How chemical companies excel in turbulent times

Change in the business environment has reached new and unprecedented levels in recent months. Energy and electricity prices have spiked, and inflation moved from near zero to levels not seen in the last 40 years in Europe and the United States. Very low interest rates—negative rates in some countries—have given way to steep monthly hikes. And demand has moved from pandemic recovery-triggered peaks into declines, creating concerns about a recession. The magnitude of change is massive, and the speed of that change is unprecedented. And more than ever, chemical companies need to find ways to keep up and adapt.

In the chemical industry, the established response to lower demand and growing pressure on profitability is an increased focus on reducing costs and cutting back on investment. But this will often be the wrong move in the current environment. Keeping up with the speed of change and capturing the opportunities it creates requires investments in new capabilities. Today’s ways of working and managing need to be reinvented—dramatically and quickly. Typical management routines such as monthly pricing, monthly demand planning and monthly inventory planning are no longer sufficient when energy or raw material prices are changing 20% to 30% within a week.

However, this does not mean that all activities in a company are affected in the same way by these shifts in the business environment. Some routines are less exposed to rapid change and less critical to the business. Others are both fully exposed and highly critical—and companies need to give high priority to these activities. (See Figure 1)

Figure 1: An illustrative example of targeting high impact/high speed of change activities

The ability to master today’s rapidly and constantly shifting environment requires the fast implementation of new approaches across four areas of focus: a change in mindset; an acceleration of management routines; the use of real-time internal and external data; and investments in technology to support automated workflows and analytics.

A new mindset: Accept uncertainty

In general, chemical companies have long worked in a relatively stable environment that sees only incremental change, allowing them to rely on multiyear trends and past experience to steer and manage the business. But the pace of change in the last few years has proven that extrapolations of the past cannot provide sound guidance for the future. To master today’s volatility and ambiguity, chemical companies need to:

• Accept uncertainty. Do not use the stability of the pre-Covid era or previous trends as a reference framework for planning and decision-making. Instead, run “what if” scenarios to understand how industries and customers are impacted and look proactively for new opportunities in the new volatile business environment.

• Question established beliefs and paradigms. Analytics based on sound, real-time data should be used to understand shifts in the business environment, which can happen quickly. Why? Because, for example, many established beliefs about customers’ willingness to pay were shattered by the price levels achieved with recent raw material price peaks.

Management routines: Accelerate the cycles

Many chemical industry activities, such as planning for supply and operations, establishing price lists and setting inventory levels, are typically conducted at monthly or quarterly intervals—a clear mismatch with a world where significant change can occur weekly or daily. Companies should:

• Shorten management cycles. Move from monthly cycles to weekly or even daily cycles, especially for tasks impacted by rapid change, such as demand planning, price setting, and production and inventory leveling. For example, prices are often set at the end of one month for the following month. With sudden shifts in material or energy input costs becoming the norm, those price lists can be obsolete within a week.

• Manage processes on an end-to-end basis. This could mean integrating product pricing with the real-time costs of raw materials or energy, or developing greater transparency into the duration and details of product and raw material contracts.

Data: Create transparency

The acceleration of management cycles will be effective only if management decisions are based on solid, relevant data, which can be used to provide insights into opportunities to reach customers, make better use of raw materials, drive innovation and so on. But too often, companies rely on data from the previous month or months to support decisions—that is, data that is “old” in the context of rapid change. Addressing this problem will require investments in new capabilities and new ways of working. Companies need to:

• Accelerate the time to insights. Moving to real-time or near real-time data for decision-making is key. Companies working with last month’s or last quarter’s data—including for activities such as product costing, the building of bills of materials, or budgeting raw material, energy or electricity costs—are likely to leave money on the table due to missed opportunities and wrong decisions. Thus, they could find themselves at a disadvantage to competitors working with up-to-date data.

• Tap into more external data to increase visibility. Companies stand to benefit from knowing what is happening through a broader, multilateral perspective on customers, the value chain and supply chain dynamics.

Technology: Invest in digital transformation

Practices such as extracting data manually, running analyses in spreadsheets and working primarily with internal data are still common in many chemical companies, and that is a barrier to keeping up with change. Indeed, pricing decisions often take days to trickle through the organization and to be implemented with customers. Adapting legacy systems to enable greater automation and new capabilities is typically a slow and expensive process. Instead, investments in new technology are needed. Companies should:

• Accelerate digitalization programs. This applies particularly for targeted software-as-a-service (SaaS) solutions for areas like pricing and demand or inventory planning, as well as migrations to a new digital core and the use of the cloud to bring data together, contextualize it and automate the creation of insights.

• Move beyond manual workarounds and spreadsheets. This means implementing automated future-ready platforms that enable end-to-end management of the business and improve decision-making. It also involves deploying more focused robotic process automation and intelligent data hubs to accelerate time to insights.

The amount of change taking place in business, along with the magnitude and speed of that change, can easily result in a gloomy outlook at chemical companies—especially if they turn to the old patterns of hunkering down and curtailing investments. From our perspective, success now requires a paradigm shift. Making that shift will take focused investments in new capabilities and training to enable agile management cycles, real-time insights, workflow automation and, ultimately, the ability to find new opportunities and excel in an era of turbulence.