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Digitalisation Offers Next-Step Gains For Chemicals
Posted on March 9th, 2017 by Nigel Davis in Chemicals Industry News and Analysis
Where can chemical companies look for the next step change in financial performance? Consulting company McKinsey poses the question in a study published this month. It suggests that the answer probably lies in digitalisation.
Chemical companies collectively have performed remarkably well over the past 15 years, McKinsey analysis suggests, with total shareholder returns outpacing other players in the main resources-to-manufacturing value chains including oil & gas and mining, construction, automobiles and pharma.
Improved productivity has probably been the driving force. Producers have been able to use technology to run their plants better – the reaction to the 2008-09 crash, first the slowdown and then the ramp back up, must be testament to that. Supply chains also are much more efficient than in the past. At the same time, the focus on selling, general and administrative (SG&A) costs has helped raise overall rates of return.
But nothing stands still for long. McKinsey analysis last year showed that 50% of chemical companies in the top quintile of performance between 2000 and 2004 were not there in 2014. What is gained can so easily be lost.
“We believe that digital can give them [chemical companies] the power to tap into new value pools and capture growth from competitors,” McKinsey’s Søren Jakobsen, Kedar Naik, Nikolaus Raberger, and Georg Winkler say.
“Applying readily available digital approaches to marketing and sales to reduce costs to serve and improve pricing could be worth as much as $105bn to $205bn annually in additional earnings before interest, taxes, depreciation, and amortisation (EBITDA) to the $3.8-trillion-a-year chemical industry. In addition, fast-mover companies that act aggressively to deploy digital tools could also capture $45bn to $65bn of additional earnings by taking customers and revenues away from less nimble peers,” they add.
The additional EBITDA would improve return on sales performance, particularly for the fast movers.
The (chemical) world is not likely to be turned upside down by new digital competitors; barriers to entry in the sector are too high for that. However, that does not mean that some digital players will not make inroads into the chemicals space.
Chemical companies have recognised the potential of digital but probably are still scratching their heads over what it is they can do to apply digital most effectively to cost reduction.
“Introducing and expanding digital sales channels, applying advanced analytics and machine-learning tools, increasing automation, and digitising end-to-end processes in commercial operations will help chemical companies tap all aspects of digital to increase growth and profitability,” McKinsey’s analysts say.
They see opportunities in four areas: in new growth; in delivering better access to customers; in using ‘big data’ to drive decision-making; and in delivering a better customer experience.
They see the challenges in deciding what the opportunities are, designing the digital solutions effectively, and delivering performance improvements with the least risk
However, the plethora of opportunities for doing things better stand out.
BASF has used an e-store on Alibaba to access the thousands of small and medium sized companies (SMEs) in China, for instance.
Materials companies are using 3-D printing to help introduce new products.
A specialty chemical company adjusted up to 150,000 product and customer price points to take into account numerous price drivers rather than apply across the board increases. Price increases realised by the firm rose from 1% to 3-5%.
McKinsey says that a big logistics company expects SG&A costs to fall by 20-30% initially, and by as much as 60% as it applies an easy to use digital interface to help deliver better customer service.
Digital can help de-mystify marketing and sales, the McKinsey authors suggest.
Cost to serve can fall by 15-50% through e commerce. By digitally enhancing price and margin management, companies can raise their return on sales margins by two to three percentage points. Creating a best in class sales channel can significantly improve customer satisfaction and help raise revenue growth.
This week, specialty chemicals giant Evonik said that it was creating a digitalisation subsidiary and appointing a chief digitalisation officer (DGO) to help it develop new digital business models and to help build up digital expertise.
“Digitalisation offers more than new technologies. It also creates new opportunities for collaboration and production, and gives rise to new business models and marketing options. Evonik is taking a pioneering role in the chemical industry here,” said executive board deputy chairman Christian Kullmann.
Evonik wants its digitalisation initiative, which will cut across organisational units, to strengthen its competitiveness and continue to distinguish it from other companies.
“We recognised early on the opportunities that digital business models could offer, and we’re very systematically organising the necessary changes in the company,” Kullmann said.
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All opinions shared in this post are the author’s own.
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