New Chemistry: Digital Tools and Levers for Success in the New Normal

CHEMISTRY:NEWDIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMAL WHITE PAPER2NEW CHEMISTRY:DIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMALThe chemicals industry was hit especially hard by the pandemic, but vaccines, therapeutics and other developments are expected to stabilize conditions in 2021. The worldwide impact of COVID-19 forced industry leaders to scramble. While many experts forecast a 2021 recovery due to the widespread availability of vaccines, the chemicals industry will likely not make up all its lost ground until 2022. According to the American Chemistry Council, production is expected to increase only 3.9% in 2021, with most of the increase expected in the second half of the year.1While the industry continues to face muted demand and higher input costs, best-in-class enterprises will master digital levers to drive new value and become strategic partners to the business.In addition to enterprises leveraging technology to blunt the impact of the pandemic, central banks have done their part by working to increase liquidity. Average interest rates are now below 1% globally and negative in one-fifth of the world, according to several industry reports. Combined with the anticipated economic recovery in 2021, this move is leading to increased input costs.Prices in the futures market for commonly used raw materials and commodities confirm this trend. Steel, light sweet crude, HDPE and methanol have all experienced double-digit price increases.The following three charts — liquid fuels, copper and crude oil — are representative of where the chemicals industry is headed. Demand is going to be muted and prices are going up. WHITE PAPER3NEW CHEMISTRY:DIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMAL7580859095100105Q1Q2Q3Q4Q1Q2Q3Q42015201620172018201920202021Million barrels per dayWORLD LIQUID FUELS PRODUCTION AND CONSUMPTION BALANCE World Production World ConsumptionQ1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Forecast-5051015 Implied Stock Build Implied Stock DrawSource: U.S. Energy Information Administration, Short-term Energy Outlook December 20202 WHITE PAPER4NEW CHEMISTRY:DIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMAL2,0001,5002,5003,0003,5004,000Jan ‘16July ‘16Dec ‘16Jun ‘17Nov ‘17May ‘18Oct ‘18Apr ‘19Oct ‘19Mar ‘20Sep ‘205-YEAR COPPER SPOT PRICEUSD/lbSource: Kitco Raw Material (Copper) Cost Forecast3Source: Raw Material (Crude Oil) Cost Forecast4Aug’201D1Y3Y5Y10YMAX5DSep ‘20Oct ‘20Nov ‘20Dec ‘20Jan ‘2136.0042.0048.0052.1554.00WTI CRUDE OIL SPOT PRICE52.15 USD/bbl for Jan. 11, 20211M3MYTD6M WHITE PAPER5NEW CHEMISTRY:DIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMALPROCUREMENT ADAPTS TO THE NEW NORMALIn response to ongoing volatility, enterprises must be aggressive about controlling costs across all elements of the supply chain. While COGS is the most significant cost contributor to any enterprise’s P&L statement, capex, SG&A and inventory must be rigorously examined and optimized. Traditional sourcing methodologies should be augmented with tools that can uncover previously untapped business benefits or new value. DRIVING NEW VALUE ACROSS ELEMENTS Cost ElementSources of New ValueTools to Achieve New ValueCOGS• Quickly responding to global arbitrage of raw material pricing• Using pricing constructs that allow compa-nies to take advantage of changing market conditions• Choosing materials and services that drive best business outcomes instead of focusing singularly on price• Advanced analytics• Cost drivers, TCO models• Outcome-based agreements• Real-time market intelligenceCapex• Leveraging supplier capabilities to create as-set-light models to increase ROCE and supply chain resiliency• Leveraging standardized designs and com-ponents• Deploying sophisticated tools that enable analysis of complex bid packages and embed industry cost benchmarks• Supplier innovation• Value engineering• Digital assistantsSG&A• Implementing demand management of services post-COVID-19• Closed-loop, budget-to-pay processesInventory• Developing intelligence-based dynamic stocking levels• Building reconfigurable logistics and dis-tribution networks to respond to demand changes• Supply chain visibility and optimization• Demand sensing WHITE PAPER6NEW CHEMISTRY:DIGITAL TOOLS AND LEVERS FOR SUCCESS IN THE NEW NORMALLEVERAGE COST DRIVERS AND MARKET INTELLIGENCECompanies traditionally achieve price discovery through a competitive bidding process. However, changing raw materials suppliers in the chemicals industry is often difficult as it involves qualifying suppliers and setting up new supply chains. A faster path to capturing value is through fact-based negotiations and understanding the suppliers’ cost structure. Understanding the scale and speed at which costs propagate through the supply chain gives buyers negotiating leverage. This detailed understanding of market dynamics and supplier business conditions is critical to successful price negotiation.Leveraging cost models is the first step — descriptive