By Stefan Guertzgen, SAP
The Chinese zodiac calendar says it’s the Year of the Dog, but in the chemicals industry, 2018 might be more appropriately dubbed the Year of the Tiger for the pace at which the business is changing its stripes.
This year we’ve seen a continued shift in supply centers due to the rise of shale gas in the United States and the move from coal to olefins in China, for example. Demand centers are shifting, too, due to a rapidly growing middle class in such places as the Asia Pacific region and Latin America. The accelerated globalization of the chemicals market is one of four major trends that we see shaping the chemical industry through the remainder of 2018 and beyond.
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1. Rapid globalization
As part of this rapid globalization, new market entrants – from emerging countries and adjacent parts of the supply – are emerging with intelligent business models, concepts, and processes. In turn, this drives shrinking lifecycles and rapid commoditization of products as innovators rapidly catch up with or even exceed incumbents in terms of the speed and responsiveness in which they are developing new products, formulations, and services.
Amid such a dynamic and pressurized global environment, the onus is on chemical companies to explore new ways to maintain a competitive edge. Many are doing so by reimagining fundamental business processes through a digital lens. They’re investing substantial amounts in new digital solutions and applying them in areas like sales and operations planning, demand planning, supply, and response, with the goal of making them real-time ready, more collaborative, and better integrated with the entire ecosystem – within and beyond company boundaries.
This move to integrated business planning and execution provides an agile decision-making framework for realigning strategy with execution plans across all business functions. It also goes a long way toward ensuring that business goals and targets are consistently aligned while minimizing business risks.
2. The circular economy
The rise of the circular economy is another trend worth watching in 2018 and beyond. Scarcity of raw materials is a reality that chemical companies must factor heavily into their strategic thinking. So, too, is regulation. Amid a drive to reduce material, energy, resource consumption and waste, and emissions, regulatory requirements are rapidly expanding their reach at the global, regional, and local levels.
To put themselves in the driver’s seat to respond to stricter regulation, chemical companies are extending their ecosystems to establish end-to-end, “cradle-to-cradle” approaches. As companies like SAFECHEM Europe GmbH demonstrate, these approaches are as much about competitiveness as they are about compliance. SAFECHEM Europe has developed a sustainable solution using chlorinated and non-chlorinated solvents for high-precision metal surface cleaning and dry cleaning applications, where high quality is a must. Here, the solvents are managed in a closed-loop process without any release to the environment.
Critical to innovations like these are digital platforms that allow the rapid, highly collaborative development of new products and services in a way that minimizes their impact on people and the environment along the entire lifecycle. It’s important that these platforms also embed safety and compliance requirements along those lifecycles and monitor the impact of changes in regulatory requirements on products and services in real time so chemical companies can respond accordingly.
3. Digitalization
The trend toward digitalization in the chemicals business goes hand-in-hand with globalization and the emergence of the circular economy. A massive wave of digital innovation shows no sign of cresting this year. Recent technological advancements such as in-memory processing power along with almost unlimited data storage capabilities at low cost offer unprecedented levels of connectivity, granularity, and speed in accessing, processing, and analyzing huge amounts of data.
The Internet of Things, machine learning, and blockchain are also fueling the digitalization movement within the chemical industry. Big players like BASF are using the IoT to improve efficiency in its engineering and maintenance processes throughout the asset lifecycle, while also increasing reliance on machine learning for invoice matching and on blockchain technology to more efficiently manage the supply chain with a “smart pallets” approach.
To capitalize on the potentially massive efficiency and competitive gains that accompany an embrace of digital solutions, chemical companies need an agile business process and IT foundation, one that combines a stable core system – a “system of record” for running day-to-day transactions, including real-time insight and decision support – with a “system of innovation” that allows an organization to leverage external data in order to rapidly develop new business processes and even entirely new business models. Tight integration between these two systems on a single platform provides the foundation to rapidly scale such innovations for maximizing business value across the entire enterprise.
4. New business models
Digitalization is indeed helping to feed the emergence of new business models, another key trend that figures to shape the chemical business for the foreseeable future. How companies fare in that future will depend largely on their strategic agility. They need the ability to rapidly transform product and service portfolios in response to dynamic market conditions and changing stakeholder needs. Döhler is among a wave of chemical companies that are demonstrating that kind of agility. One of the world’s most venerable food and beverage companies, Döhler also happens to be one of its most innovative.
The drive to explore new business models is prompting companies to look beyond their traditional value chains and start competing as entire ecosystems. Such ecosystems are presently built around hot chemical segments like precision farming and the aforementioned circular economy. As they become more customer-centric, expect to see more chemical companies positioning to sell business outcomes instead of products. So it’s less about delivering paints, coatings, or reactive resin components and more about delivering first-pass-quality products.
New business models also are emerging around operational excellence and business process automation. With the aforementioned digital technologies becoming scalable and commercially feasible, companies can now realize concepts like “lights-out manufacturing” and “touchless order fulfillment.”
For these innovative new business models to prosper, companies will need a solid foundation that includes a fourth-generation platform for business processes and IT infrastructure, as well as a skilled workforce. Machine learning, IoT, and blockchain won’t succeed in a vacuum. They need to be embedded into our thinking and into our processes. But they will go only as far as you and your people carry them – people such as the emerging data engineer with the specialized skills to perform vital data mining, data analysis, data orchestration, and data governance functions. Such data engineers need to be paired with business and process domain experts to ensure that innovative technologies tap their true potential.
A perfect storm
The convergence of these trends – globalization, digitalization, new business models, and the circular economy – is creating a perfect storm for the chemical industry, challenging strategies that companies have relied upon for a generation. In today’s chemical business, factors such as customer and feedstock proximity, intellectual property, and technology know-how no longer guarantee a sustainable competitive advantage.
Hard-to-anticipate geopolitical risks and an emerging protectionism movement in some countries may adversely impact free trade and the availability of critical raw materials, further clouding the competitive outlook. Still, the edge goes to early adopters of innovative business models, which have a unique opportunity to act as game-changers and digital disruptors, even amid so much uncertainty.
Visit the SAP International Conference for Chemicals and hear about how to capitalize on this perfect storm, digitally transform your business and become an Intelligent Enterprise.
