Cost efficiency programs are a familiar part of the chemical industry landscape, so it comes as no surprise that all chemical companies have announced cost reduction and contingency programs in response to COVID-19. However, this leads us to an interesting question: Are these recent programs more of the same, or is there something new?
COVID-19 has resulted in new cost and demand baselines, new technology and partnering options are now available. These factors provide a unique opportunity for companies to take a different approach to cost efficiency that can lead to greater, more sustainable value.
Maintain the goodness brought forward by COVID-19
COVID-19 has challenged many established beliefs, demonstrated the feasibility of new ways of operating, changed companies’ needs dramatically on many fronts, and defined new cost baselines (see Figure 1).1 For example:
- Digital marketing and sales have been the only way to do business during lockdown. Sales representatives do not have to travel to client sites, and clients are reliant on e-commerce.
- Self-quarantining of shift teams in plants have demonstrated that plants can operate with smaller teams and fewer shift positions. It is worth noting that some plants have even achieved record production under these circumstances.
- COVID-19 has led to simplified organizational processes—for example, reducing the number of meetings, iterations and administrative tasks—resulting in new levels of productivity.
- COVID-19 access restrictions have reduced demand for certain types of third-party contractors, such as those in maintenance, repair and industrial services.
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The eventual recovery of demand should not mean a return to traditional ways of working. For example, if sales representatives are allowed to start traveling again, they should not give up digital interactions and re-route customers from digital channels back to in-person orders.
The cost and demand baselines seen during COVID-19 provide a robust basis for resizing workloads, budgets and structures to not only deal with the pandemic but build for future success as well.
Apply new technology and data to improve cost efficiency
Data analytics and technology enable new measures of cost reduction. For example, they allow companies to set up data-driven targets using the demand and cost levels seen during COVID-19 as a baseline and hardwire new demand and workload levels through automation and digitization.
In traditional workforce reduction-centered cost efforts, costs typically creep back up within a couple of years because neither demand nor the amount of work is reduced. A more lasting approach could include the following:
- A forensic baseline based on complete data insights. For example, customer relationship management and order intake data can be used to resize marketing and sales efforts, as well as bake the appropriate levels of digital interaction and e-commerce into new budgets.
- Automation, robotics and digital platforms that bring a sustainable reduction in manual effort. Historically, investments in automation have promised 10%-15% in labor productivity gain, but they have often not delivered on that promise.
- The hardwiring of behavioral changes into processes with data and artificial intelligence driving “next best action” apps and business rules. As companies expand their digital customer transactions, they can use these technologies to provide the right service levels for each customer and thus avoid a return to pre-COVID-19 practices.
- A different kind of benchmarking. Benchmarking looks at the past, neglecting the impact of new technology. Companies should instead apply “benchbreaking,” which focuses on approaches that apply available technology.
New data insights and new measures that sustainably reduce demand and manual effort can result in new levels of cost efficiency. Equally important, they can also help companies generate new insights, new offerings and new value propositions, thereby accelerating post-COVID-19 recovery and growth.
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The eventual recovery of demand should not mean a return to traditional ways of working.
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Engage partners to accelerate time to benefit
Delays and greater-than-expected effort can result in missed cost efficiency targets—a common phenomenon in cost efficiency programs. Support functions such as finance, HR and logistics have tended to fail in their attempts to achieve a leading cost position.
COVID-19 has demonstrated that significant investments are needed to ensure resilience, and that resource constraints require companies to set priorities. In functions with high fixed costs and no direct contribution to the customer value proposition, large investments in automation or digitalization are often not the best use of resources when looking to increase resilience. Here, co-sourcing and/or partnering may be the right choice, because they give companies a way to accelerate time-to-benefit and provide more certainty on achieving top quartile performance while building the required resilience.
The partnering picture in the chemical industry is typically fragmented, and often shaped by traditional beliefs and legacy structures. However, experience has shown that by creating a holistic view of company-specific partnering of functions, companies can potentially turn 8% to 10% of their fixed costs into variable costs, achieve a 20% to 40% reduction in costs, and often, generate a positive cash contribution in the first year of their efforts.
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Seize the opportunity
The last six months have shown that “same procedure, same budget as the previous year” methods are no longer enough. However, COVID-19 has so far triggered cost efficiency programs in the chemical industry that target cost reductions of a few percent of sales, but do not lead to a step change in costs or competitiveness. We now have a window of opportunity to pursue fresh, zero-based budgeting and sizing that frees up resources that can be re-invested in growth and competitiveness—and ultimately, help avoid a return to pre-COVID-19 cost structures.
Making that shift will require a new approach: Companies will need to use COVID-19 demand and cost data to set new baselines and budgets. They will need to apply technology and data to reduce work through automation and digitization and enable new offerings. And last but not least, they will need to find partnering opportunities that will help them accelerate time-to-benefit in their cost-reduction initiatives.
1 Accenture analysis