We all want to be responsible global citizens, make the necessary efforts to save our planet, and build a more sustainable future. And the same is true for chemical industries, which face enormous financial restraints while attempting to satisfy sustainability standards.
Economic constraints, supply chain interruptions, and growing regulatory requirements must be weighed against sustainability goals. Find out the difference between payday and installment here.
Consider a handful of the industry’s current challenges:
- Rising material prices are threatening profitability. For example, natural gas, liquefied petroleum gas, and natural gas liquids make up about 96 percent of the chemicals industry’s overall feedstock consumption. However, the cost of these materials has risen dramatically in response to the European Union’s Emission Trading System, a market for carbon credits.
- Supply networks that are unreliable and interrupted are causing shipment backlogs. Chemical businesses are becoming more inventive due to delayed imports from China, port backlogs, and erratic railway shipments. Certain companies are exporting whatever commodities they can get directly at inflated pricing. Procurement experts inform me that their shipping expenses have increased four to sevenfold in the last year.
- Unplanned alterations to manufacturing schedules create havoc. Supply constraints and unpredictable logistics are compelling manufacturers and contract manufacturers (CMs) to alter their manufacturing plans, moving operations to accommodate available supplies. Numerous CMs have implemented rules prohibiting them from scheduling production on customer runs before all required items are on-site. According to one procurement specialist, this strategy has resulted in months of backlog for his organization.
- Regulators continue to tighten their grip on the business. Industry executives are worried about the current US plan to reintroduce the Superfund, a 1980-era excise tax on chemicals, oil, and gas corporations to cover the cleaning of hazardous waste spills and disposal sites. The new law wants to reinstate the levy, which expired in 1995, at double its previous level, at a cost to the chemicals sector of US$120 billion, according to analysts.
When these issues are combined with growing consumer demand for more sustainable business practices and CEO vows to do better, the chemicals sector is under constant pressure.
Increase Your Organization’s Sustainability and Profitability Through Procurement Insight
How can chemical manufacturers overcome these obstacles without going bankrupt? Utilizing the procurement function is a straightforward but sometimes ignored method.
Procurement affects margins — buying expenses account for 50% to 70% of sales income and product sustainability scores since around 60% of a final product’s sustainability score is determined by the sustainability of its supplies.
As a result, procurement is the ideal location to seek cost reductions while simultaneously increasing the company’s sustainability score. Consider these two characteristics in further detail.
1. Margins: Chemical firms have long ceased sourcing many raw materials – particularly those considered poor margin commodities – owing to the difficulty of sourcing a complicated bill of materials and the belief that they already have the lowest cost. However, chemical businesses are already using technology that automatically imports complicated BOMs from their MRP to the sourcing tool. This may result in a four- to six-week reduction in the sourcing cycle, allowing for more sourcing events and consequently more savings.
They also benefit from reverse auctions on everyday items such as corrosive acid, debunking the misconception that they already have the best deal. For instance, one chemical business had long-term contracts for acetic acid, but a reverse auction involving three suppliers and three distributors resulted in an 11.5 percent price drop. These savings may assist in funding and supporting essential environmental efforts.
2. Product Sustainability Ratings: Because the sustainability score of a final product is highly reliant on the resources used to generate it, procurement may help a firm enhance its sustainability scores. The difficulty is in collecting such ratings from vendors.
Numerous businesses use technology to enforce laws requiring suppliers to disclose sustainability data at the material level. These organizations will not accept invoices from suppliers who fail to submit the necessary data. When sustainability data is collected, it is instantly integrated into firms’ supplier management and risk management systems for grading, which improves visibility. Certain firms have even included active triggers that restrict suppliers with low sustainability ratings from participating in sourcing events and even block them from creating purchase orders.
Leading businesses believe that adopting a contemporary and digitalized procurement strategy may help them improve their sustainability. According to a recent Oxford Economics poll, 89 percent of chemicals executives believe that the procurement function contributes to their firms’ sustainability efforts.
Increase Collaboration Between Suppliers and Providers
Another successful strategy for increasing sustainability in procurement is to concentrate on strengthening supplier relationships and cooperation. Collaboration might result in unanticipated supply chain improvements.
A notable illustration of this is a chemical business whose close network engagement with suppliers enabled it to speed its resumption three to four weeks after a COVID-19 outage. The firm was able to discover which suppliers were not yet operating at total capacity and identify supply gaps resulting from cooperation. The company then filled in the gaps by using a digital business supplier network to locate new vendors.
Collaboration with suppliers may also result in efficient initiatives such as Supplier Managed Inventory (SMI). Certain chemical businesses have been punished for failing to maintain an adequate supply of hazardous vessels for materials supplied according to planned agreements that do not consider changes in the plant’s production schedule. SMI enables manufacturers to be more agile and cut transportation runs, hence lowering the company’s carbon impact.
Utilize Supplier Data to Create Measurable Value
Finally, supplier lifecycle performance management (SLPM) technology may assist chemical manufacturers in making sound sustainability choices and mitigating supply chain disruption.
Sustainability tracking and disseminating data to sourcing and contract managers enables businesses to make more informed choices. Collecting all supplier data in a single view — such as KPIs, financial and brand risk, and sustainability – allows a previously unattainable viewpoint. This comprehensive approach enables businesses to assess and manage supplier risks, including sustainability.
Construct a More Sustainably Oriented Chemicals Business
Increased supply chain openness is a potent weapon for chemicals businesses, which may help them flourish in the face of the industry’s most difficult circumstances in decades.
By digitizing procurement processes and developing more collaborative and partner-like relationships with suppliers, chemical companies can connect their purchasing, supply chain, manufacturing, delivery, and sales operations, thereby increasing sustainability and delivering significant business benefits.