U.S. chemical companies are at a critical point today. With abundant feedstocks (oil- and gas-based chemical raw materials) and huge anticipated growth of chemical and plastics exports that will stress existing chemical transportation infrastructure, producers must overcome supply chain challenges they haven't previously faced—or, in some cases, aren't sufficiently prepared for. Their success navigating these difficulties hinges on producers adopting new, innovative supply chain strategies to drive greater efficiency and capitalize on growing export opportunities—and do so while staying nimble in the face of change and disruption.
Changing market creates multiple challenges
Almost a decade ago, it was assumed that the United States would be a net oil and gas importer for years to come, and that new chemical capacity would only be constructed overseas. But in the years since, the shale-drilling revolution has saturated the U.S. with inexpensive gas and its related chemical feedstocks, attracting about $164 billion in chemical industry investment.1
While the shale boom has made the United States an attractive proposition for both domestic and foreign capital investment, the U.S. chemical market most likely could not absorb the resulting capacity increase. The U.S. is the lowest-cost region in the world, after the Middle East, for producing gas-based chemicals. Therefore, it can sell those chemicals competitively in the growing export market, which is primarily centered in Asia. However, it also means chemical companies will need to not only secure long-term overseas customers, but also fundamentally redesign their supply chains to accommodate the growth in global trade.
There is a lot at stake. We project that the United States could improve its international net trade position in major chemicals and plastics by up to 18 million metric tons by 2020. A highly integrated approach to supply chain operations could be the crucial differentiator for successfully managing the transport of those escalating product volumes.
Chemical companies will encounter some challenges, however. One issue is that, while many chemical companies are international in outlook, they too often operate in silos, which may be geographic, product, market, or functional, rather than as integrated global operators. To manage today's growth in exports and ensure that all relevant parties are privy to a full suite of timely information, streamlined communications from the local level through to the global level are essential—as is strongly aligned integration of the functions involved. Metrics must also be aligned, so that one team's successful performance optimizes the performance of other teams and, ultimately, the entire company.
If regional and functional units maintain a siloed structure they will be impaired by regional boundaries and misaligned metrics, and therefore stand to miss out on much of the chemical export boom. And, without the visibility or capability to effectively manage issues such as the regional availability of shipping containers, weather conditions, port congestion, and other external factors throughout the supply chain, of course, the success of the entire operation will be compromised.
Another challenge revolves around logistics. Developments and upgrades to infrastructure in the United States have lagged behind the growth of its manufacturing base, which is likely to create transportation bottlenecks. Over the past 10 years, U.S. monthly construction spending on transportation grew only 25 percent versus 45 percent for manufacturing. 2 And many U.S. chemical producers' supply chains aren't nimble or dynamic enough to deal with those bottlenecks. This will impact their ability to serve the global customers they're seeking to reach.
Improving logistics capabilities to successfully deliver the right product at the right time to the right place for export customers will enable leading companies to achieve higher netbacks (profits after distribution costs) than their competitors. Those that fail in this area are likely to see increased costs and delays, and ultimately the loss of customers due to unreliable service.
Improved logistics will be especially crucial as chemical producers and shippers prepare to negotiate two major potential supply chain choke points:
- First, the Panama Canal will soon need to handle a significantly increased level of exports to Asia in refined products, hydrocarbon gases, chemicals, and plastics. In fact, canal transits of these products have already increased 6.8 percent between 2013 and 20163—this before any of the larger chemical production expansions have started up. Moreover, the rise in U.S. chemical exports could not have been factored into the original canal-expansion plan, since it was proposed in early 2006, about three years before the reign of low natural gas prices began. This casts uncertainty on the expanded structure's ability to handle the increased gas and chemical traffic and makes the risk of delays more likely.
- The second pain point threatening producers is insufficient infrastructure along the U.S. Gulf Coast, where most assets are located. This has resulted in multiple capacity constraints affecting transit between plants and ports. Consider the example of resin pellets, which are plastic's form before molding into a finished product and are a key chemical industry product. Resins move by rail, in covered hopper cars or containers, and by truck, in containers. Resin shippers are facing increasing congestion on the road and rail routes they use. They also must deal with insufficient storage facilities near chemical plants and packaging facilities, where resins typically are received in covered hopper cars for bagging and loading into shipping containers. These are continuous operations, and material must continually flow through this network to avoid costly disruptions to plant operations.
To overcome these choke points and stay ahead of disruptions across the supply chain, chemical companies should actively pursue three key strategies:
1. Develop integrated global operating models. Companies must reexamine their key business functions—across marketing, supply chain, product management, manufacturing, and finance—to support cross-functional and cross-geography organizations and processes.
Crucial to this effort will be investment in emerging digital technologies, which can help eliminate operational silos and provide greater transparency across the company. They can improve the ability to monitor macroeconomic changes, currency fluctuations, trade flows, shifts in regional product supply, varying demand and pricing, and transportation capacity changes, to name but a few benefits.
Taken together, these enhancements can allow people to work more efficiently and make decisions based on real-time visibility into global supply chain operations. And, they will help chemical companies to holistically anticipate, plan, and respond to change.
2. Enhance logistics capabilities. Key to building more dynamic supply chains, anticipating problems, and maintaining optimal service levels will be insight-driven logistics: the use of analytics tools to develop a deep understanding of external supply chain factors and transportation options across multiple providers. For example, companies in the U.S. Gulf Coast region might collect and analyze data from the Panama Canal, the Houston Ship Channel, ocean carriers, railroads, and storage and port operations to identify trends, forecast the best routes, and maneuver around delays, all in real time.
By contrast, companies that stick to traditional, static supply chains, which are linear and inflexible, will struggle to adjust to external changes in a timely manner, leading to poor service levels; additional costs in demurrage, detention, storage, and penalties; and other pain points.
3. Employ digitally enabled supply chain management. Digital capabilities will be crucial to powering chemical producers' new, integrated, and increasingly global supply chains. For instance, one such approach, the supply chain "control tower," brings together professionals from various supply chain functions, such as order management, transportation, warehousing, compliance—including environmental, safety, health, and purchasing—to help facilitate the transport of goods to the customer. These "sense and react" capabilities could help U.S. chemical producers better manage their complex global supply chains by providing increased visibility in real time and enabling swift responses to developing situations. At the same time, they will give producers the information they need to understand how to avoid similar disruptions going forward.
In the past, chemical manufacturers did not focus on orchestrating major U.S. export supply chains, simply because they did not need to, as production was sufficient for the U.S. market with just minimal exports. But the visibility provided by the control tower approach could enhance their ability to manage the coming export boom, enabling them to improve supply chain operations and strengthen critical supply chain processes such as forecasting, carrier management, and network modeling.
Successful U.S. chemical producers will have to increase the flexibility, speed, and effectiveness of their supply chains to satisfy the demands of overseas customers. To navigate this new and growing set of challenges, they will need to build supply chains that are nimble and dynamic—that is, able to handle growing volumes and adjust to evolving strategies. These innovative and highly integrated supply chains will allow chemical companies to maximize efficiencies, outpace competitors, and best capitalize on growing export opportunities in the face of ongoing change.
Notes:
1. American Chemistry Council, https://www.americanchemistry.com/Media/PressReleasesTranscripts/ACC-news-releases/US-Chemical-Industry-Investment-Linked-to-Shale-Gas-Tops-164-Billion.html
2. Based on seasonally adjusted monthly spending data ending May 2017 from the Federal Reserve Bank of St. Louis
3. Panama Canal Authority, Statistics and Models Administration Unit (MEEM)
