Managing Complexity in Chemical Industry

Source: AT Kearney - Controlling Complexity in the Chemical Industry

Chemical companies are facing increased complexity. Levers of managing better growth: 1. Complexity; 2. Cost of raw materials; 3. production; 4. sales and delivery; 5. sales; 6. delivery.

I. Optimize operations: shutdown lines and locations, improve utilizations, avoid investments.
II. Reduce material costs: reduce number of suppliers formulations and raw materials, introduce technology platforms.
III. Improve productivity: Adapt organization, processes and resources for product development, technical services and sales.
IV. Make top-line improvements: Improve product mix, increase prices, switch or remove under-performing products.

Ascertain complexity by plotting formulation across these two axis:
1. Average sale per formulation ($ million)
2. EBIT margin per formulation

Average sales per formulation - <= $5 million (be alert on complexity managing), $2 million (reducing complexity is a priority).
Complexity tradeoff is defined as the difference of value and cost of complexity.

• Leading indicators of complexity:

1. Focus on revenue growth (topline) rather than profitability (bottomline).
2. Customer value understanding gap.
3. Inability to understand full product or service cost and profitability.
4. Limited or no understanding of PLC Vs unclear responsibility for complexity management.

• Lagging indicators:

1. Flat bottom-line in-spite of growing top-line.
2. More products but no increase in bottom-line.
3. No enhanced value generation by increasing portfolio.
4. No success in product pruning.
   

Complexity and tie-up meagre or limited resources such as:

1. Product development is forced to manage a broad portfolio of projects resulting in overly long development cycles.
2. Purchasing grapples with high transaction costs - managing a large number of suplliers and raw material vendors.
3. Manufacturing faces long lead times, frequent changeovers, increased cycle times, capital investment, and rising scrap and rework levels.
4. Outbound logistics is pressured by long lead times, excess finished goods inventory, loss of sales due to improper planning and demand estimation.
5. Marketing, Sales and Service deliver inefficient sales and service operations, cannibalization of sales, forecasting errors and increased expenditures on advertising a broad range of products and variants.