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Paradigm shift in supply chain management for chemical operating models
The document discusses developing an integrated chemical supply chain. It recommends segmenting the supply chain based on customer needs to improve profitability. It also recommends configuring an agile supply chain organization model with end-to-end planning capability and competence to respond quickly to customers. Automating decision making across the supply chain with intelligence can help manage new complexity at scale and speed. Developing an integrated approach in a phased manner with training and simulation ensures the capability is developed within each region or business unit.
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Paradigm shift in supply chain management for chemical operating models
- 1. Frank Jenner, EYGlobal Chemical Industry Leader Scott Chen, Integrated Digital Planning Lead, EY Supply Chain & Operations, Greater China Paradigm shift in supply chain management towards differentiation and segmentation based on multiple operating models
- 2. EY is aglobal digital supply chain leader in China with extensive capabilities Source: ALM Intelligence 2019 Provided SC&O advisory services to 3,000+ clients in the last 5 years >Worked with more than half of the Fortune 50 and Fortune 100 Global presence of 3,600+ SC&O people across Americas, Asia-Pacific, EMEIA and Japan We have 150+supply chain & operations professionals across Greater China Leading supply chain & operations consulting team in Greater China 1 # Leader in IDC MarketScape of Worldwide Business Consulting Services Vendor 2019 Leader in ALM Vanguard of Logistics Consulting Providers 2018 Leader in ALM Vanguard of Production Operations Consulting Providers 2018 Leader in ALM Vanguard on Supply Chain Planning 2019 World’s Best Outsourcing Advisor 2017 by IAOP ALM Vanguard of supply chain planning consulting providers A.T.Kearney Capgemini Oliver Wyman Argon Oliver Wight Accenture EFESO PA Consulting Roland Berger Chainalytics Barkawi Alix Partners Hitachi Consulting Bearing Point IBM Camelot Management Consultants Crimson & Co McKinsey & Company Boston Consulting Group Bain & Company KPMG PwC Deloitte EY DepthofconsultingcapabilitiesLowHigh Breadth of consulting capabilitiesLow High Leaders Challengers Contenders Page 2
- 3. Geography shifts fromWest to East both in capacity and chemical sales 11% 9% 4% 8% 27% 22% 1% 2% 10% 36% 21% 11% 26% 12% 1,186 (2000) 2,276 (2017) North America Europe China India Rest of Asia Middle East Rest of the World Source: The Evolving Chemicals Economy, UN Press, 2019, EY analysis. Source: The Evolving Chemicals Economy, p.28, UN Press, 2019; EY analysis. Global chemical industry capacity growth (million tonnes), 2000-2017 Global chemical sales (excluding pharmaceuticals) are projected to grow from US$3.82 trillion in 2018 to US$7.27 trillion by 2030. Asia is expected to account for almost 70% of sales by then. 37.3% 20.1% 15.6% 14.9% 4.4% 3.1% 3.2% 1.4% 49.9% 14.7% 10.7% 13.8% 3.2% 4.0% 2.7% 1.0% China Rest of Asia EU North America Japan Latin America Rest of Europe Rest of the World US$7.27 trillion by 2030 $3.82 trillion in 2018 Page 3
- 4. The chemical supplychain journey from feedstock to end products Naptha and natural gas (ethane, propane) Bio-based Organic Organic/ petrochemicals Aromatics Organic/ petrochemicals Olefins Plastic resins and synthetic rubber: PS, PP, PVC, PE Organic/ oleochemicals Fatty acids, alcohols, methyl ester Inorganic Inorganic Minerals Brine and rock salt Air Sulphur Sulphur derivatives Chlorine Caustic soda Titanium oxides Select products Oils Pigments and dyes Key end markets Agriculture Automotive Construction Consumer products Electronics Manufacturing Packaging Pulp and paper Pharmaceutical Textile and apparel Water treatment Surfactants: ethoxylates Starches and glues Activated charcoal Industrial gases Explosives Paints, coating and surface treatments Fine chemicals Advanced polymer, adhesives and sealants Personal care preparations Other additives R&D and engineering in technology process Formulation Branding Feedstock Basic chemicals Commodity chemicals Specialty chemicals Intermediate chemicals Page 4
