Diversified Chemical Procurement and the Supply Chain

By: Ankur Rishi

Key takeaways

1. Evolution in Procurement Strategies: Chemical businesses are moving away from traditional procurement approaches and adopting new strategies such as supplier diversification and bundled procurement to mitigate risks and reduce costs.
2. Data-Driven Decision Making: Leveraging data analytics and predictive sourcing techniques enables chemical companies to make more informed procurement decisions, optimize spending, and mitigate supply risks.
3. Emphasis on Sustainability: Sustainability has become a key focus for chemical enterprises, driving initiatives to reduce environmental impact and ensure compliance with sustainability mandates throughout the supply chain.
4. Understanding the Chemical Industry: The chemical industry is vast and diverse, encompassing various sectors such as petrochemicals, agrochemicals, commodity chemicals, specialty chemicals, and pharmaceuticals, each with its unique characteristics and challenges.
5. Supply Chain Optimization: Implementing advanced analytics and supplier evaluation processes helps chemical businesses enhance supply chain visibility, identify best-fit suppliers, and achieve cost savings while ensuring quality and sustainability standards are met.

Historically, chemical businesses have chosen to source their strategic inputs, which account for nearly half of all spending, from a small group of suppliers to reap the cost advantages and bulk discounts resulting from the scale of purchase. However, procurement strategies that have brought chemical suppliers this far may not be enough to take them very far into the future. For one, discounted pricing is no longer the tipping point in supplier negotiation, so far as chemical sourcing is concerned. Moreover, it’s about time the industry expanded its supply lines across multiple geographic markets to avoid overreliance on a few sources and the high chance of chemical supply chain breakdowns in times of geopolitical unrests and pandemics.

New procurement trends and innovation in the chemical industry

Supplier diversification and bundled procurement as cost/risk reduction levers

Procurement costs in the case of commodity chemicals work out to between 25% and 55% of overall revenue. The corresponding figure for specialty chemicals should be in the range of 45 to 75% of revenue. In our experience, nearly two dozen products consume up to 45-50% of commodity chemical enterprises overall spend. So, it makes eminent sense to pool purchase volumes for chemical procurement with a few trusted and verified suppliers to benefit from scale economies and negotiate better prices and terms. While so doing, chemical industry participants must diversify their supply chain to avoid overreliance as well as reduce existing overdependence on any specific country markets or suppliers. This is a key takeaway from the Covid-induced supply disruptions and attendant economic shocks.

Data-driven insights to drive better procurement outcomes

Year after year, large and mid-size chemical businesses spend thousands of procurement dollars on RFPs, besides various indirect spends. Redundant and manual RFP processes are fraught with human errors, and the ROI is hardly anything encouraging. Most importantly, the real-time view of supply-side data, critical for current and future evaluations, is missing from the picture! Increasingly, chemical industry participants are relying on statistical algorithms and AI/ML approaches to accurately derive procurement insights based on historical data with a view to improve future outcomes in chemical sourcing. The name of the game is predictive procurement, and many chemical businesses have latched on to this practice to get more visibility of their spending, negotiate better supplier prices, and improve procurement ROI overall.

Walking the talk on supplier sustainability

Sustainability is the new normal, and with businesses across industries taking actions in response to this growing opportunity (as well as challenge), chemical enterprises can’t remain an exception. Mindful of this, players in the chemical landscape are stepping up to the sustainability plate with measurable initiatives. The end goal is to reduce the impact of every step in their supply chain on the planet’s biotic resources and the environment. Chemical industries are going the extra mile to ensure their actions on sustainability are in full agreement with what they say, and, furthermore, ensure these chemical procurement best practices percolate through to their tier-1 suppliers as well. This is significant since the mandates around sustainable sourcing are only going to grow in the days ahead.

