Missing a €100 billion opportunity
Chemicals companies are missing out on a €120 billion value opportunity, representing 250 basis points additional return on sales, due to a lack of project resources and outdated ways of project execution.
In the past, project teams have reduced production losses by fixing bad actors, increased output by removing bottlenecks and differentiated the business by bringing new innovations to market. Today, making such improvements is easier as new digital technologies—from analytics to automation, robotics, mobility and artificial intelligence (AI)—enable the next level of value from proven levers.
There is a strong pipeline of projects in the chemicals industry. Many projects represent less than a €2 million investment, with short payback periods and limited risks. But while there is no lack of project ideas, there is a significant, growing backlog in executing the pipeline. From our experience, this is not due to a lack of financial resources, but due to a lack of project resources. Inefficient project execution models add to the challenge.
Our research shows that in a typical chemicals company, half of projects with capital expenditures of less than €2 million and positive investment cases are often not executed. Faced with this investment backlog, chemical companies focus their project teams on regulatory and license-to-operate related projects, which means that 60 to 70 percent of growth, expansion and optimization projects currently are not being executed.
We see a major potential to free up resources for projects by breaking away from established project planning and execution models, applying new technologies and accessing talent from the ecosystem for project execution.
Pick your opportunity
Based on our research and project work, we estimate these profit opportunities, conservatively applying an 11 percent average return on sales:
- Up to €10 billion by reducing unplanned production slowdowns or stops of typically 3-6 percent (continuous flow plants typically on lower end, batch on the upper end) by 1-3 percentage points
- Up to €10 billion by removing plant bottlenecks and implementing small-step capacity increases of 2-5 percent per year
- Up to €10 billion by incremental innovations, new products and expanded applications of 2-3 percent per year
- Up to €45 billion by optimizing chemical production processes and yield and capturing 1-3 percentage points in efficiency gains
- Up to €45 billion by gaining efficiency in administrative tasks from automation and application of analytics and AI, approximately 20-30 percent of SG&A costs, typically 5-7 percent of total revenues
Companies miss these opportunities when projects are postponed, shelved or cancelled due to a lack of project teams and ineffective execution models.
The vicious circle: Misallocation of resources
The growing backlog in optimization projects can be closely linked to a loss of competitiveness. What is happening across chemicals projects is a vicious circle. A lack of project resources leads to lack of executing optimization projects. Limited resources are tied up in traditional ways of operating and executing projects.
Procedures, tools and execution models are unchanged from 30 or 40 years ago, and they are passed on from one generation to the next. If chemical companies invest in new digital ways of working, this would reduce manual effort and drive up efficiency, thereby freeing up resources to focus on optimization.
Agile project execution, digitized documentation, digital collaboration and learning from previous projects can stop the vicious cycle and help boost competitiveness. Our experience and research shows the potential:
- 20-30 percent cost and resource reduction by automating transactional tasks, for instance, by using agile instead of waterfall project execution and by bringing in broader and deeper expertise from the ecosystem
- 20-30 percent faster timelines through agile execution, better visualization and AI-enabled algorithms that inform next best actions
- 10-20 percent cost savings and timeline acceleration from managing the portfolio instead of individual projects, leveraging expertise across projects and also learning from insights and results of previous projects
Disrupting established ways of planning and executing projects
Competitiveness and growth require continuous improvement and a keen focus on modernizing way of executing projects to boost competitiveness and value. These are some ways how:
There is no reason to wait. By acting fast and decisively, chemicals companies can begin to seize a variety of opportunities for efficiency and savings.
- Size the prize: Aggregate projects and quantify lost opportunities.
- Rethink project execution: Use digital technologies, agile execution and technology-enabled execution models to increase project execution efficiency.
- Digitize the enterprise: Use off-the-shelf technologies to increase effectiveness in workflows, processes and structures.
- Expand resources: Increase recruiting and shape flexible workforce models that allow the business to build agile project teams comprising internal and external team members.