- 5. Notes: 1. Syngentawas acquired by ChemChina in 2017. Source: various company websites; annual reports if listed company for FY2018; EY analysis 2019. Not exhaustive Feedstock Basic chemicals Commodity chemicals End MarketsSpecialty chemicalsIntermediate chemicals The chemical industry landscape, 1990 and today Page 5 SinoChem Shell ICI BASF Dow 1990s High level of vertical integration across the value chain Bayer Hoechst AkzoNobel LyondellBasell Covestro Wanhua Clariant Bayer Today More complex landscape, emergence of more focused, as well as diversified, solution-based players Shell SinoChem Dow ChemChina/Syngenta1 Sinopec PetroChina SABIC BASF Celanese Givaudan Huntsman LANXESS Corteva
- 6. Clear focus drivesvalue creation: focus on commodities generates higher margin, solution providers rewarded by greater multiplies 12 28 18 16 26 10 14 34 20 22 24 30 32 36 38 Rongsheng Petrochemical EV/EBITDA EBITDA margin (%) Enterprise value vs. profitability of major chemical companies Commodity players area Solution ProvidersIndustrial Gases Commodity Chemicals Diversified Chemicals Specialty Chemicals1. High valuation driven by one-off shareholder equity effects and EBITDA adjustment in 2018. Source: Capital IQ; EY-Parthenon analysis. Note: EBITDA (earnings before interest, taxes, depreciation, amortization value) for FY 2018, EV=Market Capitalization by 31 Dec 2018. 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 39 40 4 Christian Hansen SABIC Air Liquide Air Products Shin-Etsu Wanhua Petronas Novozymes FMC CF Sasol W. R. Grace Nutrien Celanese Eastman Covestro Dow DSM Solvay Lyondell- BasellAsahi Kasei Evonik BASF LG Toray Mitsubishi Chemical Formosa Chemicals Yara Hengli RPM PPG Nan Ya Ecolab Symrise IFF Umicore SA Nippont Paint Sherwin- Williams Sika PT Chandra Petrochemical Givaudan Formosa Plastics AkzoNobel1 Linde Ems Solution providers area Asian Paints Pidilitei Industries PetroChina SinoPec Not exhaustive Page 6 Specialty and integrated players area
- 7. Different key successfactors for commodity players, specialty and solution providers 1 EBITDA margin Key success factors in chemicals EV/EBITDA Rigorous efficiency focus drives success in commodity business Cost Capital Service KSF commodity players • Focus on assets, costs and utilization • Increase customer service levels with fewer standardized offerings to meet customer needs • Dominator culture, functional excellence Cost Capital Service KSF specialty and solution providers • Differentiation of products and services, customer specific solutions priced for value, lower asset intensity, greater ability to deal with complexity • Establish cross-functional teams to serve clients to balance business complexity and standardization of products and services Understanding of customers’ business enables better service and transformation of specialties into solutions providers yielding higher multiples Cost Capital Service Page 7
- 8. Leading specialty andintegrated players transform their supply chain to meet customer demands with end-to-end planning capability Drive customer distinction with supply chain segmentation to improve profitability by responding to unique customer needs in each segment Configure an agile and responsive future supply chain organization/model to uplift competence and efficiency with integrated business planning & what- if simulation capability Automate and add intelligence in the decision making process across the end-to-end supply chain in order to manage the new complexity at speed and scale Page 8 Digital twin Deliver Make Design Marketing Service Deploy Buy Sell
- 9. Robust supply chainmanagement leads to increased revenues, asset productivity reducing supply chain and working capital costs Supply chain levers • Supply chain segmentation to improve service levels to meet unique customer needs • End-to-end planning capability to allocate supply constrained products with what-if simulation capability for internal and external customers • Standardized S&OP/IBP process for faster decision making • Reduction in lost sales and rush orders • Collaborative and optimized new production • Accurate forecasting & planning due to segmentation • Increased inventory management skills due to real-time visibility • Standardized S&OP/IBP process for faster decision making • Standardized S&OP/IBP process for fast decision making • Alignment of planning and manufacturing • Process standardization with regional centralization & consolidation • Competency center drives continuous improvement • Lower rush shipments • Transportation consolidation with re-negotiated rates • Warehouse consolidation with smart tank/terminal management Business impact Improved service levels Increased revenues Inventory reduction OEE improvement Effective supply chain planning Greater efficiency across logistics and transportation Improved warehousing Revenues Supply chain costs Asset productivity Net working capital Notes: IBP = Integrated Business Planning I S&OP = Sales & Operation Planning I OEE = Overall Equipment Effectiveness Page 9