Chemical industry: The structure

The chemical industry is one of the world’s largest economic sectors, 96% of all manufactured products rely on chemicals in one way or another, and chemical manufacturers produce more than a trillion chemicals each year (global chemical industry revenue). It is a highly competitive global industry with a diverse range of products. It can be divided into several distinct groups:

• Petrochemicals are chemical products derived from the chemical reactions of petroleum and other fossil fuels like gas and coal, or renewable sources such as palm oil and maize, processed through refinery methods.
• Agrochemicals and fertilizers encompass chemical products utilized in agriculture and gardening, serving purposes of growth and health (fertilizers) or ensuring safety (pesticides).
• Commodity Chemicals, also known as Bulk Chemicals, are industrial-grade chemical products like rubber, plastics, chemical fibers, detergents, solvents, adhesives, and cleaning compounds, primarily utilized in industrial applications.
• Specialty Chemicals refer to chemical products designed to fulfill specific functions or cater to particular industries, including paints, coatings, dyes, cosmetic additives, flavors, food additives, and fragrances, among others.
• Pharmaceuticals represent a distinct branch within the chemical industry, characterized by stringent regulations and unique challenges. The supply chain management for pharmaceuticals differs significantly from other chemical sectors due to the nature of the final product and regulatory requirements.

Time for a new supply chain strategy

Find the right balance between supplier diversification and bundled sourcing

To cushion themselves in times of price volatilities and supply risks, businesses should give serious thought to sourcing inputs that are critical to the quality of their end-use chemicals from a diversified base of pre-assessed suppliers. Chemical businesses must discover and bring in suppliers with the demonstrated ability to use multiple shipping locations and transportation modes to avoid supply disruptions and secure the production process. At the same time, centralizing the procurement function and pooling demand volumes from decentralized chemical plants dotting their ecosystem will help businesses drive enterprise-wide cost reductions and negotiate better deals with vendors, including lab chemicals suppliers.

Make more data-driven decisions with predictive sourcing

Faced with supply risks, cost escalations, and revenue leakages, chemical businesses are increasingly embracing predictive procurement as a potent means to forecast demand more accurately, make more fact-based decisions, and keep inventory risks at bay. Leveraging AI/ML techniques, predictive analytics models can cherry-pick relevant patterns from terabytes of purchasing data, supplier information, market trends, and various current and historical data to estimate future demand for specific products with high accuracy. Besides, based on past transactions, supplier behavior is modelled to estimate and address future uncertainties. Predictive procurement is saving millions of dollars for chemical companies in RFP as well as direct and indirect spends in chemical purchase.

Bake sustainability into the procurement strategy for bottom line gains

The prevailing industrial system values reuse, repair, refurbishing, and recycling over overconsumption and wastage with the aim of reducing pressure on the world’s finite resources. Since the circularity of products is key to guaranteeing precious resources, now and in the future, chemical enterprises now prefer to sign up suppliers who comply with applicable sustainability mandates. Sustainability action is a large canvas, but some of the most impactful initiatives so far include the use of recycled packaging, reducing water consumption, recycling of plastics into feedstock for new chemicals, and eradication of forced labor. Study after study suggests sustainability helps businesses reduce operating costs while boosting bottom lines and, most importantly, business reputation, including in the specialty chemicals market.

Chemical supply chain: A detailed view

The three sectors:

1. Chemical merchants are middle dealers that buy chemical items from chemical producers or other chemical wholesalers (breaking bulk) to fill orders for customers or clients such as retailers, wholesalers, governments, etc. They benefit from the distinction between what they spend buying an item and offering it at retail cost.
2. Chemical engineers are chemical specialists who give chemical arrangements to real-life issues. They have a chemical foundation and work with chemical experts, engineers, researchers, etc., in different areas for the improvement of unused chemicals or improvement/optimization of existing ones, counting updating generation forms, lessening natural effects, or creating more ecologically inviting items.
3. Chemical producers are mindful of fabricating chemical items. They utilize crude materials (such as chemical compounds, normal materials, or biological-based substances) to create chemical items employing a chemical response handle. Chemical producers can be isolated into makers of different chemical sorts.

How it works

The current supply chain combines chemical producers, makers, and merchants to fulfil item needs. The method begins with the crude materials that chemical companies buy from providers and changes them into chemical items. These chemical items are at that point dispersed to wholesalers who offer the chemicals to clients in different businesses. Chemical producers battle to oversee their complex supply chains including managing unsafe and perishable fixings. The chemical fabricating preparation is inclined to varieties in item characteristics (like strength, colour, composition, etc.), changing from clump to bunch. These variations mean they have the next chance of giving compounds with off-base properties to clients, compromising trade results concerning security, quality, and benefit. Altering equations based on accessible fixings and guaranteeing wrapped-up items meet the demanding resilience of clients and directing offices requires adaptability and predominant arranging capabilities.

