flow of goods. There has been a trend to outsource transport execution, but outsourcing these skills creates a potential knowledge gap. What we see as a key to success here is ensuring that all knowhow is extremely well-documented. This can then be used effectively to address internal and external inefficiencies and to ensure transparency in task ownership and responsibilities. Freight auditing and invoicing Freight audit and invoicing is not a particularly exciting subject for many people, but it certainly absorbs time, energy, and cost. Here again, we see the effectiveness of organisations increase when the expertise of handling this type of activity can be automated and optimised. This allows the organisations to focus more on how they manage their business rather than dealing with invoices that are sent incorrectly. Performance analytics The ability to manage the performance of any supply chain depends on the availability of reliable data. As mentioned earlier, cloud providers have made a very clear business case based on aggregating information that is not readily available from the various existing IT systems or that is incomparable because of formatting issues. Having usable data from multiple sources allows strategic plans to be put in place, followed by tactical execution to look at further optimisation of the supply chain. We have seen this having significant impacts across organisations that have limited visibility internally (from ERP systems) or externally (from forwarder platforms or ‘cloud’ type environments).

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07. IMPLEMENTING SUPPLY CHAIN IMPROVEMENTS How can producers benefit from all these insights to optimise their supply chain? Although the details will always be customer-specific, it will be illustrative to present a recent case in which Damco worked with a fairly typical client in the chemical industry. This customer moves a considerable amount of products by ocean and is also shipping less-than-full container loads. They are moving bulk in the form of ISO tank containers and, like many of their competitors, they rely on airfreight for more shipments than they would like.

Figure 9 - Supply chain improvement for a global chemical producer rests on the pillars of standardisation, scalability and optimisation.

Damco started the journey with this client, who felt the need to look at how they could improve their current way of thinking, by engaging from a regional perspective (see figure 9). The first step was standardising processes that are very different across the different countries in Asia. Once this was achieved, we were able to digitise the information. This then allowed us to begin taking actions to influence the movement of goods within their supply chain. The second step was to go beyond the region and to look at how we could help them further optimise the flow of goods around the globe. We did this by implementing a similar solution for their business in Europe. This made it possible to take cost out of their flows in both directions, from Asia to Europe as well as from Europe to Asia. The third and final element was to create scalability to the solution. The answer here consisted of standard ways of working, and connecting the dots through a digitised supply chain. By incorporating the principles on a more global basis this client could then begin to drive efficiencies not just through procurement, but also through optimisation. Explore the possibilities If you recognised elements in this eGuide that apply to you, you may wonder what potential for optimisation is hiding in your current supply chain. Our industry specialists will be happy to investigate your situation and identify the potential ‘quick wins’ and longer-term gains.

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About the author Since 2007, Anthony is Damco’s Global Head of Chemicals, based in the Damco headquarters in The Hague, The Netherlands. He has more than 16 years of experience in the logistics industry, including various positions within operations, business development and account management. About Damco Damco, one of the world’s leading third party logistics providers, specialises in delivering customised freight forwarding and supply chain solutions. The company has more than 300 offices in over 100 countries and employs 11,000+ people. Damco is part of the Maersk Group. More information about Damco can be found on www.damco.com

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