- 10. Drive customer distinctionwith supply chain segmentation to understand real customer needs Customers may have different requirements by product; with deep dives on real customer needs, set up different KPIs for different customer segments Direct Distributor Inventory Production Inventory Drop-ship Product enters inventory and customer has some storage space JIT – product is feedstock, customer has no storage space Product enters inventory, distributor has large storage space JIT – product is feedstock, customer has some storage space Product enters inventory and customer has some storage space Operational situation Production Inventory Sales channel Real case study Sample distribution of delivery dates Page 10 -3 -2 -1 0 1 2 3 Delivery day -3 -2 -1 0 1 2 3 Delivery day -3 -2 -1 0 1 2 3 Delivery day -3 -2 -1 0 1 2 3 Delivery day -3 -2 -1 0 1 2 3 Delivery day
- 11. Configure supply chainsegmentation to distinguish strategy to increase profitability with lower supply chain costs Supply chain segmentation framework Supply chain segmentation definition Customer required lead time CustomerrequiredOTIF 70%100% 0 100 80%90% 30 50 1 3 4 2 5 Real case study Guaranteed stock. Critical products need to be available and delivered immediately. 1 Fast moving. Standard products with short lead times. Predictable sales volumes and stock levels. 2 Expedited. Configurable products for customers with specified delivery timeframes. 3 Baseline. Configurable products for customers who accept a longer lead time. 4 Projects. Projects that require delivery of multiple configurable products in large quantities. 5 Page 11
- 12. Configure an agileand responsive future supply chain organization/ model to uplift competence and efficiency Demand planning Materials planning Supply planning Logistics planning (inc. control tower) Sync center of excellence Analytics and data Global S&OP and global process ownership Regional S&OP and RCCP FG inventory policy and management Replenishment model management Best practice build and implementation Policy definition and ownership Logistics strategy Network design and optimization Transportation planning KPI definition, monitoring and reporting Master data management End markets (Commercial) Factories Global shared service center 3PL optimization and contracting Backhauling / spot market tendering Customs management Inventory SS and CS parameter setting Long term materials planning Production schedule execution Continuous improvement Promotion event management Market S&OP Factory footprint Specification management RM inventory policy and management End-to-end synchronization Analytics support Global/Regional Local/Region Global Best practice systems and tools Plant and line scheduling Net requirement Management and call off Statistical forecasting Demand sensing Demand planning oversight and collaboration Promotional planning event management Master data management Demand planning Regional DCs Warehouse execution Transport execution Market cluster Market cluster FG inventory management (for end market) Real case study • Mobilize with centralization and standardization – Focus on people and transform around customer • Improve through automation, digitalization and optimization – Drive ecosystem platform with technology enablers • Transform to a globally end-to-end vision state – Integrate seamlessly in technology, process, data and organization Page 12
- 13. Automate and addintelligence in decision making process across the end-to-end supply chain Benefits of AI and automation More efficient, volume and value- oriented planning processes across the supply chain to drive reactivity and focus on value-add Planning flow Segmentation Demand planning Supply planning Production planning Materials resource planning • Conduct segmentation • Identify machine planning candidates • Conduct forecasting segmentation • Determine optimal forecast model and parameters • Update demand forecasts for Commercial input • Update master data planning parameters • Review and update master data (lead times, safety stock levels, MOQ, EOQ etc.) • Manage routine planning exceptions • Run Supply Plan creating versions for service, inventory, utilisation • Manage plan exceptions • Create alerts for remaining exceptions • Review and update master data (lead times, safety stock levels, MOQ, EOQ etc) • Review supplier availability and refine production plans for realistic availability EY’scognitive automation Harnessing robotic process automation (RPA) or AI and machine learning to digitize the process Applications of RPA and AI technologies in typical planning processes AI or machine learningRPA Page 13
