Most chemical companies are still unable to profitably respond to highly variable demand, or to execute predictable product supply strategies. A previous note, So What’s the Big Deal with Chemicals?, presented the current state of the chemicals industry, including a discussion of the challenges the industry faces.

Part Two of the series So What’s the Big Deal with Chemicals?

Optimizing the distribution network and rationalizing inventories at each point in that network are hence the keys to an efficient supply chain and smoother operations. An optimal inventory targeting capability that calculates all the components of inventory at every point in the supply chain, and that then compares historical forecasts to actual sales data, and models all the processes that contribute to inventory, should allow users to quickly identify problem areas and make adjustments that decrease inventory without reducing customer service. As for maximizing inventory efficiency, at each point in the supply chain one should get the information needed to determine optimum inventory levels, and redeploy the excess to improve service at high-priority locations.

Additionally, some optimization tools should help companies minimize the combined costs of manufacturing and holding inventory, without necessarily sacrificing service. These tools must allow users to examine all the factors that contribute to inventory and production costs, such as cycle times and cycle stock levels, production line transition costs, inventory tradeoffs, and so on. By using the cycle optimizing tool, production planners should be able to determine optimal policies for product frequency, cycle length or production campaign length, as well as target levels for cycle and safety-stock inventories. In this way, it might be possible to set realistic inventory policies that support both good service and good profit margins.

Furthermore, industry roles are fluid and ever-changing, given that nearly 30 percent of chemicals sales are to other chemical companies. The largest players are typically basic life science (pharmaceuticals and agrochemicals), industrial gases, and specialty chemicals (perfumes and cosmetics, paints and ink, soaps and detergents, dyes and pigments, and so on) producers. The rest are critical middlemen, who process and add value to basic commodities, and resell the still unfinished products for further processing. Some large companies might sell the product of their commodity division to their specialty division (thus becoming their own major customer), or they might sell basic commodities to an intermediary and then buy back the finished product for further use by the specialty division.

On the other hand, the manufacturing process is often the weakest link in the supply chain as a whole, since component products and semi-finished materials require long lead times that impede quick-acting demand-driven principles. Manufacturers can do very little to accelerate the subassembly processes, since the laws of chemistry (in other words, the processing times) are largely inflexible, posing challenges for manufacturers who want to integrate their demand forecasting, sales teams, plant floor personnel, and so on. It is thus not that uncommon for fierce competitors to temporarily partner so as to reduce costs: they will often swap a commodity in one location for the same one in another location. Tracing these complicated transactions is very difficult, the more so because of the fluctuating prices of these commodities.