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Why Choose SpendEdge?

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Map suppliers by chemical, load handling, and quality

Our experts in procurement assist MNCs and SMEs in the chemical industry to get their supply side up to speed by identifying right-fit suppliers at a per-chemical level in various country markets. Key selection parameters include the capability of vendors to handle large, pooled demand volumes from dispersed client facilities and deliver chemicals in different packaging sizes. The consistency of the suppliers’ quality control systems and the chemical test reports generated for both raw materials and products are also key considerations. Thanks to our in-depth and regular supplier evaluations, chemical businesses, including lab chemicals suppliers, have succeeded in monitoring their supply base continuously to reduce costs and mitigate risks significantly.

Get more granular spend visibility with advanced analytics

Market participants in the chemical industry increasingly turn to our experts in predictive sourcing to “slice and dice” spend data and make more effective decisions, factoring in potential benefits and risks. By bringing the power of AI and ML to spend data analysis, our experts enable chemical businesses to evaluate procurement data more effectively and get a clearer view of demand with no blind spots. Besides, our spend analysis and reporting will not let maverick spends fly under the radar. This is significant since such rogue expenses, outside of negotiated terms, are a key cause of compliance failure and cost escalations. More transparency into organizational spending also means fewer frauds in chemical sourcing.

Inlay the supplier base with best-in-class sustainability practices

Using proven and time-tested tools as well as bespoke solutions, we help chemical companies score the performance of their tier-1 chemical suppliers for dimensions such as environmental, social, governance, and economic sustainability. Having established a comprehensive sustainability baseline, our experts proceed to vet the suppliers’ capabilities against global peers, industry standards, and other agreed-upon criteria. We weigh up the social and environmental risk factors for each supplier, flag potential high-risk events, and bridge most sustainability problems preemptively before symptoms start to appear. By embracing our sustainability practices, several of our clients in the chemical sector have realized cost savings and efficiencies, besides moving up in brand reputation rankings.

Success stories: SpendEdge helped chemicals client achieve digital transformation with market intelligence and save procurement costs

A well-thought-out category management strategy helps a global chemicals provider realize 5% additional savings in procurement: Our client, a global supplier of inorganic base chemicals, has managed to sustain growth in a highly competitive market for more than two decades. A laser-sharp focus on customer needs, an innovative product line, and embrace of digital technologies are key factors underpinning the company’s success story until very recent times. Of late, however, growth has started to tail off for reasons like stiffer competition in some sub-markets and certain pain points on the clients supply-side. These are all key concerns for the C-Suite. To start with, the company identified its procurement process as a test bed for its overall cost reduction efforts aimed at addressing dwindling revenues, market share, and profitability. Having convinced itself of our credentials, the company leadership turned to our experts for assistance.

The insights offered by our experts pivoted around sales and profitability of specific product categories, continuous cost reductions, and more enriched supplier relationships. Our granular insights are helping the client take a more strategic approach to chemical sourcing and shrink the source-to-pay cycle time. As a result, the client’s procurement function has netted an additional 5% of savings already. In addition, with improved category management, the client is able to maintain a better supply-to-demand ratio, both internally as well as with the external suppliers.

Businesses across industries now operate in a sea of ever-rising supplier risks. To know more about how we help businesses in the chemical supply chain stay ahead of risks and net additional savings in procurement, contact us now.

Conclusion

The chemical industry operates within a complex supply chain framework, encompassing various stages from manufacturing to distribution. Chemical manufacturers and distributors navigate challenges such as fluctuating costs, supply risks, and environmental regulations while striving to optimize operations and reduce waste. With increasing emphasis on sustainability, recycling efforts, and environmental compliance, the industry is witnessing a shift towards more efficient and eco-friendly supply chain practices. Agrochemicals, fertilizers, commodity chemicals, specialty chemicals, and pharmaceuticals constitute key segments within this vast industry, each with its unique challenges and opportunities. As chemical businesses embrace data-driven procurement strategies, supplier diversification, and sustainability initiatives, they aim to enhance supply chain efficiency and mitigate risks while driving bottom-line gains. Amidst evolving supply chain trends, continuous innovation and strategic partnerships are crucial for staying ahead in this dynamic landscape of chemical manufacturing and distribution.

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