- 14. AI-based planning drivessmart automation and optimization across the entire value chain Feedstock suppliers Aggregated planning Pipeline monitor Campaign planning Production planning Commodity chemicals player Transportation planning EHS2 monitoring Smart replenishment & allocation Warehouse/ terminal/tank Real-time tracking Differentiated solution offering Pick & Pack optimization Specialty chemicals player Real-time tracking Truckload optimization Warehouse/ terminal/tank Intelligent scheduling Smart ATP End-use industry Transportation planning Demand sensing & shaping Promotion planning Distributors Dynamic pricing End customers Personalized couponing Customer behavior analytics Cloud-based ecosystem Real time visibility DG1 monitoring Notes: 1. DG: Dangerous goods 2. EHS: Environment, Health and Safety Last-mile Delivery Last-mile Delivery Page 14
- 15. Develop a projectplan with transition phases by investing in training and simulation to ensure integrated capability within region/BU • Data modeling & statistical model parameter tuning • Disaggregation logic development • Machine learning applied in demand sensing or shaping • Outlier correct algorithm development • Value-add analysis for statistical model • Statistical model simulation for other segmens • Promotion analysis • Continus improvement on forecast accuracy • Outlier correction • Sales history cleansing • Sales history analysis with XYZ-ABC • Statistical model selection for high runner • Customer segments with demand analysis • Provide input for customer segmentation Level 3 Level 2 Level 1 Optimization analysis Fundamental analysis Advanced analysis Key Activities in Demand Planning High Low Phase I Phase II Phase III Globaldemand analyticsCoE Globaldemand analyticsCoE Regional/BU demandexpert Globaldemand analyticsCoE Regional/BU demandexpert Demand planning and analytics can be grouped into key activities in different phases to achieve a seamless transition Real case study Page 15
- 16. Develop an integratedchemical supply chain with the right approach and mindset Drive customer distinction with supply chain segmentation to improve profitability by responding fast to unique customer needs in each segment1 Configure an agile and responsive future supply chain organization/model to uplift competence and efficiency with integrated business planning and what-if simulation capability2 Automate and add intelligence in decision making process across the end-to-end supply chain in order to manage the new complexity at speed and scale3 Page 16
- 17. Key contacts Visit ey.com/chemicalsand ey.com/china to learn how EY is helping chemical companies to transform. Scott Chen Mobile: +86 156 1890 9217 Email: scott.c.chen@cn.ey.com Mobile: +49 172 9450920 Email: frank.jenner@de.ey.com Frank Jenner Managing Partner, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft EY Global Chemical Industry Leader Director, Ernst & Young (China) Advisory Limited Integrated Digital Planning Lead, EY Supply Chain & Operations Page 17
- 18. EY | Assurance| Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. About EY’s Global Advanced Manufacturing & Mobility Sector Urbanization, changing consumer expectations and emerging digital technologies are reshaping what’s possible, from the production and distribution of goods to the transportation of people. To succeed in this new world of mobility and smart manufacturing, incumbents must transform themselves at unprecedented speed — to think like an innovative start-up, tap into new talent and engage the customer. With experience across the value chain and key technology alliances, our teams show clients how to create efficiencies now while adopting digitization and optionality for long-term growth. Automotive, transportation, aerospace, defense, chemicals and industrial products companies can draw on the strength of our network of cross-industry players and put our diverse range of approaches to use today to equip their businesses for tomorrow. © 2019 EYGM Limited. All Rights Reserved. EYG no. 005507-19Gbl BMC Agency GA 1013777 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/chemicals ey.com/china